Tales from the Trenches

In this Tale, our investor was right to walk away, but they will probably lose their deposit. Avoid using the same realtor for both buyer and seller. Know the difference between a Real Property Report and Title Insurance. Make sure your team members are real estate investment professionals, not just family, friends, or people who speak your language.

Download the audio file HERE and the text/handout HERE.

This is such a great learning Tale. It illustrates so many real estate investment teaching-points and the consequences of ignoring the Real Rules of Real Estate. The RRRE are understandable, fair to all and protective. Here is the Tale told in our investor’s own words (edited for clarity).

I’m going to buy a house.

Mistake 1: for some reason, we used the seller’s realtor that later we find out is the seller’s mother. From the beginning, she didn’t want to give us the Real Property Report (RPR) and insisted on giving us title insurance instead.

When we met to sign the offer, she brought an offer to purchase form where the standard RPR clause (4.11) which states the seller should provide the buyer with an RPR and evidence of municipal compliance or non-conformance were scratched out already. Fortunately, I learned from Barry that RPR is very important, and it cannot be replaced by title insurance. They are two completely different products.

With our insistence, she refused to write up a new offer but added “the seller should offer RPR and compliance before the closing day.”

Mistake 2: My lawyer asked me why I want buy title insurance if the seller can give me RPR. And he told me with title insurance no RPR is OK; and with RPR, I don’t have to buy title insurance. Title insurance only protects me during the possession process; it’s not valid after the purchase.

So I have to verify this by calling First Canadian Title. At that moment, I know I made a huge mistake to choose a lawyer just because he can speak my first language. I thought my English is not good enough and find a lawyer who can speak my first language can make me understand better.

Now, one day before the possession day, the seller’s lawyer gave my lawyer RPR showing the property to be non compliance, because the city said the RPR survey shows the building was not set back enough from the regulations (one side over 0.3m and another side over 0.05m). So the development and building permit has to be applied. Plus the seller had added a fence and deck, no permits for the deck.

Tomorrow is the closing day and we have to decide to take the risk or give up. So we decided to give up the deal. But the realtor (the seller’s mom) said that there must be a problem with the new survey because when her son purchased this house the 2006 RPR has no problem. She didn’t want offer RPR from the beginning just because they get new fence. If we cancel this deal she will not give my $5000 deposit back. My lawyer said in this case she have to give the deposit back.

Is there any chance she can keep the deposit? And how long should she give me the deposit back if she has to?

Talk about a lot of red flags on this deal! At the time of writing, this process was still ongoing…

Your starting position as a buyer should always be that you want the RPR and compliance. It’s essential if you are planning an addition or building new. If you don`t get compliance problems fixed when you buy, they will bite you when you sell.

Consider making receipt and review of both the RPR and compliance a condition of your offer. A typical clause would look like this: “Subject to seller providing RPR and compliance satisfactory to buyer on or before (insert date).” This gives you a chance to identify and deal with issues well before the closing date.

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.

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“House and Keys” image by geralt on Pixabay used under CC0 1.0.

A holdback clause can help insure that the seller takes care of a property’s deficiencies before closing. The language of this item in your purchase contract needs to be very specific in order to be effective. Some lenders, however, don’t like cash backs, holdbacks, or credits.

Download the audio file HERE and the text/handout HERE.

In a recent situation, our investors wanted to purchase a property that had shoddy renovation work done to the heating and electrical system, which included three furnaces (one in the garage). The roof also needed re-shingling. Their inspector told them what work needed to be done; they consulted with plumbing, roofing, and electrical contractors, and produced a list of deficiencies that they wanted the seller to remedy within a specific time.

The seller said he would take care of the deficiencies and then he didn’t. Arguments ensued about what was really required and who would be the judge of whether the jobs were properly done. The two weeks given to the seller to fix the deficiencies was extended by three more two-week periods. Now we are at two months after signing the offer to purchase and still nothing done.

Our investor had a fully approved mortgage and, in fact, the lender had funded the mortgage based on the original closing date and we had to send the mortgage money back to them. The lender is starting to ask questions. The seller throughout had been uncooperative and, to be charitable, not forthright in providing all the information on the property or the existing three tenants and their information.

