Tales from the Trenches

When buying a property, you are buying the neighbourhood and neighbourhoods are not homogenous. Do some diligence around schools opening or closing, new public transit soon or in the works, and rezoning. Check parking lots and dumpsters where you intend to buy; these will give you an informal tenant profile. Any environmental considerations?

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

I can hear the wheels grinding out there. “What do you mean we’re buying the neighbourhood? We’re buying this building, quite frankly it’s a nice building and we don’t care much about the neighbourhood.” Well, you should care because your building is part of the neighbourhood. What goes on in the neighbourhood affects you. Here are a few scenarios.

Usually, they have good areas and not so good areas. You might be in a good area of a particular neighbourhood and it might be nice for a couple blocks.

But, what’s going on in the rest of the neighbourhood? Is the neighbourhood collapsing, rejuvenating, any proposed LRT, new developments, are they shutting the local schools, re- zoning plans, area redevelopment plans, other new transportation? All good questions (and of course there are more) that need answers for you to make an informed buying decision.

Deduce amazing information by simply opening your eyes and observing. Look at the parking lot of your proposed building and others in the area. Are they filled with junker cars and trucks, cars on blocks, cars in various stages of disrepair? If so, you are looking at an informal tenant profile. These are all tenants with a past and no future.

Check the dumpster at your building and others in the area. Are there large collections of mattresses and furniture? If the answer is yes, you are looking at a building with high turnover or bedbugs or both.

What buildings or businesses are next to or close to your proposed purchase? Here’s a chilling story. My client bought a multi-family building next to a dry cleaning establishment located on the commercial periphery of the neighbourhood. The phase 1 did not reveal any problems. Later, the government changed the rules about the allowable levels of certain chemicals for residential buildings. The 50-year-old dry cleaning plant emissions were within the range for dry cleaners but exceeded the new allowable levels for residential buildings. My client could not sell or refinance; he’s caught!

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

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“Downtown Chelsea Residential HD Chelsea MA 02” image by Jameslwoodward used under CC Attribution-ShareAlike 3.0 Unported.

When buying a multifamily building, inspect all the suites. Your vision of what is satisfactory and the vision of a seller anxious to sell are likely to be completely different. Failure to inspect meant substantial extra expense after closing for this investor.

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

“All the suites look just like this one,” it what the seller said when our investor showed up to inspect the 24-suiter.

The first-floor vacant suite looked pretty good. There was fresh paint, the carpets were clean and the appliances looked relatively new. Generally, the suite looked fine, neat, clean, and tidy. The only exception was a cracked mirrored door on the medicine cabinet in the bathroom. Our member and his realtor made a note and carried on with the inspection.

The seller’s property manager squiring them around the building said, “we’ve got two more representative suites for you to look at, one on the second floor and one on the third floor. Nice long-term tenants in both. The suites will give you an idea of how the units set up when they are furnished.” So, up the stairs they went (no elevator in the wood frame building). The two tenants were, indeed, very nice.

The lady on the second floor seemed happy to show them around followed closely by her pet Yorkie. “Nice dog,” says our investor, who is a dog owner himself. Nice, but didn’t the sign out front say “adults only, no pets?”

He gently asked the tenant about her dog and the no pets sign. “The manager is so nice, they made an exception for me,” was the reply. On to the third floor. A retired couple seemed happy for the interruption and proudly showed pictures of their grandchildren.

Finished with the three suites, our member and realtor inquired about the other 21 suites. The seller’s property manager said, “the owner didn’t tell me about that. He said you wanted to do an inspection and to show you three representative suites. We haven’t given notice to the other tenants. We can do that. I’ll have to talk to the owner and it will take 2-3 days to set it up and give the proper notice.” A quick look at the offer to purchase revealed the words ‘subject to suite inspection.’

