A Mortgage Financing Guide for Developing Vacant Land in Canada

The General Thought...

Developing vacant land, a lot, or a small acreage with a new home can mean a lot of great things for you and your family, including the opportunity to escape the hustle and bustle of the city in the home of your dreams, choosing all the elements of your new place, and the sense of accomplishment and satisfaction that comes with bringing it all together.

If you are seeking mortgage financing to develop the property, please be aware of the following Four Requirements:

1. The money required on your part to acquire and develop vacant land with a new home is roughly 5 to 7 times the minimum down payment required to purchase an existing residential property. We call this your Cash Requirement. Note, lenders do not give you money in advance to put it all together, rather they rebate you based on progress milestones met.
2. Mortgage lenders all have property criteria that must be met before they agree to give you a loan, and whether your proposed project can meet the criteria or not will determine if there are many, a few, or no mortgage lenders at all to choose from. We call this the Property Requirement.
3. Developing a property is risky because if you run out of money due to cost overruns or unforeseen events, the project grinds to a halt. You must prove to mortgage lenders that DO provide construction financing that your project will be completed on time and on budget. We call this the Experience Requirement.
4. Finally (and most importantly), you must be able to get a mortgage meaning you must have sufficient employment income and credit to mortgage qualify in addition to your Cash Requirement. It is also useful to know your maximum capacity to borrow in order to establish a budget. We call this your Mortgage Requirement.

In this article we are going to delve into these themes in more detail as **All Requirements Must be Met** for you to successfully develop a residential-use property with mortgage financing. We also provide a cost-of-construction budgeting tool and some budget amounts.

For those who live in Alberta that cannot meet the Cash or Experience Requirements, you may be interested in learning more about a low down residential land development financing program that we are piloting.

Please note: This is a Self-Study Information Page loaded with free information and resources about mortgage finance as it relates to acquiring and developing land with a home – the Dos and Don’ts. If you would like to consult with me directly about your project, you can inquire about Fee-for-Service consulting options To make the best use of your time, we recommend you read and study all the information provided in advance and download and complete the available templates. Please understand that time is a valuable and finite resource and we can only respond to contact made through the offers on this page. If you like what we have provided for free, you are welcome to Buy us a Beer!

Mortgage and Cash Requirements

Mortgage Pre-Qualify is Step 1

First and foremost, assuming you need to borrow money to finance the new home, you first want to confirm that you can indeed get a mortgage and for how much. Clearly, you should have a budget amount to work with and to know what is likely within financial reach and what is not.

To be able to mortgage-qualify you need reliable employment, enough income to pay the new mortgage plus your current debts, and reasonable credit repayment history. In addition, you must have enough cash or equity to make the project happen and the property you are developing must meet lender criteria. If you are unsure if you can mortgage qualify, we have a robust pre-approval process to give you the required confidence to move from dreaming to doing.  

Warning - proceeding under a false assumption that you can get a mortgage to complete your project only to discover that is not the likely case would be - best case - a waste of time, and -worse case - disastrous. We often see this lack of planning manifest with clients successfully acquiring land but not having the resources to develop it and being forced to severely modify or worse yet abandon their plans. This page is to help prevent this situation and to offer solutions.

 

Cash Requirements

Assume for a moment that you have a good job and good credit as required for a mortgage. Let’s talk in a little more detail about your cash requirements as this is where developing a lot or small acreage with a new home differs from buying an existing property.

When you buy an existing home ready for occupancy, whether in town, lake lot, or on a small acreage, then your down payment can be as little as 5% and those funds are advanced to your lawyer a few days before you take possession with the bank’s mortgage money making up the balance of the purchase price. However, when it comes to developing land with a new build, it is particularly important to understand that mortgage lenders do not give you money in advance to acquire land and develop your project. Rather, they only fund (ie. rebate) for work completed to or on the land. If the lender funds only once at the very end when the home is complete that is called a new-build “completion” mortgage (most common). If the lender funds at various stages of development, that is called a “construction” or “progress-draw” mortgage.

To get the order of land development activities straight in your mind, first of all you need acquire the land or at least get permission to access the land so that you can walk around and choose your potential home-site location. We call this first step getting the "keys to the gate."  You will then want your home supplier to visit to make sure the home-site is suitable for the proposed foundation, accessible for transportation, and to ensure that all elements of a successful installation have been considered and accounted for. For items and services that the builder will or does not provide, you get those quotes next, perhaps for power, water, septic, gas, and any required surveying, earthworks, grading, or foundation work.

Payment Terms are Critical to Know

Your goal is to get an accurate quote along with the payment terms for every element of your proposed project including the home. For example, a water-well driller might say $5000 due on order, and the balance due within 7 days of completion. If the total bill is $12,000, then the water well driller is providing you $7000 in “trade credit” (short-term financing). The gas company might say $8000 all due up front, which means no trade credit! To acquire the land, your down payment for a land loan might be in the order of 35 to 50% of the land purchase price, due at possession.

Gather up and make a note of all these quotes and payment terms. We have produced a template that you can use to record and summarize the quotes and payment terms such that you can determine the Cash Requirements and cash flow timing on your part, which you are welcome to download here.

By using our template to record your quotes and payment terms and then transferring those amounts to the monthly cash flow table, you will soon discover what cash payments are required in each month of your project. You then want to compare the monthly cash requirement to the cash available from your own savings, personal lines-of-credit, Bank of Mom & Dad, etc., and when rebates would be available (if at all) from a mortgage lender.

How the Money Flows

For any sort of land and construction financing, you must have enough access to cash, personal credit, or trade credit to make your deposit for land and to also pay for the home and various installation services based on the payment terms that you negotiate with the suppliers or for which they require. Our template will help you organize this information into a monthly cash requirement. Be very careful utilizing credit cards and lines of credit, as high balances at the wrong time can reduce your credit score or otherwise impact your ability to mortgage qualify.

