As part of obtaining my degree in accounting, I had to do a major research paper. I chose to do it on the economics of sustainable building, in specific, the need for government support in Canada.
I think most people would be inclined to live in a home that was better for the environment and reduced their bills, aka a "sustainable home". Unfortunately, the economics of " green building" are forcing most people to stick with traditional homes.
Read my research paper and find out why the average Canadian will not be buying a sustainable home:
Research Paper
Showing posts with label mortgage. Show all posts
Showing posts with label mortgage. Show all posts
Tuesday, 5 November 2013
Saturday, 12 October 2013
Mortgage Specialist
Last week I scheduled a meeting with a mortgage specialist from RBC. Although I am not ready or committed, I needed to know if my calculations were correct so I can start saving. I also wanted to see their reaction to funding a sustainable home project.
Once again, if you aren't financing your build, save yourself the trouble of reading this.
I have a rather sophisticated spreadsheet I've been working on, which adds up all of my estimates and also takes into consideration family income, taxes, budgets, amortization and other things. I showed her what I had done, and I didn't actually tell her that it was an Earthship. I used the term "net zero" home, since this is the buzzword right now. (In fact, I wouldn't recommend using the word Earthship when talking to mortgage or construction specialists because they have no idea what that is, and they may not take you seriously at first.)
She seemed very interested and of all people in the world, actually knew what an Earthship was. She totally called me out on it. Her concern was the "higher ups" who have no idea what it is, how it works or that it's completely safe and functional. Therefore, she gave me some contingency options.
The first and in her opinion not the best, is the construction mortgage. My estimates on the draws and the amount of capital and downpayment required was quite accurate. I was only $10,000 short on my estimate, due to faulty numbers I received from a leaflet. Yes, for a $400,000 project you do require $120,000 in capital. Not very appealing.
She also indicated that the higher ups would be very nervous about the home owner doing the contracting, and they probably wouldn't like the idea of them doing some of the work (You know, pounding tires.) Considering how we build earthships, this would be very counter productive and I doubt you'd find a construction contractor familiar with tires and pop cans! Even so, if we'd like to see these houses become more mainstream, we have to consider that there will be people out there with bottomless wallets who simply don't want to do the work or the contracting.
I inquired at how much a contractor would cost. She said that normally they run about 3% of building costs. That's about $12,000 for a $400,000 home (this doesn't include the land prices, just the structure.) To be honest, knowing how stressful building an Earthship can be, it's almost appealing. On the other hand, you'd have to find a willing general contractor, and if they aren't too keen, they could end up charging you a "pain in the @$$" fee. So 6% or more. That crosses the line for me, I'd rather do it myself.
The second option was to purchase the land. I always thought that this was kind of a bad option, since you had to put 50% down. She said it's only 40% down with RBC. Woopdido with my land prices at $200,000. But it comes to $80,000 down. At this point she said that the home owner could complete some of the construction, and THEN apply for a construction mortgage. For an Earthship, you could do the grading and get done the tire walls. At this point it might be less intimidating to the bank, since there is more commitment showing.
Unfortunately it doesn't look like this would spare you from having to save $120,000. Funding the first part of the build isn't exactly chump change. (Water drilling, geological evaluation, gas/electric setup, grading and surveying comes to about $24,500). After that point, the draws still work the same. They still give you 60% of the land price for the first draw, even though you aren't buying the land. So if that doesn't cover your first set of contractor bills, you'd need to save up for the shortfall. You'd also *STILL* need the 10% contingency fees, plus insurance fees and draw holdbacks. Other things would change as well, so I hope you like math. But this is definitely a feasable method, if the bank refuses to lend you money from the beginning.
The third option is to find land with a trailer on it. Here you are buying land AND a home, so miraculously the mortgage rules go back to normal and all you need is 5% down. Granted, you'd still save up a huge chunk of change, knowing that the structure will cost $200,000. But at least if you had a place to live on the property, all of it could be done at your own speed and you might be able to bring the structure price down by doing more of it on your own. Depending on the country, your deadlines might not be so restrictive. But I know that here, if you have a trailer and are building a house, the county may want some sort of contract stating that you will remove the trailer after the house is complete, plus all the permits you'd still require. The bank might finance some of the build as well, but I'm not sure how that one would work.
