Rural Loans for Unconventional Properties and Underserved Communities | Guest Darla Larson, Rural 1st
Disclaimer: Rural 1st is an RLI partner. Opinions expressed reflect those of Rural 1st, not RLI.
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Intro: Welcome to the REALTORS Land Institute podcast, The Voice of Land, the industry's leading land real estate organization.
Justin Osborn: This is Justin Osborn, Accredited Land Consultant with the Wells Group in Durango, Colorado. On today's episode of The Voices of Land podcast, we're talking to Darla Larson with Rural 1st. Darla has deep experience in agriculture with rural roots, growing up on a family farm in Ohio. After graduating with a bachelor's in Agricultural Business and Applied Economics from the Ohio State University and a masters from the University of Arkansas, she grew her career with Farm Credit. She has spent the last 19 years within the Farm Credit System, working as a loan officer, Regional Vice President and Chief Lending Officer, to currently expanding the Rural 1st brand as Vice President of Rural 1st Sales. She has always enjoyed servicing the rural communities and working with farmers and ranchers and people that wanna reap the lifestyle of a rural life. Welcome to the podcast, Darla.
Darla Larson: Thank you, Justin. Thank you for the great intro and inviting me to join you. I'm thrilled to be here, to discuss the housing market and what trends we are seeing in rural America.
JO: Yeah. I'm excited too. I greatly appreciate the sponsorship that Rural 1st did at the National Land Conference in Louisville. And I know you have also stepped up sponsoring some of the Colorado Chapter events.
DL: Yeah. Colorado is a fun chapter. They're very active and Rural 1st is in 20 states now, and so I've gotten to go all over the country and to meet so many great people, but Colorado definitely has the most beautiful landscape and the most fun people. So shout out to your group.
JO: Well, thanks. Yeah, we definitely like to have a good time out here. Well, talk to me a little bit about kinda what you've seen over the 19 years you've been in the Farm Credit System, that's quite the resume, looking at both your bachelor's degree and a master's degree, so I'm sure you've seen quite a bit over the past 19 years.
DL: Yes. Farm Credit has been a great place to build a career. Working with salt of the earth customers in agriculture has been such an honor. And it's been very rewarding. Recently, just a year ago, is when I actually transferred over to the Rural 1st side. And basically, Rural 1st is a consumer brand of Farm Credit in America, which is based out of Louisville, Kentucky. And the Farm Credit system has been around for over 100 years. And they obviously have a legacy of serving farmers and ranchers across the United States. And Farm Credit has done a tremendous job giving those agricultural financial needs all the products that they need to operate their farms and ranches.
DL: But since most of them don't live in their barns, Farm Credit saw a huge need to develop these consumer products to meet the needs of the consumer home loan rural space, whether it's a homesite or land loan or a home construction loan. And that's where the birth of Rural 1st came to be known a few years ago. And so the biggest misconception about Rural 1st as a lender is that we can only finance farmers, which is not true. Because in addition to the part-time and full-time farmers, we can finance those non-farmers that only have W2 wage earning potential, but they just wanna finance a piece of property that's rural, and that's out in rural space that might be on larger acreage that a traditional bank may shy away from.
JO: Well, I'm so glad that you talked about that and that the entity was created 'cause I think there's a lot of misconception in our industry, that Farm Credit and American AgCredit and Rural 1st and all these entities are huge competitors. But I think in reality, it's more like a working relationship where, I don't know, this may be a bad example, but I kind of think of you guys as like cousins where it's like, okay, if American AgCredit can't get it done, they don't just say, "Good luck." They say, "All right, let's bring in Rural 1st because they've got a loan offering package that we don't have at this moment."
DL: That's exactly right. And my biggest part of my job right now is partnering with American AgCredit and actually staffing loan originators for Rural 1st in American AgCredit's footprint. And so what that is, it's Kansas, Colorado, Nevada, New Mexico and California. And we are an extension of American AgCredit. So when we go to market, we're representing Rural 1st consumer products, but we're also representing American AgCredit. And so a lot of times we do run into applicants that they may need a loan from both Rural 1st and American AgCredit, or it may end up being an agriculture loan, which we still put them to the right point of contact. Obviously, an American AgCredit goes forward with that loan request, but it's our job to be an extension of American AgCredit, to represent American AgCredit and help build the Farm Credit System and serve that rural customer base.
JO: Well, I wanna get into the types of loans that you all offer, but before we do that, talk to me a little bit about kind of what you're seeing in the industry. Is there still a huge demand from people moving out of the city into the rural properties, or has that slowed down a little bit?