Construction Financing

Progress-draw funding is well established and suited for site-built homes but can be awkward and limited for factory-built or off-site-built "RTM" homes (we use the term "RTM" or Ready-to-Move to generally refer to homes that are completed in full or in part off-site and transported to the construction site for final assembly). Progress-draw financing is tough for RTM builds as the home components must be permanently attached to the land before the bank can advance mortgage money against the land tile, whereas for site-built homes the land/lot is being constantly improved with materials and labour and regular rebates are possible based on the progress and milestones made. If the off-site home builder wants or needs regular payments from you to fund your build while on the factory floor or in their yard, that means the builder may be asking you to provide them with working capital or work-in-progress financing, which a mortgage lender will not do (see the Caution at the end of this section.)

For any draw construction financing, as you progress through your project, the lender will send out an inspector to your property at various pre-agreed stages to confirm the work done and then reimburse you to pre-agreed amounts. A lender will ALWAYS hold back the cost-to-complete the project. Said differently, a lender will NEVER advance mortgage money for work yet-to-be-completed on the property. That’s just how it works and that is the major hurdle to overcome when you want to develop land. Banks that do provide construction funding will provide a ‘draw schedule’ based on milestones. You want to compare the bank’s draw schedule to your completed Cash Requirement template and look for shortfalls. If you want to be mortgage-approved, there can be no shortfalls.

When bank money or a ‘draw’ is available, it goes to your lawyer first before it is made available to pay the builder and/or suppliers who are waiting to be paid. These draws will likely not match the exact spend to-date, especially if you are over-budget, so either you or your builder have to make up the difference. Further, the lawyer must withhold a certain percentage of the funds (typ. 10%) regardless until 45 days have passed (typ.). If no trade or materials supplier has filed a ‘builder’s lien’ against your property for unpaid bills by the end of that waiting period, the drawl amount can be released for payment.

By the way, going over-budget is a big risk in developing a property. If you fail to pay a builder or supplier for services rendered, they can file a Builder’s Lien against the land title. Further if suppliers and trades are not getting paid, they quit working on your project and the whole thing grinds to a messy halt. Running out of money mid-project is bad news.

Caution: if your chosen RTM builder wants or needs your money to fund construction in their yard before the home is delivered to your property (not possible with mortgage financing), my advice for you would be to only rebate for progress milestones met on your home, the same way banks operate. Otherwise, the risk of prepayment (vs progress rebate) is that the builder uses your money for other projects they are working on and then runs into financial difficulty with you left hanging. Mortgage lenders protect themselves from this risk by only lending based on the value of your land and improvements made to that land. Once something is affixed to the land, it now belongs to the land under the Land Titles Act and the mortgage lender can make a claim on it if need be. Conversely, if you are going to provide your builder with working capital, there is a piece of legislation called a Purchase Money Security Interest which you might be able to use to protect yourself. Seek legal advice. If you are looking for a source of off-site funding for construction or vacant land and you already own a property with equity (perhaps you are going to sell your city home once the new home is complete), check out this blog on financing difficult projects. 

Types of Builds

There are 3 main categories of builds from a lending point of view.

1. Self-Build is where you will coordinate all the parts to the acreage or lot development yourself and you pay the bills as they fall due. For example, you might hire Bob’s Backhoe Service for your earthworks, Sam for Foundation Service, Ernie for Electrical, etc. In this category, the costs are often quite variable and subject to cost overrun, which is risky for you and lenders. Typically, mortgage lenders will require that you have a buffer of 10-15% extra cash or line-of-credit space available for potential overruns beyond the approved budget, which further adds to your Cash Requirement. You must also meet the lender’s Experience Requirement, meaning you can provide a resume showing that you have done this type of project management and build coordination before. Be prepared to explain how you will keep your job (that pays you the income required to mortgage-qualify) while managing the build and why you will be able to access trade suppliers competitively. If this is going to be an evening and weekend project, keep in mind that the longer it takes to complete your project, the longer you will be paying interest on borrowed money perhaps while also paying rent or a mortgage elsewhere, and the more you may be distracted from money-making opportunity in your regular jobs. These are called “carry-costs” and often neutralize the perceived cost savings of a self-build. If the lender has concerns, they may require that you hire an experienced General Contractor to keep the project on-time and on-budget.
2. Fixed-Price Build – where you hire a residential home builder to coordinate all elements of the home and foundation under a guaranteed fixed-price contract. You still need the money to acquire the land and bring in any missing utility services if the lot is un- or partially-serviced, or buy a “fully serviced-lot” with power, water, septic and gas to the lot line.
3. Turn-Key Build – common in the city, where a builder already owns the serviced-land and will give you an all-in fixed price guarantee and your only cash outlay is the builder’s initial deposit requirement (say 10%) with the balance due via progress draws or upon completion. Rurally, it would be rare to find a builder to pay for everything so that you don’t have to. Certainly, if you could find a builder or developer that would acquire vacant land on your behalf, service the lot with utilities at their expense, prep the home-site at their expense, and allow you to choose the home and foundation, that builder/developer would need to be compensated for their experience, cost of money, and be entitled to earn a developer’s profit that makes it all worthwhile, else why would they take on the increased risk?

Cash required for a “Self-Build” – if you (or a general contractor that you hire) intend to coordinate all the parts to the acreage development, a general rule-of-thumb is that the up-front cash or equity required on your part to acquire land and make it through a construction mortgage is generally about 1/3^rd the total project cost including land. For example, if the entire project is going to cost $450K, you probably need $150K standing by, whether cash, existing equity, line of credit, temporary help from a family member, or trade credit. A good chunk of this money will go to acquiring the land, prepping it, and builder deposit. This E-Z 1/3^rd rule is not intended to discourage you, rather to help you see immediately whether your pockets are likely going to be deep enough for a self-build without spending a lot of time to discover that they are not.

Cash required for a “Fixed-Price Build” – if you intend to hire a builder who handles the majority of the new home project from start to finish under a single fixed-price contract (but not the land), and is prepared to accept payments from the bank per the bank’s payment schedule or at the very end upon completion, then cash required on your part might be less than 1/3^rd of the total, but it could still be quite a bit depending on what the builder includes in the contract and what is not included.

Example - Let’s say the land is $100K and you need $35K down payment (35%) to buy it based on location and your build timing, that site preparations that you are responsible for include power and natural gas at $20K, and the builder will pay for the rest with only a $25K deposit required on your part and $225K (balance) due upon completion. In this example, the builder is extending you “trade credit” (deferred payment plan). If you are good at math, in this example, the entire project cost is $370K and your cash requirement is $80K or 22%.

