Rural properties have traditionally been problematic for underwriters. Complicating issues include
primary appeal, high land value, agricultural use,
and outbuildings. Underwriters unfamiliar with rural
lending may not differentiate poor from limited
comparable selection. Marketability may improve
when telecommuting allows a more employees to
Each of the three locational classifications has its
own distinct challenges. Since neighborhoods differ, evolve, and are affected by economic conditions, challenges can change.
About fifty years ago, there was an exodus of
homeowners from West Los Angeles to larger
homes on larger lots in the San Fernando Valley.
About twenty-five years later, another exodus occurred with homeowners from the San Fernando
Valley moving even farther out into Ventura County. Simultaneously, employment once concentrated in metropolitan Los Angeles has dispersed
to the suburbs. The longer I worked, the farther I
commuted. Cities grow, suburbs become citified,
and rural areas turn into new suburbs.
Eric and Marilyn owned a spacious house in a
low-density suburban neighborhood with an acre
of avocado trees in the backyard. An irrigation
system watered the grove, but the gardener came
no more often than for a normal residence. Twice
yearly a crew harvested the crop. Despite Eric
referring to their backyard as Marilyn’s farm and
the Schedule F in their tax returns, this clearly constituted a hobby farm. The value of the property
rested largely in the residential structure, not the
small but profitable income from the avocados.
Location was in an upper-end suburban residential
neighborhood. Although an adjacent neighbor's
backyard housed a few llamas, that property was
not considered a zoo.
Lesson: It's not a working farm unless a primary
appeal is agricultural use, despite what you call it.
HOBBY FARMS VERSUS
An underwriter advocated that a property was a
hobby farm because the borrower could easily
afford the Schedule F loss. The borrower's earn-
ings from a tech position easily offset losses from
the vineyard covering most of the residence's
acreage. Relative to high-paying employment, the
vineyard was the borrower's hobby. However, rela-
tive to Schedule F activity, it could not be consid-
ered minor agricultural use.
A key indicator of a hobby farm is minimal gross
earnings. The vineyard had significant gross earnings but was far from profitable, even though the
wine was sold commercially. There was no resemblance to a home garden or a 4H project. That the
borrower could easily afford the loss was irrelevant
to how the property was utilized.
Another consideration is primary appeal. A large
house on moderate acreage could be attractive to
a buyer looking for what could be called a kitchen
garden--enough produce to supply the house-hold--and privacy from neighbors. A small house
on the same moderate acreage would only attract
a buyer wanting to farm the acreage.
Anne Elliott studied mortgage risk throughout her professional career. Her upcoming book, Underwriting with
Thought, or An Alternative Approach to Responsible
Origination, will be published in early 2017. Contact her