Re: Mortgages and Financing for Rural Acreage Properties : A Response to Jim Hazzard’s recent beleaguered plea!
I read with interest the article “Rural Properties: Where are the banks?” that appeared in your excellent November Issue of REM. From time to time we have difficult with banks, particularly the big urban banks known to us affectionately as “Humongus” Bank, recognizing the value of larger country acreage properties. They have little appreciation of country properties and neither do the loafer-shod appraisers that they send out to “value” the property for “mortgage purposes”.
The most banks, and particularly Humongus make a distinction between the market value of a property (the value of a property in relation to similar properties in the area and the price that the buyer and seller agree is “fair” and “reasonable”) and the properties value for mortgage purposes (the discounted value that the bank will accept in granting a mortgage). For example: if a property has a comparative, market value of $375,000.00, the banks will discount it by 5-10 % (or more) and assign a “value for mortgage purposes” of from $355,000 to $340,000. This discounted value then becomes the base that is used to calculate the maximum mortgage that will be granted. Not happy with this discounting, they also demand excessive amounts of collateral, particularly for rural land.
Humongus Bank usually wants nothing to do with country properties. They “set their hair on fire” when they learn that the property is serviced by its own well and has its own septic system. If the property in question is a larger parcel – say 40 to 60 acres, Humongous Bank sets an arbitrary rule that it will only consider granting a mortgage on the value of the house plus five acres with nothing allowed for the other improvements (out-buildings) and the additional acres.
A few years ago I had some clients come out from Vancouver to buy a 12 acre, equestrian property that featured a modest older home, out buildings, and a newly built $250,000 indoor riding area with 25 stalls attached. It was on a popular bridle trail to a regional park, just 10 minutes ride away, and it was surrounded by equivalent country estate properties – all selling in the $400,000 – $600,000 range. The property was listed at $689,000 and the after some serious negotiations, a Contract of Purchase and Sale was signed by the parties for $675,000 – subject to the purchasers being able to get a first mortgage of $325,000, and subject to a satisfactory final inspection to be carried out by the purchasers and/or their agents. It looked like a sure sale.
The inspection was carried out three days later and the home and improvements passed with flying colors. When the buyers told me they dealt with Humongus Bank in Kerridale and that the loans manager would like to send an appraiser out to value the property for “mortgage purposes” I cringed. I could predict the results.
It was cold and rainy November morning when the wimpy looking, loafer-shod, appraiser arrived on the scene. He was dressed in an Australian bush hat and a light windbreaker. I met him in my boots, Stetson, long raincoat, and golf umbrella. I suggested that I’d walk the property with him and show him around the barns. “Oh” he replied, “I don’t have to see that. I’m only interested in the value of the house and five acres.”
I was incredulous, and when I pointed out the value of the additional acreage, the out buildings, the new riding arena, the attached stables, and the fencing he stated that this was of no interest to him or Humongus Bank. Next the appraiser wanted to know about the water and sewer systems. I showed him the well-house, the jet pump, and the new pressure system that supplied water to the property but he was anything but impressed. When I pointed out the location of the septic tank and field, it was as if he’d never heard of one before. I had to draw one on a piece of paper to show him how such system work. At that point he stepped in a puddle and the muddy water filled his left Gucci loafer. This annoyed him no end and after a cursory examination of the three-bedroom, twenty year old, basement style home (which had recently been remodeled with a new metal roof) he sped back to the city and his cozy office.
A few days later the distressed purchasers called to say that Humungus Bank would not give them the mortgage they were seeking. The loans manager claimed that the value of the property for mortgage purposes was only $335,000 and the most they would lend was $251,000 at 2% above prime. I told my clients to sit tight and give me a couple of hours. First I called the loans manager at Humongus Bank. He said it was their policy to value only the house and five acres and that this property didn’t even have an “approved” water or sewage system. Next I called the mortgage loans manager of the local credit union that I regularly deal with. I explained the situation, the market value of the property and the employment income of my clients. Without hesitating the loans manager stated: “I know that property, we financed the riding arena and the renovations to the house about two years ago — lovely people. If your client’s credit history is ok and their income is as you say it is, I’ll give them a mortgage at 1% over prime this afternoon. Have them come in and you can remove the subject tonight! ”
The purpose of all this is to point out that unless it is a “gold-plated” deal, located in the heart of an urban area, with 200% or more collateral, Humongus Bank doesn’t want your business. They’ll invest billions of dollars some foolishly fictitious, gold mine somewhere in the jungle that has “salted” core samples, but they’re reluctant to grant reasonable mortgages at reasonable terms on valuable country properties. They also want to tie-up as much collateral as they possibly can — far in excess of the value of their miserly mortgage.
This scenario plays out with great regularity — and not just with Humongus Bank. Big city law firms and insurance companies play the same game. I’ve had metro city law firms quote conveyancing costs that are often thousands of dollars more than the fees quoted by friendly, hard working, local lawyers. The same can be said for insurance agents. I regularly get quotes from lawyers and insurance companies and invariably the local service providers offer timelier, friendlier, and more knowledgeable service at much less cost. They also follow-up and ensure that their new clients are happy and will use their services again. The recent policy of several home insurance companies, denying fire insurance to rural homes, is to my mind unconscionable. Once denied insurance by one firm, the applicant is forced to state on his next application if another company has ever turned him down for insurance. If he indicates “Yes” its usually a quickly terminated interview.
A good local bank manager and/or a mortgage broker, who knows the territory and the market, is worth his weight in gold and most experienced realtors have one or two of them that can be counted on when their clients are let down by Humongus Bank.
I asked my mortgage broker to give me his opinion on Jim Hazzard’s article and here is his response.
“This mortgage broker does not know what he/she is doing for the client. TD – Canada Trust policy has always been – house plus 5 acres as the accepted appraised value, NO MORE or less. The mortgage broker should have known this information from the beginning.
“On the other hand CMHC guidelines would insure properties beyond 5 acres and take full value beyond 5 acres as long as the neighboring houses have the same average acreagesize. But you need to find a lender that does not have a restriction on acreages like the big banks, such as the local credit unions who are happy to lend on farm/agricultural land.
“As for the client’s need for additional cash to complete the out buildings, Home Depot or Revy would likely advance the funds for the building materials as long as they have a commitment from the bank that they would be advanced the funds as soon as the buildings are complete. Other home construction/renovations companies would also build as long as they know the money is there once the building is complete.
“I would have done this mortgage – NO Problem! I can’t see why CMHC would have been involved in this deal unless the bank wanted more comfort.
“It all boils down to the mortgage broker.”
I hope that this helps!
Roger W. Patillo
Abbottsford, B.C.