Be clear that the more of the project components that the builder will provide and put into their fixed-price contract means less that you must pay for out of your own pocket. This is called “getting trade credit.”

Cash required for “Turn-key Build’ – this final category of new build is where you can find a builder or developer who already owns or will acquire the land on your behalf, bring in the services and the new home, and only requires a small deposit from you, say 10%, with the balance paid by the mortgage lender either via draws or at completion. The builder’s contract will stipulate the entire project specification and fixed cost including tax. In this circumstance, you can be unconditionally approved by some mortgage lenders at the outset. An unconditional mortgage approval removes risk for you and the builder.

Mortgage and Cash Requirements Summary

When you want to acquire and develop land with a new home, it is critical to know each line-item in your project budget and the payment terms and availability of trade credit for each. For a mortgage approval, you must be prepared to provide a detailed list of all quotes and development costs, and prove to the lender that you have enough cash to make it through the project and manage the risks.

If you do not have enough cash or access to credit to make the payments as they will likely fall due and the lender will not step in, then you will have a cash flow problem and you may need to change your approach.

We have developed a free cash flow planning template available for download here to help you figure this all out. 

PLEASE NOTE:  at this point in time, our mortgage brokerage is able to arrange acreage and lot-development mortgages only if you can meet all of the following criteria:

1. You are a resident in Alberta
2. Your land is or will be in Alberta
3. You can mortgage qualify (stable income and credit, and sufficient cash)
4. Fixed Price and Turn-Key projects only (no ‘self-builds’)

If you do NOT fit all the above criteria but are still tempted to contact us to tap into our knowledge, please be prepared to compensate us for our time. This is a very specialized area of lending and the banks operating in this space are few and far between and the ones that are available do NOT pay mortgage brokers such as me for arranging these deals. You are welcome to hire me on a fee-for-service basis to discuss you objectives and help your formulate and articulate a plan before taking action.

Property Requirements

We will make some quick recommendations for your property with detailed analysis following the table. For best access to mortgage lending today and for ease of financing for future buyers, we recommend the following:

The Real Estate Appraisal

When you seek mortgage financing, a mortgage lender will utilize the services of a licensed Real Estate Appraiser to confirm the property attributes that you are acquiring or building and to project the fair market value of the home once complete. In the case of a new-build, the Appraiser will visit the building site and examine your building plans and quotes, specifications, land attributes, etc. and come up with an 'as-if-complete' valuation of the property. The Appraiser is required to compare your proposed property to the market value of similar existing properties that have recently sold in your area with price adjustments for new vs old. If your cost to complete the project exceeds the projected fair market value of the home once complete, then you will have a financing problem. Put another way, if it is going to cost you $400K to create and a buyer in the market would only pay $350K for what you are creating, then you would lose $50K if you were forced to sell. To protect themselves against the risk over-lending, a mortgage lender will base their lending on the lower of  1) your cost-to-complete OR 2) the projected market value.

Important to Understand How Mortgage Lenders Think

In the table above, we made some recommendations as to an “ideal” property, because as mortgage professionals we know what attributes have broader lender appeal. A property may still be financeable with a sub-set of those attributes but understand that as more and more exceptions are required, the less lender choice your property will have because some lenders will begin to view your property as less ‘marketable,’ which means higher risk for them in the event of default.

“Mortgage lenders like properties that are easier to sell in the event they ever have to foreclose on you for non-payment of your mortgage, repossess the property, and sell it quickly to get their money back.” (Yikes, but it is true!)

Lenders and insurers perform statistical and subjective analysis, and if that analysis suggests that a property as likely to have less appeal in the resale market (ie. lack marketability), then those mortgage lenders are apt to say no-thanks in the first place rather than risk losing money. This thought process is called ‘risk management’ and every firm and person on earth has risk to manage. What this means to you is that it is important to create a property that has good market appeal, hence good re-sale potential, and that reduces your risk as well.

Properties in demand go up in value over time, which lenders and owners like because it reduces their risk. Properties in poor condition or with lower market appeal can fail to hold their value, which is a concern to lenders as it increases risk-of-loss in a foreclosure. If a property is difficult to finance, then value slides even more as the typical seller response is to lower the asking price until the property sells. Conversely, if something is easy to finance then there are more available buyers which tends to make a property appreciate more (gets bid-up over time). The point of this paragraph and this whole web page for that matter is to make sure you develop something with decent re-sale market appeal to both lenders and future buyers.

Developing a Property is an Investment

Also, it helps to think about property development today as an investment and the future sale price of your property as the return on your investment or ROI%. Compare a property that costs $450K to develop today (say with a full concrete basement foundation) and doubles in value in 15 years to one that costs $400K to develop today (without a concrete foundation) hence is worth 1.5X that in 15 years – which is better?

Let’s do very simply math: The first property is worth $900K in 15 years and the second property is worth $600K, so $300K less. Property one cost $50K more than property two, so you would be ahead $250K on property one simply because it appreciated more.

We are not saying this will be the case one way or the other, but simply suggesting that you do some critical thinking and ask around because we feel smart decisions will present greater opportunity.

Let me share a recent example where corners appear to have been cut in developing an acreage, which has come back to haunt the owner. While some cost was no doubt saved in 2001, today the property value is suffering compared to similar properties and is not selling at the price the owner thinks it should, and in my opinion this is because the property is difficult to finance.

In this example, the owner (a carpenter by trade) appears to have been trying to save costs with a DIY project. In 2001, he bought 5 acres, brought in services, excavated a basement and built an ICF foundation on his own. He then trucked in a home built in 1965 and installed it on the foundation. He then refinished the exterior and interior. Fast forward to today and the owner is struggling to sell it. Why? Lenders want to see and the seller cannot produce documentation for prospective buyers that the foundation was professionally engineered or inspected back in 2001 (ICF foundation leaks can be expensive to locate and fix if not done right). Further, he cannot produce the electrical permit that showed the wiring (circa 1965) was inspected or upgraded in 2001. The lenders that will finance an ag-zoned acreage today are declining to finance this particular property because they are concerned about future marketability as should prospective buyers. Kind of a catch-22.

