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The obstacles of financing rural properties

Rural vacation properties have been on the radar of many urban dwellers for years, but in recent times a growing number of buyers have been turning to permanent rural residency. A case in point is in the Land ’O Lakes region in eastern Ontario. While the region is seeing more home buyers from the Toronto-to-Montreal corridor, securing a conventional mortgage isn’t always easy – or, in some cases, even possible.

Banks often steer clear of financing rural properties because things like septic tanks and adjacent farms are issues they don’t understand. “It is stuff the banks could do (learn) but the market isn’t large enough,” says Matthew Robinson. “They really don’t understand what it is like to live on a lake. They don’t have enough data.”

Robinson is CEO of WA Robinson Management, Pillar Financial Services and Lake District Realty – family owned businesses based in the hamlet of Sharbot Lake, an hour north of Kingston. He offers alternative financing solutions for buyers in rural areas.

He says his father Wayne saw a need in the early 1980s for alternative financing when the local bank in Sharbot Lake wouldn’t finance a property for the hamlet’s school principal because it had a well and septic system. To address the problem, Wayne opened a business providing loans and mortgages for real estate.

Deals for properties back then were straightforward by today’s standards. Robinson recalls when he got into real estate in the mid-1990s, a typical no-frills cottage on Sharbot Lake sold for about $60,000. Times have changed. Buyers in the region now fork over $250,000 and up for a country home/cottage.

One of the reasons for the bigger, more permanent home in what was once a region dotted with simple cottages is because lot prices have soared. After paying big bucks for a lot, many buyers can’t justify building just a bare-bones cottage for summertime use only. “It is not so much a cultural shift for people from big cities as it is a price-driven one,” Robinson says.

That’s led to many buyers rethinking the purpose of a place in the country. They often choose to stay longer, even into winter, which, in some instances, leads to a four-season home. “We’re seeing that trend more and more with the baby boomers,” says Robinson.

He says of his clientele seeking alternative financing, 40 per cent of them are after construction loans – either for renovations or new construction. Pillar Financial works with mortgage brokers across Ontario to provide short-term construction and financing rural properties – typically three to 16 months. Financing might be about one per cent a month on a construction loan of 12 months.

He says big banks don’t take that type of lending risk because the margins are small. “If you have bruised credit . . . and you are doing a construction deal, you do not qualify if you are a business yourself. It’s becoming more difficult to get that 2.99 per cent mortgage.”

That’s the advantage of mortgage investment corporations (MIC) like Pillar, which are tailored to lend mortgages to that type of client, he says. “We will do it at a higher rate, but we’re willing to listen to your story and evaluate what the real risk is.”

He says, “The banks are going to a higher rate at the front and lock it in lower at the back. On an average basis we might be higher over the short term but once it is all completed, the risk assessment on the other side might be lower for the five-year term so it would be cheaper to do it with us.”

He says his MIC represents more than $150 million in assets under management and is the only MIC publicly sold by prospectus in Canada that is not traded on the TSX. “I have that control of capital; I don’t have to wait for the public market.”

The funding required for alternative mortgages has opened a door for investors, he says. Returns can be in the six per cent range per annum because the investment is not correlated with interest rates. “Even if interest rates go through the roof, it doesn’t have any real affect in the short-term on our returns for the investor.”

He says for financiers to be successful in rural markets, they need to develop relationships with real estate agents, mortgage brokers and appraisers from those regions.

He advises anyone looking for property in the country – even if they get financing from a bank – to get a mortgage broker with expertise in the region. “You might just find that there is a credit union or a broker like us that can do short-term financing better, cheaper and faster with less risk.”

On Canada’s West Coast, a couple of the most popular big city getaway areas are Whistler and the Sunshine Coast, says Jared Dreyer, vice-president, corporate relations, Verico Financial Group Inc. Properties within a two or three-hour drive from Vancouver are in the most demand and therefore most apt to meet the requirements of a conventional mortgage. Verico is a national company of mortgage professionals that sees more than $13 billion in mortgage volumes annually.

Further afield in more isolated regions of B.C., however, it is a different story, Dreyer says, suggesting that alternative financing can sometimes come from local credit unions familiar with a host of issues property owners might face in the country.

While a growing demand to convert cottages to homes might be happening in some regions – Ontario’s Muskoka, for example – Dreyer doesn’t see it happening so much in B.C.

While new construction is slowing down in Robinson’s region, north of Kingston, he says there still are renovations going on that require loans. The hamlet of Sharbot Lake serves about 5,000 people in the summer and has a population of 1,000-1,500 permanent residents. While the lake is far removed from a big city, today’s technology allows people to run businesses from almost anywhere – a carrot for entrepreneurs from the city looking for a change of pace.