This whole thing is definitely a gong show and it's understandable why people would want to skip the bank with all these rules and restrictions. I'm doing this because I'd like to pave the way for average people to own Earthships. Convincing banks is a huge part of that and someone has to pioneer it or at least prove beyond a doubt that it's impossible. As previously stated, not everyone is going to quit their job and move out to the boonies to build an Earthship. That is certainly respectable, but not feasible if we want to mainstream them! I will continue to keep everyone posted on "financing" bits.
Oh and trust me, even if I don't get financed, I will still build one. But when the construction inevitably gains media attention, I will be VERY LOUD about how useless the banks were.
Once again, if you aren't financing your build, save yourself the trouble of reading this.
I have a rather sophisticated spreadsheet I've been working on, which adds up all of my estimates and also takes into consideration family income, taxes, budgets, amortization and other things. I showed her what I had done, and I didn't actually tell her that it was an Earthship. I used the term "net zero" home, since this is the buzzword right now. (In fact, I wouldn't recommend using the word Earthship when talking to mortgage or construction specialists because they have no idea what that is, and they may not take you seriously at first.)
She seemed very interested and of all people in the world, actually knew what an Earthship was. She totally called me out on it. Her concern was the "higher ups" who have no idea what it is, how it works or that it's completely safe and functional. Therefore, she gave me some contingency options.
The first and in her opinion not the best, is the construction mortgage. My estimates on the draws and the amount of capital and downpayment required was quite accurate. I was only $10,000 short on my estimate, due to faulty numbers I received from a leaflet. Yes, for a $400,000 project you do require $120,000 in capital. Not very appealing.
She also indicated that the higher ups would be very nervous about the home owner doing the contracting, and they probably wouldn't like the idea of them doing some of the work (You know, pounding tires.) Considering how we build earthships, this would be very counter productive and I doubt you'd find a construction contractor familiar with tires and pop cans! Even so, if we'd like to see these houses become more mainstream, we have to consider that there will be people out there with bottomless wallets who simply don't want to do the work or the contracting.
I inquired at how much a contractor would cost. She said that normally they run about 3% of building costs. That's about $12,000 for a $400,000 home (this doesn't include the land prices, just the structure.) To be honest, knowing how stressful building an Earthship can be, it's almost appealing. On the other hand, you'd have to find a willing general contractor, and if they aren't too keen, they could end up charging you a "pain in the @$$" fee. So 6% or more. That crosses the line for me, I'd rather do it myself.
The second option was to purchase the land. I always thought that this was kind of a bad option, since you had to put 50% down. She said it's only 40% down with RBC. Woopdido with my land prices at $200,000. But it comes to $80,000 down. At this point she said that the home owner could complete some of the construction, and THEN apply for a construction mortgage. For an Earthship, you could do the grading and get done the tire walls. At this point it might be less intimidating to the bank, since there is more commitment showing.
Unfortunately it doesn't look like this would spare you from having to save $120,000. Funding the first part of the build isn't exactly chump change. (Water drilling, geological evaluation, gas/electric setup, grading and surveying comes to about $24,500). After that point, the draws still work the same. They still give you 60% of the land price for the first draw, even though you aren't buying the land. So if that doesn't cover your first set of contractor bills, you'd need to save up for the shortfall. You'd also *STILL* need the 10% contingency fees, plus insurance fees and draw holdbacks. Other things would change as well, so I hope you like math. But this is definitely a feasable method, if the bank refuses to lend you money from the beginning.