What Acreage Mortgage Lenders *are* Willing to Finance

As it relates to developing an acreage or vacant lot with a home, lenders want the property to have wider market appeal hence easier to sell in the event they have to foreclose on a non-performing mortgage. To that point, they protect themselves by sometimes limiting the total loan they will provide, by refusing to finance value associated with non-residential use (say a barn or acres over 10) and also by ensuring the property meets certain criteria, specifically the building code, new home warranty, a permanent foundation, and the presence of utility services, as described above.

If you want to develop something that is a little beyond “normal” or to take short-cuts or make any decisions that might make the property harder to sell, you may find it difficult to obtain financing or require a large cash down payment in order to minimize lender risk. Off-grid homes often fall into this category, as do uncommon construction methods such as dome houses, cordwood homes, log homes, tiny homes, park-model homes, preserved-wood foundations, and even age-restricted (+55) communities or RV/Resort communities. While they might be absolutely perfect for your needs, mortgage lenders shy away from properties deemed harder to sell hence fail to hold their value or appreciate. (That being said, we can refer you to a non-mortgage financing option for tiny homes, indeed for any structure with a chasis and wheels, even if the wheel are later removed. )

The “Acid Test” - the key take-away point is to start at the end of your project and work backwards. Whatever it is that you are planning to build, assume you found the exact finished property ready-to-buy and available for sale today – you don’t have to flex a muscle get your dream place! Find an MLS-listing of a property currently on the market that is similar to what you envision. Now call a mortgage broker or your bank and see if you can hypothetically arrange purchase financing for it and what would the mortgage terms look like with respect to required down payment, interest rates relative to a property in town, and available amortization? If you cannot easily find lenders willing to finance your hypothetical property with a low down payment, then what you are planning has low lender appeal hence the property will likely have trouble retaining value over time. Ask yourself whether that makes sense.  

Acreage Development Step-by-Step

To acquire land and develop it with a new home, the following items are probably going to be on your list. We will talk about these topics more so from a financing and risk perspective and to give you some sort of feel about cost.

1. Mortgage pre-approval meeting
2. Acquire suitable land or lot
3. Subdivision and Surveying
4. Development and other permits
5. Road access and culvert
6. Power/hydro install
7. Natural gas installation
8. Water well
9. Sewer/septic installation
10. Garage
11. New Home Warranty
12. Foundation system preparation
13. Home selection, approval, construction, delivery, and completion
14. Occupancy certificate (required before you can move in)

Step 1 - Mortgage Pre-Approval Meeting

At the outset, a mortgage professional should provide you with a total budget / pre-approval amount to work with that takes into account the cash / down payment you have to work with. A proper mortgage pre-approval is more than just some math and debt-to-income ratio calculations but rather an actual review of your credit report and the income support documents that would be required to support a mortgage application. Also, the amount of cash and trade-credit that you can access will dictate and be critical toward your financing options. 

The goal is to uncover any financing show-stoppers early such that you have the confidence to proceed further in the correct direction.

We recommend that – in choosing a budget amount – that you also keep in mind contingencies such as income loss, cost of having and raising kids, and other lifestyle events that might be in your future.

Step 2 – Acquire Suitable Land or Lot

As the budget / pre-approval amount in Step 1 will be fixed, it is useful to keep the following formula in mind when searching for land:

Total Cost-to-Develop (Land + Site & Foundation Preparation + Extras + Home + Setup and Delivery) x 1.15 should be Equal to or Less Than (<=) Your Total Budget 

Looking at the formula, the 1.15 multiplier is a 15% add-on for contingencies and cost overruns. Having a buffer built in prevents train-wrecks (ie. running out of money mid-project) and is typically required by mortgage lenders for any build that is not turn-key/guaranteed fixed-price.

It should be apparent that if the land cost is too high by the time required site preparations are complete, then the cost of something else must give (i.e. be lower) to keep the formula in balance. Typically, what must then “give” is the home, home finishing package, foundation, or the extras (garage, deck, etc.) you were hoping for, as setup and delivery are essentially a fixed cost.

As you can imagine, some properties may be better to develop than others from a cost and risk perspective. Attractive elements in your property search might include:

1. Existing water well, as a new well could cost $10-$20K, budget $15K
2. Existing septic system, as a new septic could cost $10-$55K, budget $35K
3. Power/electricity onsite or at property line, as running power from any distance is $10K per KM (confirm)
4. Natural gas – onsite or at the property line, else budget $7.5K
5. Usable road or driveway on the property to the home-site, else budget $__________ per metre
6. An appraiser might tell you that most of the value for land is concentrated in the the first 2 acres, then the value per additional acre falls off fast.

If you can get a suitable property at the right price, the formula should illustrate that you will have more money left over for the home and perhaps some extras.

For residential mortgage financing, the existence of any of the following make the property harder to finance:

1. Outbuildings, such as barns, that could be used for agri-business/farming
2. Acreages over 10 acres when you are cash-constrained (lenders will want more down payment from you)
3. Any zoning where a business could legally operate (lenders want residential, country residential, and some will be okay with agricultural zoning provide you are not farming, commercial zoning is a show-stopper)
4. Lack of potable water or low water pressure (water issues mean less desirable for resale)
5. Certain restrictive covenants
6. Flood zone or flooding history
7. Environmental risk or potential contamination

Your real estate agent should offer to set you up on automated email alerts. You will automatically receive listings that meet your most important search criteria so you can review these properties, including pictures and property features, online. Nowadays, most buyers preview listings before deciding whether to have their agent set up a showing. Please keep in mind we recommend working with a Realtor (a “Buyer’s Agent”) that is different than the listing agent trying to sell the property (the “Seller’s Agent”). When the same Realtor attempts to represent the interest of both buyer and seller, that creates the potential for a conflict of interest, as buyer and seller have competing needs (i.e. highest price for seller is incompatible with the lowest price for buyer).

Step 3 – Subdivision and Surveying

I decided to throw this section in the mix for situations where land already exists, perhaps owned by a family member or acquaintance. Often the desire or plan is to make some of that land available to you. For sake of discussion, let’s say “mom and dad” own a ¼ section of land with their own home and they want to hive off 5 acres for you and your partner. Here’s what you need to know:

You can only put a mortgage on land that you own. That means a land title or deed needs to exist that you can acquire. That might mean that mom & dad (in our example) have to sub-divide their land in order to split their land title and create a new land title to sell or give to you.