DL: Yeah, there's definitely been an interesting shift across the United States, really. And one of the data points Rural 1st has been monitoring, to help identify growing markets is HMDA data. For those of you that are not familiar with what that is, it's the Home Mortgage Disclosure Act, which is a federal law that requires certain financial institutions to collect and provide mortgage application data to the public. This set of data includes loan type, amount, purpose, location and many other credit metrics associated with that loan application. But what this data has done for the last four years especially, it has shown a strong trend of people migrating from urban areas to rural areas.
DL: And we all know COVID ignited that shift. So, an increasing interest in not just living in rural areas, but an interest in more unconventional type homes too, that data has shown us. We're seeing an increase in barndominiums. They've proven to be much more economical than a typical stick-built home on average. We've seen properties with multiple homes grow in popularity. Some larger acreage type properties, maybe 50 acres and up. So mainly somebody that normally would have looked at a conventional home in the city limits, the interest is now to become more of a rural lifestyle, maybe have larger acreage with a mother-in-law suite, or maybe a second or third home to have an Airbnb out of.
DL: And so we've seen an interest in all of those different types of things. And that's where we've seen that market be traditionally really underserved. Banks typically have shied away from something that was unconventional, maybe larger acreage, they've shied away from. And so we have tried to expand our footprint to get into those pockets that we were really serving those well in the Midwest, but we shifted west to find out that they're still being underserved in those pockets. And that HMDA data has provided a lot of information showing that year-over-year that demand has increased, which means obviously a larger market share that is not having the products that they need to finance and get into those spaces. And so we're excited to be in that Western footprint now.
JO: Well, I'm excited too. I'm in the Southwest footprint and I've personally used y'all services and it's been great for my clients and for my borrowers. And so let's talk a little bit more about those regions. You're in the Midwest. You said that you go out west. Are you going east at all? Are you going north or south? Talk to us a little bit about the territories you can cover.
DL: So, Rural 1st has a presence in 20 states. And if you go to our website, ruralfirst.com, you have the ability to put in a ZIP Code and then you'll see where your local Rural 1st representative is within that Farm Credit System. And we stretch all the way from Ohio in the east, south, down to Texas, and then all the way up to California. And just in the last year, our newest addition is the territory that I'm currently staffing loan officers in, which is Kansas, Colorado, Nevada, New Mexico and California. And so we have 10 loan officers that are boots on the ground, partnering with realtors and brokers and center of influencers in those underserved rural communities, to find out how we can grow our brand and serve that rural community. And it's been a fast and furious year. So I know I've been out in Colorado quite a bit and I've had a good time. I have major real estate envy when I'm out there.
JO: Well, yeah, we could definitely accommodate that. If you get too much real estate envy, I might know a few real estate brokers out here that can take good care of you.
DL: Yeah. I know you're right about that.
JO: Well, let's talk about the loan offering packages. I know a lot of the stuff that you do is unconventional. And I think that's great because there's a huge demand for that out there. And so tell our listeners a little bit about the types of products where, maybe they think they may have to go to seller financing because a traditional mortgage isn't gonna cover it.
DL: This space that's underserved is, it's no secret that the banks shy away from unconventional type housing and larger acreage. And so that's really our sweet spot. As far as acreage goes, there's no minimum and there's no maximum. It does not have to be a working farm. Typically five acres and up, we will look at as the potential to generate farm income, but we can certainly finance smaller acreage that is just for a homesite for a non-farmer. We can finance medium-sized acreage that could be dual purpose, whether it's a homesite or a hobby farm or just a rural lifestyle. And then we can also finance larger acreage that maybe they don't plan to build on it, but they just want to have that track of land to go out and enjoy the family and run a side-by-side on.
DL: And those land loans is really where we shine because we require very little down, as little as 15% down, long-term fixed rates. And once people get that property, they typically come back for our construction loans. And we do have a really successful one-time post construction loan, that had just been so popular because of this increasing rate environment, especially being able to lock that in on the front end and know what my permanent end mortgage is gonna be before I even break ground, just to mitigate that risk based on what the market could do.
DL: And so that's been a huge product that we have in our portfolio. And then other unconventional type properties that we seem to be financing more and more of each day are the log homes, the barndominiums, maybe the multi-purpose buildings. Some of the area may be unfinished shop space, and then some of the area may be finished living space. Also, larger acreage with multiple homes on it, whether it's one primary dwelling for a family and then a mother-in-law suite or an extra house that they're gonna Airbnb, but it's out in the country on large acreage.