The third option is to find land with a trailer on it. Here you are buying land AND a home, so miraculously the mortgage rules go back to normal and all you need is 5% down. Granted, you'd still save up a huge chunk of change, knowing that the structure will cost $200,000. But at least if you had a place to live on the property, all of it could be done at your own speed and you might be able to bring the structure price down by doing more of it on your own. Depending on the country, your deadlines might not be so restrictive. But I know that here, if you have a trailer and are building a house, the county may want some sort of contract stating that you will remove the trailer after the house is complete, plus all the permits you'd still require. The bank might finance some of the build as well, but I'm not sure how that one would work.
This whole thing is definitely a gong show and it's understandable why people would want to skip the bank with all these rules and restrictions. I'm doing this because I'd like to pave the way for average people to own Earthships. Convincing banks is a huge part of that and someone has to pioneer it or at least prove beyond a doubt that it's impossible. As previously stated, not everyone is going to quit their job and move out to the boonies to build an Earthship. That is certainly respectable, but not feasible if we want to mainstream them! I will continue to keep everyone posted on "financing" bits.
Oh and trust me, even if I don't get financed, I will still build one. But when the construction inevitably gains media attention, I will be VERY LOUD about how useless the banks were.
Sunday, 18 August 2013
More on the Construction Mortgage aka Draw Mortgage
Note: Before reading further, I want to stress that this is information is structured for an AVERAGE North American wanting to build an Earthship. While I agree that mortgages are one of the things wrong with this world, we are unlikely to have Earthships become mainstream if we insist that everyone quit their jobs and move out to the boondocks in order to build one. (Baby steps!) I admire those who can do this, but you are the proverbial 1%. Less than that actually. Even so, this style of mortgage is also going to discourage all but the most patient. So high fives to anyone actually pursuing the goal.
I apologize, this is quite long. So if you don't plan to mortgage your Earthship, save yourself the pain of reading it. If you do plan on getting a mortgage, this information is quite important. If anything it will set you on the path of how to plan to pay for your Earthship. I don't mean to discourage anyone, but if you truly want to live in a sustainable home, no one is going to roll out the red carpet for you. Plan your savings and start ASAP.
So I did some further research on the construction mortgage. This time I pulled actual loan information from the Royal Bank of Canada (RBC).
For those who don't know, a construction mortgage is something you will need if you are going to finance your Earthship construction through a bank. This style of mortgage unfortunately has some drawbacks, which are primarily a lot of up front costs.
Sadly this is going to reduce the amount of people willing to build an Earthship, but it's still a step ahead of the, "quit your job and go permaculture" scenario. I hope that pioneers like myself can find a way to make this easier.
First, the home owner is going to invest a lot more than the average 20% down. Think more like 30-40%. Especially if they want the bank to finance the land in addition to the build.
In a construction mortgage, most banks will only pay about 65% of the land cost. So if the property is worth $200,000, they will only give $130,000 to buy it. That leaves the borrower to pay $70,000 up front, before construction costs. But it doesn't stop there.
After the land is purchased, the bank will then give the borrower one year to complete construction. During this period, the bank will dole out certain amounts of money to pay for materials and labour. These are called "draws", and there are usually 4-6 of them. They will also require an inspection before each new draw, to verify that work was completed. This means the builder can't take years and years to complete the construction by themselves, which is what some Earthship folks would like to do. And if the weather in the area limits build time (e.g. in Canada we have from April to about October), the builder may only have 5-6 months to get the house from dirt to lockup. (Four walls, roof, windows and doors).
Knowing this, it is now necessary to figure out how much each stage will cost, because if a draw fails to fully cover the costs required to complete that stage, the builder must pay the uncovered costs out of pocket. The bank will not give another draw if the work isn't complete and they don't care if the draw was enough money to pay the bills. That's the borrower's problem!
Failure to be able to afford out of pocket costs could get ugly. If the borrower can't get the funds to finish the build in time and the bank refuses to give any additional money, the risk is that the bank will cancel the mortgage and reclaim the property. This is why it is important to know how much everything will cost. Knowing this will help you predict draw amounts and therefore, additional savings requirements on top of the downpayment.