To sub-divide land, mom and dad need to get permission both from the municipality and from their current mortgage lender/bank if they still have a mortgage. Both could refuse or make things difficult. The municipality will have development, zoning, and subdivision rules and a process to follow if permitted. Mom and dad’s mortgage lender would have to agree to reduce the bank’s “security interest” in their land by 5 acres, a process called “subrogation.” If the bank says no, mom & dad might be forced to break their mortgage contract, pay any penalties, and then re-qualify for a mortgage on the ¼ section minus the 5-acre parcel based on the proposed post-subdivision land titles. If mom and dad can no longer mortgage qualify, this could be an issue.

There is a cost to sub-divide. Besides the municipal permitting process and cost, the land must then be physically surveyed, the proposed or “unregistered” survey plan approved by the municipality, then the plan must be registered at the land titles office whereupon the existing land title is replaced by two new land titles. It is at this point that any existing mortgage must be discharged on the old land title. If mom and dad have a new mortgage approved, it would be registered on the new land title (the one they are keeping), and the final 5 acre parcel would remain for you to acquire with a “clear title” – ta da!. Yes, this all takes time (perhaps a year), upfront money, and considerable effort.

Finally, you might be thinking that you will simply place your new home on mom and dad’s land without subdividing and skip all the fuss. Here is what you might run into:

• As you do not own the land, there can be no mortgage financing for you, so you would need to inquire about getting a “personal or secured” loan on the home from your bank instead.
• Any lender would be concerned with their ability and ease to enter upon the land and repossess the home if you default on your loan. You’d be asked to produce a formal land / pad-rent lease with mom & dad as they would be the landlord and you’d be the tenant. The lender would have then have the legal right to take assignment of the lease and enter upon the land.
• Perhaps mom & dad can get a loan against their land or have enough cash to purchase and install the new home, then you simply pay them rent each month.
• The municipality would have to agree to two homes on one land title, so ask them.
• The additional home on mom & dad’s land would be considered an “out-building” for residential mortgage financing purposes, which means in most cases that no money can be lent to them against it or to any future buyer should they choose to sell, so the money invested risks becoming a sunk cost.
• If mom and dad’s property is or needs to be sold, the new owner/buyer may not want you on the property any longer and you are asked to leave. Further, the home – if permanently affixed to the land – legally becomes part of the land title and no longer your personal property. (I’ve seen this happen).
• Long-story short, in the scenario where you do not own the land, your rights are as a tenant and your financing options are extremely limited, certainly our office cannot help.

Step 4 – Development and Other Permits

Assuming you have your eye on a piece of land or building lot or target geographic area, your next call is the municipal or county office. You will discover that most jurisdictions have a set of rules called a Land Use Bylaw, which controls what lands can be developed and what types of buildings and uses are permitted. This is called Zoning. As your intention is to make a home to live in, you will need land zoned such that a residential home is a “permitted use” else you will need to re-zone (complicated). The bylaw will also prescribe the process for issuing a development permit, which is required before you can develop the land with a new home. At the beginning of your property search, ask a lot of questions (ask neighbors too) and get to know the land use bylaws, process and approval timeline for your target geographic area. Specially determine:

• What is the current zoning? (for residential mortgage lending, zoning must be in most cases residential, country-residential or agricultural, and certainly not commercial or industrial.)
• What permits will the town/county require for the structure and cost? (typ. $1000)
• What permits will the county require for road access if no driveway yet (typ. $1000)
• What is the application process and how long does it take to get a permit?
• What is the required distance the home must be from all property or lot lines? (called minimum set-backs)
• Any other requirements to be aware of, such as minimum square feet, architectural controls, foundation-type, etc.
• What are the permitted uses for the neighboring properties, say within a 5 km radius – what if a feed lot or pig farm could legally start operations nearby, would that be okay with you?
• Before you ever purchase a parcel of land, get a current copy of the land title from the Land Title Office and check what restrictions, caveats, or easements are registered against the target property. They will be listed on the title. Restrictive Covenants, for example, impose restrictions on the use or transfer of land that could impact you significantly. Easements give someone other than the owner certain rights to use your land.

Step 5 – Road Access and Culvert

If your home-site on your land has no direct access to a public road, you will need to build one early in the development process in order for trades and suppliers to reach the construction zone, and later for you to park outside your home. You will need quotes for grading or building a driveway. Where your driveway connects to a public road you will likely cross a ditch and need a culvert to allow water to continue to run down the ditch.

If access to your property must pass through private property belonging to another party, you will require a formal Easement Agreement (legal right to cross or otherwise use someone else's land for a specified purpose) that is registered and attached as a Caveat to the land title belonging to the other party. This will take time and effort to secure.  A constant theme of this topic and mortgage lending in general is that to obtain mortgage financing a property must be marketable and easy to sell in the event of foreclosure. If access to your land is through mom and dad’s yard without an access agreement and you need a mortgage, that’s a no-go-zone.

Costs:

• Cost for approach / connection to public road (county might coordinate this and potentially pay for a portion as they will be collecting property taxes on the property for all years to come)
• Grading and building road to the homesite cost estimate?
• Gravel or asphalt supply cost estimate?

Steps 6 through 9 – Utility Services

When you hear the term ‘serviced land’ that is a reference to utility services. To get mortgage financing for a home that you will occupy full-time, your new home will need utility services consistent with other homes in the area. Simply put, you need reliable power, water, septic, and fuel for heating (typ. natural gas in colder climates). If the home is for seasonal occupancy (ie "B-type" cottage), then more lax property requirements may apply. When I write ‘consistent with other home in the area’ that means – for example - if everyone else is on propane, then you too can be on propane; if everyone else is trucking in drinking water or trucking out septic waste, then that should be okay from a mortgage lending point of view.

6 – Power / Electricity

You are going to need to provide electricity to your home for heat or to power your furnace fan, to run a water pump, lights and appliances. The existence of grid-connected power will be a condition of mortgage financing for all properties except for seasonal cottages. Without reliable power, your pipes could freeze in the winter, and certainly the property’s re-sale market appeal will be a small sub-set of potential buyers should you or the bank try to sell. Put another way, the bank has certain property requirements in order to provide residential mortgage financing to you. If you need their financing, you must comply with those minimum requirements.

