Tales from the Trenches

In Edmonton, AB, we have a program where homeowners can get a loan from the City to put in or fix up a secondary rental suite. The difficulty is that the City then puts a caveat on the title to ensure that their requirements are met. This can complicate selling, purchasing, and refinancing.

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

Cornerstones is a grant program initiated by the City of Edmonton where property owners can get up to $24,000 to create a legal suite or modify an existing suite so that it meets City bylaws and the Program guidelines. Once the suite is completed, inspected, approved and then rented according to the Program guidelines, the grant funds of up to $24,000 are forgiven over a five-year period at 1/60 of the grant amount per month.

Sweet!

As you might predict, this was an extremely popular program, and the City ran out of funds. It was so popular, in fact, that the City of Edmonton has launched a second edition of this Program that is scheduled to run through to 2016. For all you folks who don’t live in Edmonton, call or e-mail your local municipal representative and ask them to institute a Cornerstones-like program in your city or town.

Okay, here’s where it gets a little sticky. Once the suite is completed and approved, the City of Edmonton registers a caveat against the property title claiming an interest pursuant to the Cornerstones Agreement that every program participant is obliged to sign.

Once that caveat is on the title it has to be dealt with just like any other caveat. In three recent transactions, investors were refinancing a Cornerstones property, selling a Cornerstones property, and buying a Cornerstones property. Issues came up all over the place

The City of Edmonton caveat protects the grant and is therefore a financial charge against the title. Our members know that any first mortgage lender wants to be well, first on the title. That means that the caveat has to be ‘postponed’ to the new first mortgage. The City understands this, therefore in the Cornerstones Agreement, the City agrees to postpone their interest to a new first mortgage.

Firstly though, because the caveat is a financial charge, the new first mortgage lender has to be advised of the caveat and approve it. Since our investor and their mortgage broker did not know this had to be done, the process of getting the first mortgage lender’s approval only started once RMLO Law LLP received mortgage instructions, searched the title, and saw the caveat. No lender based in Toronto knows anything about the Cornerstones Program. The underwriters needed an explanation and time to get their head around exactly what the Cornerstones Program is all about.

In the end, between an extremely long lender underwriting, lost documents, mortgage revisions from a ‘Step’ type mortgage to conventional mortgage for a lower principal amount, redrafting of documents, and then final approvals, it took three months to get this refinance done!

In our second scenario, our investor was purchasing a property with an existing Cornerstones Suite. He wanted to take over the existing Cornerstones Agreement. Again, during the initial mortgage application process neither our member nor the mortgage broker understood that the new lender would have to approve the existing Cornerstones Grant and caveat protecting same. This lender approved and took less time than the refinance lender.

Next, we had to deal with the City of Edmonton bureaucracy and obtain a Transfer Agreement for the existing Cornerstones Agreement. As a new buyer you have to agree to takeover and honour the existing Cornerstones Agreement. Only then will the City of Edmonton supply the required Postponement Agreement.

A Postponement Agreement moves the Cornerstones Caveat into second place priority on the title behind the new first mortgage lender. When a lender says “first,” they mean first in priority on the title. None of this happens fast; it’s very time-consuming.

In our third scenario, our member was selling to another member a property in which he had constructed a Cornerstones basement suite. The usual caveat was on the title protecting the Cornerstones Agreement.

This situation was slightly different in that the member buying wasn’t sure whether they wanted to take over the Cornerstones Agreement or have the seller pay it off. The seller didn’t care. If the buyer took over the Cornerstones Agreement, the seller would credit them the remaining grant amount on the Statement Of Adjustments.

If the buyer did not want to take over the Cornerstones Agreement, then the seller would pay it off and get the caveat discharged from the title. Seller didn’t care because it cost him the same amount of money either way. The buyer spoke with his lender who had the usual lender trouble understanding what the heck was going on! “What is this Cornerstones Program? To us this looks like a restrictive covenant and a financial encumbrance and we won’t allow it.”

At the time of writing, this scenario is still ongoing.

So, there are lots of issues with the Cornerstones Program. Here’s another issue that everyone should consider. Yes, the Cornerstones caveat is a financial encumbrance. Therefore, there needs to be specific negotiation about taking it over or not. Typically, when a buyer takes over and assumes a financial encumbrance, they get a credit on the statement of adjustments. That reduces the cash to close. However, because the Cornerstones Program is a grant that is paying itself off at 1/60 of the grant amount each month, maybe the buyer shouldn’t get a credit as the grant amount is self-eliminating. Maybe the seller was able to get a better price because of the legal Cornerstones suite so the buyer should get a credit. Big negotiating point, there is no right answer.

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

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“cornerstones on Stone House – Prospect Hill Cemetery – 2014-08-08” image by Tim Evanson used under CC Attribution-ShareAlike 2.0 Generic.

When an inspection reveals problems with a potential property, these need to be fully resolved—even when they seem like they might be OK. Before removing conditions from, make sure to nail down issues so that they are 100%. Close or sort of isn’t good enough!