On my personal build, while all 5 draws appear to fully cover construction estimates, the bank still requires a 10% minimum contingency amount. This means that the bank wants you to have approximately 10% of the value of the build in cash, in case something ends up costing more than anticipated. After all, they are only going to provide the draw amounts. If a contractor screws up or discovers something unanticipated, the bank is not on the hook for the extra costs. The builder is.
So on a $200,000 build, that's about $20,000 in excess cash. At this point, the amount to be saved is now $70,000 for the land plus + draw gap coverage + 20,000 in contingency funds.
Lastly, there is also another issue. It is called a lien amount. By law, the provinces in Canada require a certain percentage of the draw funds received to be put aside for legal reasons; basically in case a contractor puts a lien against the property. This can be anywhere from 5-20% of each draw amount. So everytime the bank gives a draw, a lawyer will deduct about 5-20% of it and probably put it into a trust or escrow account. While this amount will be refunded 30-60 days after the build is completed, it is still money that the borrower must pay from their own pocket. On my project, this amount comes to approximately $20,000.
At this point, the total amount to be saved is now $70,000 + draw gap coverage + 20,000 in contingency and $20,000 for lien hold back.
For my build, this is a $110,000 - or approximately 30% of the mortgage amount. It's going to take a few years to save that up!
One might argue that a borrower could just get a mortgage for the land only and then pay for the build out of pocket over 5-7 years. This is actually a decent idea, but it really depends on a number of factors, the main one being again, money and the rest patience.
I spoke to a mortgage specialist, and they pointed out that if you apply for a mortgage for a piece of empty land, the bank will require 50% down. If your land is only $20,000, that's great! Then all this stuff about draw mortgages is pointless.
But if your land is $200,000, you still need to save $100,000. At this point, saving the extra $10,000 could have you living in the house within 12 months instead of 5 years, not including the time it would take to save $100,000. Who knows, it might be 10 years of living in apartments and shanties until the actual move in. I'm personally not that patient.
The only way I could see circumventing this would be if there was a small house or trailer on the property, which changes the mortgage type. If the bank considers it as being a regular home purchase, the borrower could go back to traditional mortgage rules and down payments. It would still take 5-7 years to build the Earthship, but there would be less risk and less initial investment or savings time.
I'd say if you are patient and can get a regular mortgage, then go for it. Otherwise, the construction mortgage may be the only option. Start your research now and your savings now and this won't be impossible. Also make sure to put your savings into a high interest account so that you can earn some extra cash.
One a side note, this is situation is not great for the future of sustainable, green building on a larger scale. If they can't be made affordable and easy for the average person, then they can't be expected to become mainstream. It would be nice to see a builder take a risk and start producing these, but when it comes to money and cookie cutters, it's more profitable to just stick with tradition.
Planning to Build by RBC
I apologize, this is quite long. So if you don't plan to mortgage your Earthship, save yourself the pain of reading it. If you do plan on getting a mortgage, this information is quite important. If anything it will set you on the path of how to plan to pay for your Earthship. I don't mean to discourage anyone, but if you truly want to live in a sustainable home, no one is going to roll out the red carpet for you. Plan your savings and start ASAP.
So I did some further research on the construction mortgage. This time I pulled actual loan information from the Royal Bank of Canada (RBC).
For those who don't know, a construction mortgage is something you will need if you are going to finance your Earthship construction through a bank. This style of mortgage unfortunately has some drawbacks, which are primarily a lot of up front costs.
Sadly this is going to reduce the amount of people willing to build an Earthship, but it's still a step ahead of the, "quit your job and go permaculture" scenario. I hope that pioneers like myself can find a way to make this easier.
First, the home owner is going to invest a lot more than the average 20% down. Think more like 30-40%. Especially if they want the bank to finance the land in addition to the build.
In a construction mortgage, most banks will only pay about 65% of the land cost. So if the property is worth $200,000, they will only give $130,000 to buy it. That leaves the borrower to pay $70,000 up front, before construction costs. But it doesn't stop there.