“Well”, said our investor,” what are the other suites like?” “Pretty much like these three,” said the property manager. Our member was from out of town with a flight leaving that evening. He felt okay about the property and asked his realtor, “what do you think, should we inspect all the suites?” “Probably a good idea,” said the realtor, “but it’s your call.” Our member replied, “will you do the inspection for me?” The realtor said, “you know, I’d like to do that for you but it makes me a little edgy. I’m not a property manager and so I’m not comfortable.” Our member thought it over for a while and said, “I’m okay with the building and what I’ve seen so far. Let’s just make sure we amend the offer to purchase so that the seller fixes that cracked mirror.”

And so the contract was amended regarding the mirror and accepted by the seller. After closing and after an inspection of every suite, here’s what our investor’s property manager reported.

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

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“Downtown Chelsea Residential HD Chelsea MA 02” image by Jameslwoodward used under CC Attribution-ShareAlike 3.0 Unported.

This is the story of one investor’s path from single-family dwellings to multifamily properties. Multifamily lenders fund mortgages based on rental revenue. On closing day, every vacancy reduces the amount of mortgage money. What does it mean when two vacancies turn into eighteen vacancies on closing date?

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

It was an okay building, in an okay part of town. 36 suites, just about the size our investor had targeted in his plan to acquire 200 units. The road to this investment was typical. Like a lot of investors, he started out small.

First he bought a condominium townhouse in a rental pool. Then he bought a couple of houses with secondary suites, one legal and one illegal. Then it was a fourplex and another fourplex. This process took three years. In order to reach 200 units he was going to have to ramp up his purchasing program. He found a realtor and started looking. Concurrently, he talked to his regular mortgage broker who referred him to a commercial lender. They had preliminary conversations with the result that our member knew roughly what amount of money he could borrow.

The hunt for the appropriate building continued until he and his realtor found the 36-suiter that seemed to fit the bill. Negotiations started; offer and counter offer with both sides bargaining hard. Finally, a deal was struck with a four-month closing date. On the day the offer went unconditional, only two of 36 suites were vacant.

Fast forward to the week before closing almost four months later. The lender wanted, as lenders do, an updated, certified rent roll. The seller had provided a rent roll as part of the buyer’s diligence. But, the lender said, “that was four months ago, we need to know how many suites are going to be rented on the closing date.” The seller provided that certified rent roll, which to our member’s surprise and horror showed that vacancies were way, way up. Exactly half, 18 suites, were now vacant.

Apparently, the seller had just let suites stay vacant as tenants moved out. The lender said, “you do understand that your funding is driven by revenue. The fewer suites rented, the smaller your revenue and therefore the smaller your funding.” Our member hadn’t really understood that part of his mortgage. He thought that he had qualified for a mortgage in a specific amount and that’s what he was going to get. Not so. He said to the lender, “I have an excellent property manager in place. Here is our management plan. We will fill up those suites in no time.” The lender replied, “Great, we’re glad to hear that. As soon as you reduce the vacancy rate, we will fund more of your mortgage.”

Well, the scramble was on. With the mortgage reduced by over $1 million, more cash was required. The seller agreed to extend the closing by one month in return for a further $50,000 non-refundable deposit. Our member and his property manager put together an advertising blitz that rented 12 of the 18 empty suites. This raised the amount of mortgage funding, but more cash was still required. Fortunately for our member he had an untapped line of credit and a family that were prepared to give him short-term financial assistance. He closed the deal with the reduced mortgage funding and started the rental process. He quickly discovered just how difficult it is to rent suites at the rental rate you need, in the winter, when the vacancy rate is 7½%. It took another three months before he reduced vacancies to the original 2 vacancies existing when he made his offer.

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

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“Downtown Chelsea Residential HD Chelsea MA 02” image by Jameslwoodward used under CC Attribution-ShareAlike 3.0 Unported.

Many things can slow down a mortgage application. Two weeks is a minimum for your financing condition, but some sellers might not like it; getting pre-approved is a safer option. To avoid human error, make sure to read over your own mortgage documents carefully.