DL: That's a large growing part of our business as well. And most recently, we've offered what we call a rural range product. And that is growing in popularity due to a lot of people having the ability to work remote. And so somebody that may live, let's say in Denver, but they wanna buy a cabin or a house on large acreage that's an hour or two outside of Denver, and they may spend every weekend there. And it's pretty much an extension of their primary dwelling. We fit that into what we call a rural ranch home loan. So it may not be their primary dwelling, but since it's an extension of their primary dwelling, they're able to get A-plus pricing, long-term fixed rates, as minimal as 15% down. And that property is typically something that a conventional bank would shy away from due to the acreage or the extra structures. There may be a shop, there may be a barn that those banks typically don't like to value those additional structures as well.
JO: Well, I think we're gonna keep just seeing more and more demand for those products. For our listeners that are not quite familiar with maybe some of the terminology that we're using, a barndominium is strictly a barn with living quarters inside it. They've been around for 50 years. It's funny, my grandpa and grandma in Southeastern Oklahoma, they ran cows in Durant, Oklahoma. And we would spend the summers up there in the barndominium. Now they didn't call it a barndominium back then, but that's exactly what it was, is the living quarters are one side of the barn and all the farm equipment and led straight out to the corrals and the chutes were on the other side of the barn. And so they've been around for a long time. But I think when you look at the cost of construction going up so much across the country, where I'm at, it's anywhere between $400 and $500 a foot for builder-grade construction. It's just crazy. But you can go get a barndominium built and it's half that price. And so I think we're just gonna be seeing more and more of those as construction costs continue to go up.
JO: And the other thing you hit on was the multiple houses. We call them multi-generational properties, because it's not so much investors where we're at looking to do short-term rentals. We have a few of those up by the Purgatory Ski area, but we have a lot of the older generation, moving back to the son and his wife, maybe they're in their 40s and 50s and they've got kids and grandkids that are teenagers. And so now you've got this multi-generational property where you've got three residences, four residences and traditional lenders don't like that. So, I'm extremely happy that y'all are offering products that I can put my clients in at very, very favorable rates and terms.
DL: Yeah. And it's fun to have customers call you up and they all have their own lingo. You talk about, we call it multi-generational. You hear shop house, shouse, barndo, you get all kinds of stuff. So yeah, we were excited about that space. And what we found is, what we thought were traditional one-time transactional consumer loans, there are actually very much relationships. And they typically come back to us because they want to build another outbuilding or they want to get livestock all of a sudden that once they embrace that rural lifestyle. And so we're able to help them as they grow that hobby farm and grow their family out in the country.
JO: Well, you're exactly right. And I wanna reiterate something you just said, not really on script here, but listeners, she said relationships. And our business model, whether you're in the real estate business or you're in the financing business, as much as certain people think it is, I can sit at home, I can work from home, I can be in my pyjamas and I can do this successfully. Real estate is still 100% in 2024 a relationship business. And so keep that in mind. If you wanna do a few deals, you can probably do them sitting at home, but if you wanna really be successful in this industry, it is still a relationship business where you've got to get out and grind and go meet these folks, go meet them on their farms, go meet them on their ranches, go meet the lenders in their offices, and you'll be successful. Let's talk a little bit about what you're seeing with interest rates. I know they're a little high right now, and I know you all have a fabulous package for refining, I think it's even once a year. So talk to us a little bit about that.
DL: Yeah. Well just talking about the market, May was a big month as far as interest rates go. So everyone knows, as of May 1st, federal reserves announced they decided to keep rates exactly the same, no movement. Which is the federal funds target of five and a quarter to five and a half percent, which is the highest we've seen in the last 20 plus years. And we've been sitting here since July of last year. So, 2024 was proven to be much different story than what the feds anticipated during at the start of this year. They prepared us for three potential interest rate cuts in 2024. Everyone was accepting them. And here we are halfway through with no movement.
DL: So, the feds definitely teased us at the start of this year. And because that we were hopeful for some inflation easing, but that didn't happen. So first quarter inflation came out hotter than anticipated. And we had the labor shortage, still have the labor shortage. And then second quarter, Federal Reserve chair came out and said, we have no reason to cut rates yet because we're not satisfied with inflation. So what I tell my customers when they they, Oh, now's not the best time, inflation sitting at three and a half percent, feds wanna target it to 2%. So we're still a ways away from that. So inflation will continue to drive the feds decision.
DL: So right now we have a situation where we have these high rates, "high," mainly because we were so, so spoiled for the last decade plus. But these higher rates really aren't generating enough breaking power on the economy. So this suggests that we'll probably remain in this higher rate environment, and possibly even see a rate cut depending on what happens. So obviously there's factors that play into it. There's an election coming up, even though Federal Reserve monetary decision makers claim to be independent from the political influence, electioneers stir everything up. Unemployment is a huge factor.
