Are you considering buying an acreage?
I will be the first to tell you that the rural lifestyle has its rewards—including big, beautiful skies and the tranquility that comes with being surrounded by nature. Unfortunately, buying a property that doesn't suit your needs could make day-to-day life less than idyllic. That’s why it pays to know what to look for when buying an acreage. Here are a few of the things you should consider during your search.
HOW MANY ACRES ARE YOU PURCHASING?
For conventional mortgages, mortgage lenders will finance a certain number of acres, a house & a garage. The number of acres that they will consider can vary based on the property location and the norm for that area. The minimum down payment can also vary based on the size and location of the land. For example, a property that is close to a major urban area and under 10 acres would most likely be approved with 20% down payment. If it is a larger acreage 30+ acres and not within an hour of a major urban area, the minimum down payment will likely increase.
The lender may consider including value of out building if the product is changed to an Agricultural mortgage instead of residential mortgage and may then have a higher interest rate.
For high-ratio / CMHC insured mortgages with a minimum of 5% down, they will approve and insure the value of the house, garage and the `residential component` of the land. If the norm / average acreage size for the area is 20 acres, this is what they will approve in land value. If it is 160k – then this is what they will approve. However, if you purchases a 160 acre acreage and all of the acreages surrounding it are only 20 acres – CMHC will likely only give value to the first 20 acres of land and the buyers will have to pay out of pocket for the value of the remaining land as determined by an appraisal. It is typically easier to secure financing on CMHC insured Mortgages and it is not uncommon for lenders to require the mortgage is insured even if the buyers have a 20% down payment based on the purchase price. If it is a large acreage, has outbuildings of major value or is a mobile or modular home – these are all things that could result in either a larger down payment requirement and / or mortgage default insurance. Genworth will look at a high ratio mortgage using the value of the house, garage and a max of 40 acres with no Agricultural component. The lender must be willing to lend on the same criteria.
OTHER FINANCING FACTORS TO CONSIDER: You may need to allow extra time for conditions to be removed on acreage purchases as insurers appraises 99% of properties and well water testing can cause delays.
If there is no home on the property a mortgage is not available and one would require a land loan. Land loans typically start at a minimum of 25% down payment and go up from there based on the location, size and value of the property, they also often come at slightly higher interest rates.
2) Water Supply
WHAT ABOUT POTABILITY?
No mortgage unless there is good water! Potability reports are needed for all well water and will be requested either upfront with the lender approval or at the lawyers before closing. In some cases the lenders will accept title insurance in place of a portability test and septic inspection.
It’s something many city dwellers have never thought twice about. But when you’re looking at acreages, you need to consider your access to clean, high-quality water. The easiest option is to tap into your municipality’s water supply, but this isn’t always possible. Depending on where you buy, you may have to rely on a well, dugout or other water supply. These systems require ongoing maintenance, so consider learning a bit about them before making a commitment. When you’re looking at an acreage, be sure to inquire about the source, quality, and quantity of the water supply.
What about Zoning?
Are you hoping to use your acreage for agricultural purposes? If so, you’ll need to start by ensuring that your plans are in keeping with local zoning regulations. From there, you'll need to determine how suitable the property is for your purposes.
Country residential is the easiest to finance. However, if the land is zoned Agricultural, but used as residential (no farming or commercial component) the lenders and insurers will consider this as well. Agricultural & Farm land that derives income is more difficult to finance. Lenders are wary as it is difficult to foreclose on agricultural land and if the Agricultural land has a farming component or income lender options become much more limited and down payment requirements increase.
Rules & regulations
Municipal bylaws and zoning requirements are an important consideration when you’re looking at acreages. These rules may influence how you're permitted to use your land, the dimensions and property lines of any buildings you plan to construct, and whether you can operate a business from the premises (among other things). Remember that both municipal and federal rules and regulations may be applicable, so it pays to do your research. A real estate agent who knows the ins and outs of purchasing an acreage can also provide guidance at every step.
Will the buildings and land meet your needs?
If you’re planning to grow crops or produce, what type of soil will you be working with, and is it of high quality? How well does the land drain? If you're planning on raising livestock, will the property's existing structures, water supply, and land be sufficient? Know what your plans are, and be sure to make a list of relevant questions for your real estate agent.
4) Access to the property
If you’ve spent most of your life in a city or town, you’re probably used to reliable road travel. Damaged, flooded, and snow-covered streets are tended to quickly, which means its easy to hop in your car and get where you need to go. In contrast, rural roads aren't always perfectly maintained. Depending on where an acreage is located, getting to nearby towns and cities can be a challenge—especially during the colder months.
If you’re thinking about what to look for when buying an acreage, consider adding road access to your list. Life is easier when you live on a property that connects to all-weather roads that are maintained frequently.
Most people who purchase rural land value peace and quiet. Acreage living offers an abundance of space and plenty of privacy, but choosing the right location is crucial.
Consider how remote you want to be. Keep in mind that a shorter commute to nearby cities and towns will lead to a more convenient lifestyle. Specifically, when you’re looking at acreages, find out how accessible emergency and medical services will be. You might also want to look into the reliability of WiFi and cellular networks.
Living in the country can be a wonderful experience, so long as you choose the right place to settle down. Working with an agent who has in-depth knowledge about acreages and the buying process can help ensure that you find the property of your dreams.
6) Out buildings
WHAT IF THE PROPERTY HAS OUT BUILDINGS?
Mortgages are for a house, garage and land – and that’s all. If the property has an out building of value the effective value of the property will often be reduced by the lender or insurer and this will affect the down payment requirements.
For example, if a client is purchasing a small acreage for 800k , and there is a brand new large heated shop, horse corrals and an arena on the property that the appraiser values in total at $160k , this would be deducted from the purchase price in the lenders eyes bringing the effective value down to 640k (800k-160k). The buyer would then need to have a minimum 5% down payment based on the 640k effective value ($32k) PLUS 160k to make up the difference (value of outbuildings) for a total of $192,000 . Even though the buyer is technically putting more than 20% down based on the contract purchase price, the lender and insurer would consider this to be financed at 95% of the value of the home, garage and land and a CMHC premium would apply to the insured amount.