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

Tales from the Trenches often talk a lot about timing. For example, we recently had a good example of timing on a mortgage application. Two weeks to get the original CMHC application approved, but another three weeks when circumstances changed. That’s five weeks to get your mortgage approved, and I know most of us think two weeks should be sufficient.

That is what one of our investors thought in a recent Joint Venture (JV) situation where he was the Real Estate Expert with what seemed like a slam-dunk Money Partner. The Money Partner’s Beacon Score is 795. Her tax return shows $95,000 worth of income, her debt service ratios are excellent, the property was already leased with positive cash flow, and she was putting 20% down. How long did the mortgage application take to be fully and finally approved?

The mortgage application started out well enough. Complete the application and provide the usual stuff: Notices of Assessment from the CRA, letter of employment, list of other properties owned, etc. It all looked good. Then the questions and issues started cropping up.

The application was in late April 2013 and the current year’s tax return showed a $10,000 tax bill. The lender wanted that paid. Fair enough. The Money Partner was applying for the mortgage in her maiden name and the lender wanted proof by way of marriage certificate that Emma Jones and Emma Smith were the same person. Smith is Emma’s maiden name, which she maintains, and it was that name in which she was making the application. Of course, the marriage certificate, which is almost never used, was not in Emma’s documents folder. After the usual time-wasting back and forth, the lender accepted a sworn affidavit of identity.

With the marriage certificate issue out of the way, the lender moved on to a property that Emma the Money Partner had purchased for her niece, Brittany, to live in with her three children. Brittany pays all the expenses, but Emma is on the title and the lender just had a hard time figuring out where this non-rental property fit in their approval process. Why? Because they were not able to recognize the payments as being made by the niece because they come from Emma’s bank account. To the lender, that meant that mortgage payment must be carried by Emma’s income, hence much tighter ratios.

During the process, Emma’s 2012 tax return was filed and it turns out that, due to a competent accountant saving Emma a bundle on taxes, she and her husband now shared some new investment income that Emma had thought would be all on her return

Just when our member thought they were through the mortgage approval loops, the lender pointed out a couple of other income producing items on Emma’s tax return. It wasn’t enough that those items have appeared on her tax return for the last five years. They wanted to know the details. Where was this money coming from? Of course, there are answers to all of these questions, it was all explainable. But, it all took so much time. Five weeks from start of application to approval. Then it took another 10 days for the lender to instruct lender’s lawyer (not us here at RMLO Law LLP) and for that lawyer to call Emma for her appointment to sign mortgage paperwork.

As side comments that did not affect timing, but that are extremely relevant, the wonderful, smart, with-it legal assistant at the lender’s law firm got in touch with Emma early in the process. Then she went on holiday, and the job was taken over by a standard legal assistant to replace the first wonderful assistant. Good-but-not-great assistance really showed how having top-notch staff means a smooth transaction. It might have been the reason when Emma sat down with the lawyer to sign the paperwork, she noted an error in the interest rate and in the term of the mortgage. She pointed that out to the lawyer and followed up with an email to the assistant. You guessed it, when Emma got her reporting letter and reviewed the documents, both errors were still there!

Now Emma is spending more time and effort attempting to get the lender to properly recognize the errors and make an appropriate amendment. The error was corrected, but the bank documentation left Emma wanting more. It didn’t slow down the process, but points out how carefully you have to read and follow up. When you go in to sign, take along anything that summarizes what you believe are the terms/outline of your new mortgage. This would normally be the Commitment Letter provided by your bank or mortgage broker. Mistakes get made and nobody means to do it, but it’s your money, so you check.

When it was all over our member had a debriefing conference with the mortgage broker and they ended up concluding that Emma’s application was not enough “plain vanilla.” Her financial situation is fantastic but shows things that lenders don’t see all the time, which makes them ask for more information because they are curious or nervous, which slows down the process.

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

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“Duck crossing Louisiana 2010-10-15” image by Richard David Ramsey used under a Public Domain Release.