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

An investor found an interesting property. Nice house in a nice area with suites up and down. The top suite was rented to a decent tenant at decent rent. The downstairs suite needed work. The seller was the estate of a recently deceased person, which always makes negotiations a little problematic.

Estates are run by executors who are responsible for ensuring there are no wrong decisions. Executors are not adventurous or quick. Plain-vanilla, straightforward, and no time-pressure is how executors like their deals to be written.

Nevertheless, an offer was written subject to financing and inspection. One inspection item that came up was that when the kitchen and bathroom sinks were filled with water, they drained very slowly.

This matter was brought to the seller’s attention and they said they would get their plumber to look at it. By and by, the plumber came back and said that everything was fine. However, on re-testing the sinks, our cautious member thought they still seemed to drain very slowly. Our member got his plumber to come in for a further inspection. This plumber could not find anything wrong, which made our investor a little more nervous because all his other sinks in all his other properties—including his personal residence—all drained much faster than this new, prospective property.

Closing went ahead without the problem being resolved and renovation commenced on the basement suite. Everyone’s busy and, with the basement renovation, it took six months before a new tenant moved in. As soon as there were two tenants in the house both using washers, showers, and sinks at the same time, the complaints about drainage came in. Not only was drainage now very slow, in some cases facilities backed up.

Someone suggested that perhaps the drainage/sewer pipes were plugged. Our member called the City of Edmonton, who came out and put a camera in the drainage lines. Guess what? Those lines were almost completely blocked with tree roots.

Now, you have to remember that the City only takes responsibility to clean out the lines from the property line out to the mainline in the street. The property owner is responsible from the property line into the house. Our member’s further investigation revealed a collapsed sewer line, replacement cost of $6,000.

Our member called me to ask whether or not he had any remedy against the seller. Why? Because our investor believed that the seller must have known about the problem even if there was only one tenant and certainly if there were two tenants. Roots plugging pipes do not develop instantly. It takes a while, but when they are plugged, they don’t get any better. Therefore, the seller must have known.

My advice to our member was that it would be very difficult to pursue the seller for this matter. He said to me, “I know, I know, just hoping. Before we took off conditions, I knew drainage was still an issue, an unanswered question. What I should’ve done was follow through and not remove conditions until I knew the answer.”

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

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“Clogged Piped” image by UuMUfQ used under Creative Commons Attribution-ShareAlike 3.0.

Money and financing are essential parts of any real estate transaction. Always make sure to have a backup in order to make sure that you can still close a deal… just in case your first choice for financing dissolves!

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

“It’s all about the money baby!” Well, maybe not all about, but if you don’t have money, you can’t do deals. Having the money means you can write the cheque, big or small, or you have a fully approved mortgage.

We’ve all heard the expression, “you have to have a Plan B.” That means if your original plan doesn’t work out to get the money, whether it be the cash part of your deal or the mortgage, you need a second option, a second place where you can get the money you need to close the deal. If you can’t write the cheque or find a satisfactory mortgage, then you need a Plan B. This becomes especially important where deals are unconditional and deposits are committed or where it’s a sweet, under-market deal. Here are three circumstances where our investors now understand why you need a Plan B.

Our first investor found a beat up property where a $20,000 renovation would support a $50,000 after-repaired value. His mortgage broker found a mortgage with a second tier lender (i.e., Home Trust, Xceed, Kingsway Financial, etc). Shortly before closing, his mortgage broker found a first tier lender (i.e., the major banks or credit unions) that would do the deal at an interest rate that was 2.5% lower as long as his wife signed the mortgage too. No problem, his wife was glad to sign; 2.5%, that’s substantial!

However, the new, first tier lender wanted to do their own appraisal and needed access to the property. The divorcing sellers who wanted a quick sale wouldn’t cooperate with access. Our member had a brainwave. His brother had recently sold his house and had a big pile of cash sitting in the bank doing nothing (because that’s what banks pay these days even on big piles of cash). After explaining the situation, his brother was delighted to get a nice bonus for a short-term loan plus double the interest that the bank was paying him. The deal closed for cash, renovations were done, the new, inexpensive first tier mortgage was put in place and a fully renovated, positive cash flow property was added to our member’s portfolio.

Our next scenario involves a senior investor who already owned 80 doors. He had never done a joint venture but he had his eyes on a 48-suite apartment that was beyond his own resources. One of his good friends had been observing his success in building his 80-door portfolio and was bugging him to participate. This friend was well-off, with lots of cash available. They agreed on the classic 50/50 joint venture with the friend putting up all the cash and qualifying for the mortgage.

Our member then negotiated the real estate purchase contract and put up $50,000 deposit. The friend qualified for the mortgage and the deal went unconditional. Shortly before closing the friend decided that 50/50 wasn’t fair after all because “I’m putting up all the money.” He backed out of the deal and our member could not find a new JV partner. Our member lost the deal, his $50,000 deposit and, without a signed JV agreement, little chance or inclination to sue his ‘friend.’

Our last scenario occurred where two investors had partnered up to find a fix and flip deal. Their credit was a bit tight, although they could’ve qualified for a higher interest rate mortgage. