The United States is a large place. According to the U.S. Department of Agriculture, 83% of the United States is inhabited by only 16% of its population. That’s a lot of land, and while it’s a fraction of the American population, it’s still a lot of people living in a very spread out area. So what makes rural areas and rural appraisals different than metropolitan and suburban appraisals?
The term rural depends on what type of area is being examined. There are a number of official qualifications, according to USDA or FHA. It can be any place with less than 2,500 inhabitants, a county with less than 20,000, and it can even be parts that are technically sections of extended cities, but in rural areas that meet other definitions. Things get even more confusing when locations fall in-between categorizations, like when an area qualifies as neither rural or suburban alone, but is both. This is a combination referred to as ‘rurban.’ There’s no traditional box to check for this, and comments in an appraisal report go a long way toward clarity.
Because so much of rural areas is agricultural in use, specific things like soil type will factor into land appraisals. High-yield soils are worth more, and low-yield soils are worth less. Harder still are the comparisons of residential properties in rural areas. Special challenges exist due to uncommon building types and sizeable lots that are frequently mixed use, including farmland and nonpublic utility sources. Rural residential properties don’t tend to conform to each other as uniformly as urban and suburban areas. Amenities change or are missing entirely, and more widely, design and quality change. Pavement becomes more rare, boundary markers and dividers such as fencing become more common and variable, and septic and sewage situations differ.
The more diverse and varying potentials for risk to a loan are what need to be stressed in rural areas, including factors such as distance and travel time, both of which increase dramatically when shifting from suburban to rural areas. It is also important to note that Fannie Mae will purchase loans that finance properties that are used primarily for residences, but will not purchase mortgages that are used to finance primarily commercial or agricultural properties. Current market conditions in rural areas will affect the cross section of market data available, and efforts will frequently need to be made to position property sales as reasonable alternatives to the subject property.
Fannie Mae released new guidelines for rural appraisals in March of 2014, which also clarified its policy on using appraisal management companies. While the GSE’s removed the adjustment guidelines of 15% net and 25% gross, HUD does still does include those guidelines as well as 10% line item adjustments. This is not to suggest that the guidelines cannot be exceeded, only that the appraiser provide commentary or support for the limited availability and suitability of the comparable data and this is of paramount importance when appraising rural properties. Exceeding the guidelines is simply unavoidable, so “whenever possible, appraisers should attempt to balance the analysis by isolating dominant features within the subject property and select sales that compare to those features,” according to FNMA.
You can read Fannie Mae’s guidance for rural appraisals here.