Our investor decides on a change of tactic. If the seller won’t fix the deficiencies, then let’s put a value on the deficiencies and do a repair holdback. Give the seller a little more time to do his job and then if he doesn’t, I will have the money to do it. That is our investors thinking. Nothing wrong with that, right?

There are two major issues that come up at this point:

Holdbacks are when your purchase contract requires the seller to do or fix something before closing. Maybe s/he has to do take away some junk or old car bodies or perhaps complete a renovation. No matter what the seller has to do, your contract needs:

Compare the following two clauses. The first was prepared by our client’s realtor and sent to me for review. The second is my amended clause.

Original clause:

The seller agrees to obtain at their cost and provide to the buyer no later than seven days prior to the completion date, proper permits and certification for the heating systems and electrical systems within the property.

Amended clause:

The Seller Agrees to Obtain at their Cost and provide to the buyer no later than seven days prior to the completion date, all required permits for both the electrical and heating systems and components of those two systems as currently installed in the property and proof that both systems have final inspection and approval by the City of Edmonton. In the event such permits and final inspections are not provided seven days prior to the completion date, the buyer will complete the purchase and hold back $10,000 from the closing proceeds. The seller will have a further 30 days commencing on the day after the Completion Date to provide the permits and final inspections. If, after the expiry of the extra 30 days the permits and final inspections have not provided by the seller, the $10,000 holdback will be released to the buyer and the responsibility for permits and final inspections will shift to the buyer. No money will be refunded to the seller.

The lender approved the mortgage on the basis of the original offer where the seller fixed and paid for the deficiencies. Lenders do not like cash backs, repair holdbacks, or repair credits. Experience has shown lenders that these types of monetary adjustments are often a scam and an attempt by purchasers to reduce the amount of cash they have to put into a property.

So, lenders often take a very straightforward position. Cash backs, repair holdbacks, and repair credits are just a reduction in the purchase price. If the price is reduced then the amount of mortgage money is reduced. Lenders instruct their lawyers to watch out for these items and advise the lender if they occur.

We did advise the lender through the mortgage broker on the file and surprisingly the lender was more lenient than most. Deficiencies were completed, paid invoices supplied, and the surplus of holdback monies returned to the lender for application against the mortgage principal. In my view this lender attitude is rare and our investor was fortunate.

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.

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“Commercial Box Gutter” image by Ethoseo used under CC Attribution 3.0 Unported.

Purchasing a new property before it is built is far more complex than buying an existing one. There are even more possible issues when subdividing and condominiumization are involved. Subdivision takes a long time and has many complicating factors. I don’t generally recommend small condos (i.e., less than 8 units.)

Download the audio file HERE and the text/handout HERE.

Our investor had an existing home with lots of equity. Her plan was to leverage that equity and purchase a side-by-side duplex. She would live in one half and rent out the other half with, hopefully, a legal suite in the basement.

Her realtor found a builder who specialised in duplexes, apparently had a good reputation and who seemed to be helpful. The builder already owned a lot on which a duplex would be built, but needed to subdivide that lot into two separate titles. That subdivision was apparently in process.

The contracts showed up in my office and were drafted to attempt to deal with the basement suite and holdbacks for finishing the suite after closing and deficiencies both seasonal and normal course. As always, the clauses that purported to give our investor comfort and security regarding the suite and deficiencies were unclear and inadequate. Those definitely had to be cleaned up.

Timing for completion and move in had to be firmed up because our investor had to sell her existing property. She wanted to move into the duplex before selling her existing home so she needed bridge financing. Why? Because all of her cash for the new duplexes was coming from her equity in her existing property.

As lawyer for our investor, I was also very concerned about the nature of the subdivision of the existing lot. Was the subdivision application to create a two-unit condominium corporation, which we completely disagree with, or two traditional lot, block and plan titles? And so the negotiations and discussions commenced.

“As much as you might have been advised and are okay that this is a condo with one sewer line, there is so much more on which any buyer of a small condo should properly be advised. For instance, as discussed before, there is no such thing as an inactive condo corporation. In this situation what we really have is a condo corporation that is not paying attention to the Condominium Property Act and regulations.

There are no:

And that’s just a small portion of what needs to be looked at and advised upon on the condominium advice side.”

As the negotiations commenced, they were impacted by constant, inaccurate information from the builder’s realtor to our investor’s realtor, worsening her own inexperience as a brand-new, apprentice investor.