DL: But what we have seen in the mortgage industry is that the rising rates did not temper the demand for housing. And we did see growth year after year over the last couple of years, especially in the rising interest rate environment. So the beginning of May, Mortgage Banker Associations actually reported a 2.6% seasonal increase in mortgage applications. And mortgage rates have come down slightly from their peak, but the demand is still there, which is why we're seeing record applications week over week at Rural 1st. So I encourage my customers take advantage of this stable rate environment, because right now you can get into a rural property with a home on it, probably anywhere from six and a half to seven and a quarter percent, long-term fixed.
DL: And then if it's just raw land only, you're looking at maybe seven and a half to 7.9%, which is still a great rate. It's locked in, it's long-term, it's fixed. And we do have the ability to, what we call, do a conversion. And so rather than actually refinancing that interest rate in, let's say a year if the market gives us an opportunity to lower your rate, we don't put you through the refinance. We don't make you pay a few thousand in closing costs and wait 30, 40 days. We just do an interest rate conversion and that converts you to whatever that low rate is at that time. And you keep your maturity date, you keep your loan on the books.
DL: It's a flat fee of $750 and it saves customers thousands of dollars. And they may do it, several times over the life of their loan, but that's the service we offer. And since these Rural 1st loans are done in-house, we're a portfolio lender, we have the ability to do this in-house servicing, which is one of the best benefits to our customers, hands down, within the Farm Credit System. I've seen it done. I've seen families just save hundreds of thousands of dollars over the last couple of decades with Farm Credit and Rural 1st doing these conversions.
JO: Well, I think that's great. And most banks doing land loans, they're gonna be 5/1 ARM maybe. They might amortize it over 20 years, but they're gonna have a balloon doing five. I love that y'all can come in here, amortize, straight amortization, what, 20 years? Is that right?
DL: We can go up to 30 years on land and on homes.
JO: 30 years. That's great. So you can finance land, same length as a home. Somebody gets locked in right now, like you said, 7.5%, 8%. Two years, those rates are 6.5%. All they do is cut you $750 check, no appraisal, no title commitment, no $3,000 in closing costs. And then it's every year. If it goes down the next year to six, they could do it again, correct?
DL: Correct. Yep. You got it. Multiple times throughout the life of their loan, people take advantage of this based on what the market gives them as far as opportunity. But a customer is technically eligible to do that once a year.
JO: That's fabulous. And I'm sure you've got stuff on your website where people can learn more about this.
DL: Yes, yes. Our website, ruralfirst.com, has a lot of detail about us being a lending cooperative, a part of the Farm Credit System, the benefits and loan servicing actions that we can provide for them, once they do get that loan on the books. A couple other servicing actions that are pretty common is, someone may buy a large parcel, but then they want to parcel off five acres and deed it to one of their kids to build a home. Those types of servicing actions, we do that on a daily basis. Partial release a mortgage to help that next generation get into a home construction loan and get that property unencumbered. So, yeah, we do it all.
JO: Well, that's great. Anything else you want to throw out for our listeners here as we're starting to wrap up?
DL: I'd say if you are under the preconceived notion that you can't afford to buy land, because it's too expensive or because you heard at one time the bank would require 30% down, call Rural 1st. We can look at what your income levels are. We can pre-qualify anyone at any time, and that's not gonna lock you in to buying anything. You're not gonna be out anything.
DL: It's a great way to kind of walk through and see what kind of property best fits your household income and give you a realistic idea of what that down payment will look like. And that can give you a goal to save for it in the future, because it's an investment in you and your family and your lifestyle. And if that's your dream, we will help you and then call Justin.
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JO: I love it. Get pre-qualified before you call your REALTOR. Great. Folks, if you'd like a deeper dive into what's happening in the real estate market and land in particular, I recommend you check out the 2023 Land Market Survey Report released by RLI and NAR just this past spring. NAR Chief Economist, Dr. Lawrence Yun, provides excellent insights on interest rates, inflation, and how the housing market impacts land. You can access that report on the RLI website under Resources. Visit rliland.com. Well, Darla, thank you so much for joining us today. If a listener wants to get in touch with you to learn more about the Rural loan products, should we send them to the website or is there a better way to get in touch with you directly?
DL: The website is great, ruralfirst.com. I'm happy to take any calls or emails if they do wanna reach out. My email is darla.larson@ruralfirst.com, and I would love to help anyone out. I'd love to direct them to a local loan officer if they wanna meet in person and explore that with them.
JO: Excellent. Well, folks, for more expertise on land real estate topics, be sure to check out the RLI blog, follow us on social media, and of course tune in for upcoming episodes of the Voices of Land podcast.