What happens when a real estate deal is delayed past the closing date? The seller can choose not to sell, but they still keep your deposit. Verbal agreements for things like extensions aren’t enough; you need signed documents or else people can change their minds.

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

A brand-new investor was looking to buy her first investment property. She had a couple of friends who were buying properties left and right using those cheap, high-ratio mortgages. Everybody’s doing it right?

She found a realtor and they started looking for property. Fairly quickly they found an appropriate bungalow and put in an offer subject to financing.

I have to think that our brand-new investor and realtor didn’t have very much conversation about the whys and wherefores of this new purchase. Why do I think that? Because fairly early on in the mortgage approval process, the mortgage broker wanted confirmation of, “You are moving into the property, right?” The answer was, “What? Of course not. I’m putting in tenants.”

Our new member was shocked when the broker said, “But you can’t do that. A 5% down payment means that you have to get your mortgage insured by CMHC or other mortgage insurer.” Having no idea this was the rule, but not wanting to stray into the grey (actually in this case, black) area, our brand-new member decided to try for a conventional mortgage.

Having upset the financing apple cart, time was running out on the financing condition in the offer to purchase. The realtor got a one-week extension to the financing condition, but it wasn’t enough. Conventional financing meant a brand-new mortgage application and the application was not yet approved by the time the financing condition extension was expiring.

The realtor asked for a second extension, but the seller was out of town and not available. The seller’s realtor insisted that the seller wanted to sell the home and thought, but did not guarantee, that the seller would have no trouble with an extension. The extended financing condition day came and, on the basis of the seller’s realtor’s comments, our member removed the financing condition. This was now a firm deal.

Unfortunately, the mortgage application process just went on and on and on. A 20% down payment meant our member needed to get help from parents, in the form of a gift letter. The lenders took a closer look because of the previous history.

Meanwhile the seller returned from his travels and seemed cooperative, but somehow was always unavailable to sign extensions to the closing date, although new dates were discussed and agreed on verbally. Five weeks later when the mortgage was finally approved and the realtor was asking for a new closing date (the latest verbally agreed-to closing date was long passed), the seller said, “I’m not closing. I’ve changed my mind; I don’t want to sell the house.”

Despite eloquent and concerted effort by our member’s realtor, the seller wouldn’t budge. The deal was over and soon the letters appeared from the seller’s realtor indicating that they were going to release the $6,500 deposit to the sellers. There wasn’t any way to argue that the deposit was not forfeit because that’s what the contract says. If you remove conditions and don’t close, the seller gets the deposit.

Now my concern was whether this investor would have further exposure. When you don’t close, a seller has to re-market the property and if they get less than what they were going to get when they sold to you, they can sue you for the difference. I took a flyer and threw up a few red herrings about why our member should keep her deposit. Then I suggested to the seller’s lawyer that we would release the deposit without a fight if they would release our member from any further liability. Even though most sellers take the deposit and don’t sue, I thought getting a release was going to improve a bad situation at least a little bit. We did get the release protecting against further loss but the $6,500 is gone.

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

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“Power of Words” image by Antonio Litterio used under CC Attibution-ShareAlike 3.0 Unported.

When doing joint ventures with friends and family, you still need formal documentation. If problems arise, deal with them promptly or pay the price.

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

This Tale is all about opportunity lost. The story talks about dealing with family and friends, failing to deal promptly with trouble, lack of documentation, no professional advice taken, greed, loss of profit, and—maybe more importantly—loss of relationships.

This is a classic Tale. It illustrates so many of those ‘Basic’ situations all of you must understand and guard against. This Tale is in the investor’s own words. Let’s have a read.