To figure out how to get a grid-connection, determine which power distribution company has the franchise for your area. That company installs, owns, and maintains all the distribution facilities required to supply electric distribution service in the area and up to what is called the Customer’s Point of Service, which is and includes the meter. Think of this as the ‘pole in the yard.’

The customer (you) are responsible for all wiring and electrical equipment on your side of the meter, including the cost for any underground trenching and conduit or additional poles, and a suitable service entrance and meter socket or enclosure.

For a new service or for the rewiring of an existing service, you will need to obtain an electrical permit from an accredited agency (typically the municipal or county office) and any wiring must conform to all applicable Canadian and provincial standards. You will need a Development Permit (step 4) before you can get an Electrical Permit.

Questions to answer:

• Does the property have electricity on it, at the property line, or a ways-away?
• Cost to provide a residential service to a pole near your proposed home site including a transformer and a meter base? Contact the power distribution company in your area for a quote - the cost will vary depending on many factors, budget $10K
• The cost from your side of the meter to your home service entrance will depend on distance and required trenching. Your builder may include this cost in their new home quote, or you will need to get an electrician to provide you with a quote.

7 – Natural Gas Service

You will likely want natural gas to heat your home and water. While you can use electricity or propane, it is a lot more expensive and generally only suitable in mild climates. The existence of a permanent and reliable heat source is a requirement of residential mortgage financing in Canada for all residential properties except for seasonal cottages.

To figure out how to get a natural gas connection, determine which gas distribution company or cooperative has the franchise for your area. That company installs, owns, and maintains all the distribution facilities required to supply natural gas distribution service in the area and up to what is called the Customer’s Point of Service, which is and includes the meter. Think of this as the ‘meter on the side of your house.’

Natural gas is typically trenched in after the home and foundation are complete. Service can be brought to the property line prior to that.

For a new service, or to renew an existing service, you will need to obtain a Gas Permit from an accredited agency (typically the municipal or county office) and any installation must conform to all applicable Canadian and provincial standards. You will need a Development Permit (step 4) before you can get a Gas Permit.

Questions to answer:

• Does the property have natural gas to the home site, at the property line, or a ways-away?
• Cost to provide a residential service to your proposed home site including a meter? Contact the gas distribution company in your area for a quote, which will vary depending on many factors, budget $8K.
• Your builder may include the cost for the final gas connection to your new home in their quote, or you will need to get a gas fitter / plumber to provide you with a quote.

8 – Water Supply System

Your new home needs to have a water source for washing, drinking and septic system as a condition of a residential mortgage financing approval.

• If you are in or near town, determine where the nearest connection point is and the cost to connect. Ask a neighbor about the quality of the water or any issues to be aware of.
• If rural, does the target property have an existing well? Many jurisdictions require a well be drilled as a condition of sub-dividing or selling vacant land. If the land does not have a water well, consider making that a condition of purchase, meaning you will only buy the land if the seller has an existing well and the Well Driller’s Certificate. This removes risk from your plans.
• For existing wells, ask the seller to provide you with a recent well water test report showing the property address, date of sample, who took the sample, the water chemistry and any presence of pathogens. You should also verify the flow rate (can it maintain 20 litres per hour for 1 hour?), water pressure, and any existing equipment specifications and share this information with a water filtration expert to determine if you need to add or upgrade a water filtration system to condition the water before or as it enters your house. Ask for the Well Driller’s Certificate
• If you need to drill a water well, the cost depends on how deep you must drill and how many times you need to drill to locate water - a local water well driller would be useful to consult as would neighbors.
• You can Google “water well reports” for your province to see a database of information on where to find water.
• Upon drilling a new well or buying a property with an existing well, *you* need to test or confirm the water chemistry (nearest community or public health office) and share the results along with the flow rate and water pressure with a water filtration expert to determine if you need to add a water filtration system to condition the water before or as it enters your house and costs.
• Budget: a well and equipment is going to cost $15K to $20K.

9 – Septic/Sewer System

Your home is going to need to either connect to the town sewer system if available or connect to an on-site septic system, whether existing or new.

• New septic systems require certification by municipal or provincial health or environment officials that the system meets standards of design and installation for the size and use of the home and number of occupants.
• Existing septic systems are often grandfathered BUT can be very expensive to fix if they fail. Don't buy somebody else's problem! Confirm what you have as a condition of purchase and be prepared to provide an inspection report in support of your mortgage financing request.
• Budget: a septic system price could range from $10K (open discharge tank system) to $55K if located near a watercourse, budget $35K.

Step 10 – Garage/Shop

A garage is not a requirement for mortgage financing.  However, there are things to keep in mind regarding your ability to roll it into financing or not.

• It is important to understand that most mortgage lenders will only consider the value of one garage in their residential value appraisal. Typically, when the bank orders an appraisal, the instructions are to “value only the house, garage, and 10 acres (typ.).”

If your property were to have a 40x60’ shop *and* a separate garage, whether attached or detached, most lenders will disregard the shop as it is considered an “outbuilding.” If the shop cannot be easily financed, then you or future buyers must come up with the cash value (ie. bigger down payment) which could preclude certain buyers. (Note: in 2020, one residential mortgage lender in Alberta started allowing the value of the second structure to be financed, which helps with mortgage financing).

Knowing what I do about how mortgage financing works and wanting to maximize the value of any investment in real estate, if I were to advise one of my sons on how to develop a garage/shop on a property, I’d say consider creating an over-sized double detached garage combined with extra space for a workshop all in one structure. For good measure, I’d say consider a steep pitched roof and rough-in a loft for future optionality and rough in water and a septic connection, too.

• Rolling financing for a garage into your RTM acreage development project is tricky if you are cash constrained. It is unlikely that a mortgage lender would rebate the cost of the garage until the entire home *and* garage is 100% complete, whichever is that later*. That means someone, whether the local hardware store or garage contractor or your new home supplier, might have to wait to get paid (extend you trade credit) longer than they are willing. We have developed a Cash Flow Planning Template for your project to help you understand and negotiate payment terms with your suppliers. If you can’t get the terms that you need and don’t have enough cash, a garage might have to be a future project.  My advice would be get a cement pad and exterior shell in place as that is fast and least cost, then finish it a later date when you can afford to pay cash OR have the RTM home supplier also supply the garage and foundation. *There is a financing tool called Purchase + Improvements that may allow you to develop the garage after the home dealer has been paid, provided the garage is completed in 90 days.