We could not get any comfort, no matter how much we tried, that the builder was creating two separate lot, block and plan titles as opposed to a two-unit condominium. Timing for closing kept getting postponed.

Late in the process our investor discovered that the lender would interim finance for the half duplex she was moving into but not for the rental half. It took a long time for the builder to confirm that he had applied for and had been issued permits to install a legal basement suite.

The expected subdivision was way behind predicted timing. The seller and seller’s realtor kept insisting that the subdivision was completed and would tell our investors realtor. The seller’s lawyer and our searches at land titles revealed the subdivision was not completed. Hugely frustrating for our investor who, like most normal people, believed what she was told. She would say to me, “Barry, they say the subdivision is completed, why would they say that if it isn’t done?” I agree, why would they? But the short answer to that question is, “if the subdivision is completed then just give us a copy of the new title!” They could never do that.

Finally, our investor had to book movers, take time off work, and move the process forward. Even with plenty of notice, on moving day, subdivision was not completed and there were yet more anxious, expensive negotiations about how to get our investor a key without actually closing. Very difficult to advise our investor to move in when we did not know about subdivision, final inspections, occupancy permits, or deficiencies.

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.

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When you want a mortgage, you need to play by the lender’s rules. Be sure to disclose the facts of your application or risk losing your funding. Timing is key, so leave yourself extra room after removal of final conditions.

Download the audio file HERE and the text/handout HERE.

There are two things you always have to consider in any new deal. The first is timing. The second thing is to understand that if you want a mortgage, you are playing in the lender’s sandbox and you have to play by the lender’s sandbox rules.

I had a brand new client who was really worried. He had applied for a mortgage and fudged his income figures, including a promotion he did not yet have. He also told the lender that he wanted a 5% down mortgage because he planned to move in. The lender discovered the job promotion did not take effect for a couple of months and became aware that my client-borrower intended to rent out the property. The lender quickly declined the loan.

Now the client was into see me with a brand-new offer. His friend was going to provide the down payment but did not want to go on title or mortgage or tell anyone he was involved. The deal was written with a completion date 10 days after removal of final conditions. His realtor and mortgage broker both told him he needed to have a short closing because it is a seller’s market. There is lots of competition for properties and sellers won’t give you more than 10 days. I insisted he change the completion date (or the ‘closing date’ as it is often called) to 30 days after removal of final conditions.

The contract also contained a clause giving the buyer a $12,000 repair credit for shingle replacement and electrical upgrade. My client-buyer was now ready to apply for his mortgage.

Did I have any comments? You bet I did!

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.

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“Home Yellow” stock image by nikcname. Used under Creative Commons Attribution Generic 2.0

Managing properties when they are far from where someone lives can be tricky. Use this fact to help you find motivated sellers. Beware that pre-possession inspections require custom clauses and you can’t just kick existing tenants out if they are a problem. When finding replacement tenants, know the difference between rent deposits and security deposits.

Download the audio file HERE and the text/handout HERE.

Our investors were pretty happy with their first two properties. Both were rented out to long-term, trouble-free tenants. Now they were starting to talk about their next property. Should they go with the tried and true strategy to buy up another single-family property or should they move on to multi-family?

They had mentioned to their realtor that they were considering multi-family. Next thing you know, the realtor is calling to ask, “are you still interested? I have an out-of-town owner who self-manages a 12-suite building and he is tired of the travel back and forth to manage. He wants out.” Negotiations didn’t take too long with a motivated seller and soon they had an accepted offer to purchase.

In the weeks before closing, they called the seller to organize a pre-possession inspection. They just wanted to make sure that the property was still in the same shape as it was when they made their offer. The seller wouldn’t allow the inspection.

The seller did allow them to interview new tenants for the single vacancy. They took 10 applications, picked the best one, and took a one-month security deposit when signing the lease, with the move-in date 15 days away. The tenant changed his mind and demanded return of his security deposit. Our investors didn’t want to give it back. A deposit is a deposit, right? It’s good faith money, why should they have to give it back?

Although there was only one vacancy, there were a couple of problem tenants who had to go. One of our investor’s fathers was helping out. His advice, “just kick them out with 30 days’ notice,” was problematic.

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.

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“House/Home Inspection” image by Mark Moz (https://electrosawhq.com) used under CC Attribution 2.0 Generic.