“Hi Barry:

5 years ago, I was approached by one of my best friends and he asked if I wanted to participate in a land deal with him and his cousin. My friend, along with his brother and sister, had inherited the land from his mother. The idea was that his cousin would buy out my friend’s brother, I would buy out his sister, and the 3 of us would proceed as equal partners. The property was a half section of land near Edmonton, including a house and yard site. The idea was that the 3 of us would market and perhaps develop the property over time and eventually we would sell off the parcel and divide the proceeds equally amongst the three of us.

Each partner had to put up approximately $300K into the entire project.

As we were close friends and family, we basically proceeded into the partnership on a handshake and did not have a formal joint venture (JV) agreement in place. One of the partners (cousin) kept all of the paperwork including a ledger that tracked of any expenses incurred, income from the property that was disbursed, as well as any funds that changed hands amongst the partners.

Approximately 1 year into the partnership, we had a potential buyer who wanted to buy the entire property for a total of $4M. The purchaser offered to put up a deposit of $1.3M. We agreed to provide vendor financing by way of a VTB mortgage due in 4 years.

The initial deposit covered all of the initial capital investment for all of the 3 partners so we were happy to wait out the 4-year term as we were receiving income from two sources. The house and yard were rented to a tenant. The land was leased to a local farmer. Once again, the cousin documented this proposal on behalf of the JV. The initial deposit paid by this purchaser was sent to the lawyer representing our partnership.

Unfortunately, the lawyer released the funds to the cousin (the partner that had kept the documentation) even though my friend and his cousin were both on title (my interest in the property was identified using an irrevocable assignment of proceeds signed with my friend as I was never added to title initially).

Over the course of time, the cousin decided to move away from the original agreement of equal thirds ownership in the property. He felt that since he had spent some time and money on the house, that he was now entitled to ownership of the house and yard site.

He had prepared documentation supporting his position on the ownership of the yard site. My friend and I indicated to him verbally that we did not agree with his position, however we did not produce any documentation to refute his claim nor did we seek legal advice at the time. We both felt that since we were family/friends that we could work something out in the end. The cousin-partner also wanted to shift the percentage of ownership in the land itself whereby he owned 50% of the land, as well as the house and yard site 100%, while the remaining two partners owned 25% of the land only. Once again, my friend and I were not in agreement with this but did not produce any documentation to refute this claim either.

The 4-year term for this deal was up on March 30th of 2012 whereby the purchaser did in fact pay the balance of the funds and the remaining funds were held in trust until Nov 2012 while the partners discussed the distribution of funds. The cousin was firm in his position in that he owned the yard site outright (even though this was never subdivided and registered with land titles) as well as 50% of the lands and the other 2 partners were entitled to 25% each of the land-only proceeds.

My friend and I always thought we could set aside our difference in opinion with the cousin and reach some agreement that would be a win-win for all three partners and would be more in the spirit of the equal partnership that we had initially agreed to. The cousin held fast in his position so we had to bring in a lawyer to act as a quasi-mediator in order to try and reach an agreement.

At the end of the day, the lawyer indicated that while the cousin’s documentation was sloppy and unprofessional, we did not have any documentation of our own to support our position and as a result, the lawyer felt that a judge would side with the cousin. He advised that we could move to litigation in order to try and reach a settlement, however the litigation process would be costly and due to our lack of supporting documentation, would not likely turn out in our favour. In light of this, we reached an agreement whereby my friend and I received approximately $600K each and the father-in-law received approximately $2.8M.

1)      Always have a proper, written JVA in place for any partnership. I would suggest that it is even more important to have a written agreement when dealing with friends and family as there may be a tendency to think that you do not require the same level of diligence when dealing with friends/family as you can always work something out. This is not always the case.

2)      Seek a lawyer’s advice at the beginning of a deal, not the end of a deal. Legal fees may seem costly, however in this case, we left a large sum of money on the table due to lack of documentation and legal guidance.

3)      Always register your interest in a property on title. Had the title accurately reflected the equal ownership in this case, perhaps a more equitable settlement would have been reached.