Step 11- New Home Warranty

Before we get into the house and foundation, it is imperative to understand the New Home Warranty (“NHW”) rules and exemptions for your province as compliance is required if the home ever requires mortgage financing, whether now or in the future. The goal of a NHW program is to protect you and future buyers of your property against defects in labour and materials, utility distribution systems, building envelope, and structural problems such as framing and foundation.

In provinces where NHW is also required for factory-built homes, the NHW must cover the home and foundation and layers on top of the RTM factory warranty. In Alberta, you cannot sell a house built after February 2014 (when NHW rules came into effect) without it. When you go for a mortgage approval, you (for a “self-build”) or your home supplier will be asked to provide proof of registration in an accredited NHW program. No NHW means no mortgage. The reason why is that if your mortgage lender or CMHC ever have to force a sale of your home as part of a foreclosure process, they must have the legal right to sell it.

https://www.alberta.ca/new-home-warranty-overview.aspx

Ontario is similar to Alberta, in that if a home is placed on a permanent foundation, mandatory registration is required.

https://www.tarion.com/builders/what-is-a-new-home-builder/types-of-homes-covered

In BC, the rules are a little different where a self-contained RTM home is exempt from NHW. Instead the buyer and future buyers must rely on the factory warranty for the home and rely on the foundation contractor and municipal permitting and inspection process for the rest.

https://www.bchousing.org/licensing-consumer-services/new-homes/home-warranty-insurance-new-homes

Budget: $3500 in AB & ON

Step 12 – Foundation System

As it relates to factory-built homes, foundation systems can go from inexpensive and not permanent (wooden blocks) to very permanent (full concrete basement) with many variations in between. For site-built or basement model RTM homes, concrete foundations are the norm. The decision you make regarding your foundation will determine whether mortgage financing is easy to obtain today and again for prospective buyers when you go to sell your property years from now, and potential for market value appreciation so it is a huge decision.

It is really important to understand that a factory-built home is the only type of residential dwelling that a supplier can sell to you to be used as either “personal property” in a leased-lot community for example or "real property" meaning on a titled or lot/land that you own.

While a non-permanent low cost foundation and a lower-cost home might make sense for personal property in a lease-land community, the decision is not so easy to make in a ‘real property’ situation where you or future buyers want or may need to obtain mortgage financing. To complicate matters, there is a spectrum of minimally acceptable foundations for real property mortgage lending up to higher-cost-permanent foundations to choose from, so how do you decide, especially if you are trying to manage costs?

Here is a mortgage practitioner’s view of how lenders view various foundation choices and the relative cost to you.

Please note, all foundation systems described are meant to be safe, durable, and long lasting and nothing in this section is intended to suggest that a home on any foundation system is better or worse from an engineering point of view. However, if your foundation system is less desirable today from a mortgage lender’s point of view, it will likely mean less lender choice for future buyers which will – in turn – affect future market value (appreciation potential) and the willingness for mortgage lenders to participate in this sector of the housing market in the first place. The flip side of this argument is that if you can get into homeownership today at a lower cost, then you at least own and are no longer paying rent. There will always be future buyers looking for a more affordable option and if the home is well-maintained the re-sale risks are minimized.

To conclude, foundation choice is a critical defining element of the perceived level of permanence to which a home is affixed to the land and how it looks relative to competing site-built homes. Put very succinctly, if your home has a wooden joist system designed to go on a concrete foundation, either a full basement or crawlspace, you will likely have equal financing treatment to a site-built home and appreciate in value like one. If the home or foundation is to a lesser standard, there will still be mortgage lenders, just not as many. In our view as mortgage professionals, the easier a home is to finance the better it will appreciate in value over time. 

For an excellent Guide to Foundation and Support Systems for Manufactured Homes from our neighbors south of the border.

Foundation budget:

• Steel piers / screw piles: $10K
• Full concrete basement: $50K (varies widely)

Step 13 – Home selection, approval, construction, delivery, and completion

There are many builders and dealers in the prefabricated housing market and many styles of homes to choose from, so that is the exciting part. This page is geared toward developing your vacant land with a factory-built self-contained home vs. site- or yard-built homes for the following reasons.

• Speed in construction, typically 2-3 months for pre-approved floor plans models from order to delivery.
• Savings in time and materials that computer-controlled factory settings can provide.
• No weather delays for indoor factories
• Reduction in greenhouse gases over site-built homes –no requirement for trades and suppliers coming and going for 9-12 months that are typical of a construction site-built home
• Quality control – advanced manufacturing technologies create a precise build and the CSA a277 certification process requires stringent quality control inspections and adherence to the national building code.
• No requirement to be on a waiting list or subject to availability, quality issues, or other vagaries often found with local site-builders and local-trades in up-and-coming areas
• Lots of design choices and ability to customize in certain areas
• Fixed-price certainty – once the home specification is agreed-to, your order is placed, and the price is set.
• Overall, much less risk and way more certainty in the final product, leading to on-time and on-budget,
• Note, homes that go on full basements typically require a further 1-2 months after the home is delivered to complete the basement mechanical connections such as furnace and ducting, hot water tanks, stairs, and basement finishing (floor/drywall). 

Dealerships

Just like “NorthStar Ford” might be a dealership that sells cars and trucks sourced from Ford’s various factories, a new home dealer will have a relationship with a particular factory and their job is to supply and install new homes to the end-use customer and to provide any follow-up warranty work. A number of these dealers can also provide earthworks, coordinate utility installation, construct full basements, and manage the final delivery and setup of your home. Larger dealers may also be in a position to to extend you favourable payment terms to make mortgage financing easier. For example, mortgage lenders will require the home to be on-site and inspected before they will advance any significant amounts of money. If the dealer can wait until the bank money comes in to get paid, then that would be considered a favourable payment term (we call this “trade credit”).