After the land is purchased, the bank will then give the borrower one year to complete construction. During this period, the bank will dole out certain amounts of money to pay for materials and labour. These are called "draws", and there are usually 4-6 of them. They will also require an inspection before each new draw, to verify that work was completed. This means the builder can't take years and years to complete the construction by themselves, which is what some Earthship folks would like to do. And if the weather in the area limits build time (e.g. in Canada we have from April to about October), the builder may only have 5-6 months to get the house from dirt to lockup. (Four walls, roof, windows and doors).
Knowing this, it is now necessary to figure out how much each stage will cost, because if a draw fails to fully cover the costs required to complete that stage, the builder must pay the uncovered costs out of pocket. The bank will not give another draw if the work isn't complete and they don't care if the draw was enough money to pay the bills. That's the borrower's problem!
Failure to be able to afford out of pocket costs could get ugly. If the borrower can't get the funds to finish the build in time and the bank refuses to give any additional money, the risk is that the bank will cancel the mortgage and reclaim the property. This is why it is important to know how much everything will cost. Knowing this will help you predict draw amounts and therefore, additional savings requirements on top of the downpayment.
On my personal build, while all 5 draws appear to fully cover construction estimates, the bank still requires a 10% minimum contingency amount. This means that the bank wants you to have approximately 10% of the value of the build in cash, in case something ends up costing more than anticipated. After all, they are only going to provide the draw amounts. If a contractor screws up or discovers something unanticipated, the bank is not on the hook for the extra costs. The builder is.
So on a $200,000 build, that's about $20,000 in excess cash. At this point, the amount to be saved is now $70,000 for the land plus + draw gap coverage + 20,000 in contingency funds.
Lastly, there is also another issue. It is called a lien amount. By law, the provinces in Canada require a certain percentage of the draw funds received to be put aside for legal reasons; basically in case a contractor puts a lien against the property. This can be anywhere from 5-20% of each draw amount. So everytime the bank gives a draw, a lawyer will deduct about 5-20% of it and probably put it into a trust or escrow account. While this amount will be refunded 30-60 days after the build is completed, it is still money that the borrower must pay from their own pocket. On my project, this amount comes to approximately $20,000.
At this point, the total amount to be saved is now $70,000 + draw gap coverage + 20,000 in contingency and $20,000 for lien hold back.
For my build, this is a $110,000 - or approximately 30% of the mortgage amount. It's going to take a few years to save that up!
One might argue that a borrower could just get a mortgage for the land only and then pay for the build out of pocket over 5-7 years. This is actually a decent idea, but it really depends on a number of factors, the main one being again, money and the rest patience.
I spoke to a mortgage specialist, and they pointed out that if you apply for a mortgage for a piece of empty land, the bank will require 50% down. If your land is only $20,000, that's great! Then all this stuff about draw mortgages is pointless.
But if your land is $200,000, you still need to save $100,000. At this point, saving the extra $10,000 could have you living in the house within 12 months instead of 5 years, not including the time it would take to save $100,000. Who knows, it might be 10 years of living in apartments and shanties until the actual move in. I'm personally not that patient.
The only way I could see circumventing this would be if there was a small house or trailer on the property, which changes the mortgage type. If the bank considers it as being a regular home purchase, the borrower could go back to traditional mortgage rules and down payments. It would still take 5-7 years to build the Earthship, but there would be less risk and less initial investment or savings time.
I'd say if you are patient and can get a regular mortgage, then go for it. Otherwise, the construction mortgage may be the only option. Start your research now and your savings now and this won't be impossible. Also make sure to put your savings into a high interest account so that you can earn some extra cash.
One a side note, this is situation is not great for the future of sustainable, green building on a larger scale. If they can't be made affordable and easy for the average person, then they can't be expected to become mainstream. It would be nice to see a builder take a risk and start producing these, but when it comes to money and cookie cutters, it's more profitable to just stick with tradition.
Planning to Build by RBC
Subscribe to:
Posts (Atom)