4)      When creating documentation including correspondence between partners, be mindful of how that documentation would be seen by a lawyer/judge should the deal or partnership require litigation or mediation in the future. In this case, simply refuting the cousin’s claims in writing would have helped support our position when a settlement could not be reached amongst the 3 partners.

5)       If you have a concern or uncertainty about any matter related with a deal or partnership, deal with it sooner rather than later. Even though we were in disagreement with many of the cousin’s claims, we chose to address these concerns at the end of the deal as opposed to earlier in the term. The longer we waited to address our concerns, the more documentation the cousin created in order to support his position, which ended up costing us a lot of money!”

As set out above in # 1-5 with a couple of extras. Let’s go over them again.

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

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“3D Realty Handshake” image courtesy of Scott Maxwell. Used under Creative Commons Attribution-Sharealike 2.0.

There are many things that can delay real estate transaction. 30 days is a minimum, but keep in mind that closing time should only begin after final conditions are removed.

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

This Tale comes under the heading of ‘The Basics.’ For new investors especially, there are certain things or situations that keep coming up again and again. Even senior investors often need reminders of The Basics.

One of those Basics is timing. I get this question all the time: “Barry, how long should I leave myself for closing? 15 days after final acceptance is good, right? Not good? What about 30 days after final acceptance? My realtor and mortgage broker both say that should be plenty of time.” Wrong and wrong!

Standard deals need to be written so that closing is 30 days after final condition removal, not 30 days after final acceptance. For out-of-province buyers make that 35 days after final condition removal to allow for couriering of documents back and forth. Note: I said ‘standard’ deals. There are exceptions.

“30 days, that seems like a long time. It can’t take 30 days to prepare documents.” True, it doesn’t take 30 days to prepare documents. But here’s how it goes. Before we can get started on preparing your file we need what are called ‘Real Estate Instructions’ and ‘Mortgage Instructions.’

You remove conditions. Your realtor gets that condition removal in to the conveyancer at the real estate office. The listing realtor’s office then sends out the real estate instructions, which include a cover letter telling both lawyers who the other lawyer is along with full and final signed copies of the real estate purchase contract, schedules, and addenda.

Your final condition removal also goes to your mortgage broker, who then instructs the lender that the deal is unconditional. The lender then tells their administrative department to send what are called ‘Mortgage Instructions’ to us. Mortgage Instructions are what we need to prepare a mortgage on your behalf.

To prepare your file we need both the Real Estate Instructions and the Mortgage Instructions. After final condition removal it can take up to 10 days to get both sets of Instructions. That chews up 10 of your 30 days and we still haven’t started working on your new purchase.

Once we do have both sets of Instructions and we get going, things don’t always go smoothly. Life doesn’t go smoothly. It doesn’t matter what you are doing or trying to accomplish, it’s always better if you have a little extra time for the unexpected. With the above background let’s talk about some of those ‘Unexpecteds.’

Here are a couple examples we have experienced:

For one transaction, we ordered funds from the lender scheduled for the closing date. Funds didn’t come in. When we called the lender, they said their lines were down and they couldn’t wire any money anywhere. It took one full day after the closing day to get funds. Calls have to be made to the seller’s lawyer requesting extensions. This was a “no money, no possession” deal. Movers and utility people were not allowed access. Our clients had to stay in a hotel overnight.

In a similar situation the lender advised that there was a fire in their building causing a full evacuation and therefore they could not fund any mortgages. Closing was delayed one day with similar stress for all involved.

We all love the Cornerstones Program here in Edmonton, Alberta. Grant money up to $24,000 to construct legal, safe suites. This month we had three scenarios where members were refinancing, buying, and selling properties with Cornerstones Suites. The logistics of dealing with assumption or discharge of the Cornerstones Grant and Caveat are new, mildly confusing, and certainly time-consuming. The refinance took an extra three months to close!!

Some other delay items:

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

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“3D Realty Handshake” image courtesy of Scott Maxwell. Used under Creative Commons Attribution-Sharealike 2.0.