Builders

With certain prefab homes suppliers, you can deal with the builder directly. Yard-built semi-custom homes typically take 5-6 months to build and a further 1-2 months after delivery to complete on-site. Note, mortgage lenders do not finance work-in-progress that is not on land that you own. Any unsecured money that you advance to a builder for off-site work is at your own risk.

Dealer / Builder Purchase Order Process

The process to choose a home from a dealer or builder goes something like this:

• Research target home builders/dealers in your area and determine their show home location(s)
• Make appointments to visit show homes and narrow down the homes that might meet your needs and budget (see step 1 on this web page)
• Focus in on the best model and discuss with a representative design, fit and finish, and options. Confirm if any of the following is or can be included in their quote:
  1. Permits
  2. New home warranty
  3. Foundation or basement
  4. Roadway / driveway
  5. Site preparation
  6. Trucking
  7. Skirting/parging
  8. Garage
  9. Deck and/or stairs
  10. Water well
  11. Septic
  12. Power
  13. Gas
  14. Final utility connections
  15. Rain wear (eaves troughs, down spouts, etc.)
  16. Determine the price + tax, and the payment terms for all
  17. Specifically, determine what is Not included and what you are responsible to do.
• Once your quote is firmed up, sign a purchase agreement. If mortgage financing is required, the agreement should still be made subject to an acceptable mortgage approval within 3 weeks as the lender must review all contracts, quotes, etc. and confirm the value via an appraisal. If you followed Step 1 above, then the approval should be straightforward.
• The builder or dealer will start the building process as agreed as well as provide any of the installation services agreed to upon confirmation of the purchase agreement and financing.
• Upon completion of the home and home site, your supplier will arrange for the home to transported from the factory to the building site and secured to the foundation, whereupon all the utility connections will be completed and the home readied for occupancy.
• Some items like stairs and rainwear can only be completed after home delivery. Likewise, multi-module homes are about 85% complete upon delivery and some final on-site exterior and interior finishing will be required. Basement model may need stairs, furnace, and duct work connections, hot water tank, etc.to be added.
• When the home is complete, the local permitting authority will need to provide an Occupancy Certificate which will then trigger a bank final inspection and any final mortgage or payment funds can then advance.

Mortgage Financing Considerations

If you want your project to qualify for mortgage financing now (or for future buyers), here are some things to keep in mind.

1. Lenders generally have minimum above-grade size requirements for homes, typically 800 sf.
2. Factory-built homes generally must be certified CSA a277 meaning built to the national building code.
3. Site and yard-built homes must be built to the national building code for the area.
4. Obtain and safely keep copies of all plans, inspection reports, and permits as future buyers may want to see them. Don't cut corners!
5. The home and foundation must meet new home warranty requirements for your province.
6. Be very clear on your builder/dealer’s payment terms. Determine what amount of money is due on order, what is due upon completion at the factory (pre-trucking), what is due on delivery to the site, and what is due upon 100% completion. If the supplier’s payment requirements do not match the money you have on hand, then you might need a different home supplier or a different strategy.
7. For clarity, there is no mortgage financing available for homes under construction in a factory or yard as a mortgage runs with land improvements only. A mortgage lender will only rebate for work completed on the land and lenders do not provide you or your builder money to work with. So if a prospective builder or dealer wants you to provide his or her company with money in advance so that they can place an order, buy materials or pay wages, that is money you have to come up with and put at risk, not the bank’s.
8. Any money you provide to the dealer or builder or towards the land’s development is considered a credit to the purchase price and forms part of your down payment. Keep all your receipts.

Step 14 – Occupancy Certificate

As touched upon at the end of Step 13, an Occupancy Certificate is required before anyone can occupy the home and before any final mortgage money is available. An Occupancy Certificate is issued by the same municipal or county permitting authority that provided a Development Permit in the first place (Step 4). Upon request of the builder, the county will send out an inspector to confirm that all work on the building site including the electrical, gas and plumbing connections have been completed and inspected as required by safety codes and the permitting process - sort of a final ‘report card.’ If everything passes, the home is issued an Occupancy Certificate and can be legally occupied. Any final money (subject to lien holdback) can now exchange hands and title/ownership can transfer to the new owner. Voila, you have successfully completed your journey to developing vacant land with a new home!

By the way, ‘lien hold-back’ is a legal requirement for a lawyer to withhold 10% of any payment due to a builder until 45 days have passed (typical but varies province to province). In this 45-day period, any sub-trade to the builder that has NOT been paid for work on your property has an opportunity to secure payment by registering a lien on the land title. After the waiting period and assuming no liens, the hold-back is released.

Mortgage Finance Conclusion

Acquiring and developing vacant land with a new home is complicated, especially if you require mortgage financing. The problem for most - as discussed – is that mortgage lenders do not give you the money in advance to spend, rather they only rebate money at very specific points and most often only at the end of a project upon Occupancy Certificate. That means **you** must have enough cash on your own or successfully negotiate access to trade credit to fill in the funding gaps.

To aid in your understanding of how the money flows, we have created a cash flow template for developing land that you can use to see what bills and deposits you will have to pay before the bank money comes in and what questions to ask your dealer, builder and suppliers. If you almost have enough money but not quite, you may discover that switching suppliers to one that may offer more flexible payment terms is enough to do the trick.

RTM Land Development Program (Alberta)

As mortgage professionals we are flooded with inquiries to acquire vacant land with a goal to develop it with a new home and sadly most people soon discover they do not have enough cash to make it happen. We also understand that many of you could mortgage qualify for the exact same home and property if it were a finished occupancy-ready property. You just need a team that understand the risks and how money flows, and to fill in the funding gaps until the mortgage money comes in.

To that end, we are developing a Turn-key funding program (Alberta residents only for now) where we – in tandem with a select group of factory-built home suppliers - are offering buyers in Alberta the opportunity to acquire a small acreage in their preferred area and develop it with utility-services (water, power, gas, & septic) and a new self-contained manufactured/factory-built home of their choice with as little as 7.5% down (OAC), the minimum down payment and closing costs required for a residential home mortgage approval in Canada. Our team puts up that cash and development expertise instead of you - you purchase the finished project from us, just like buying a turn-key new home from a builder in the city.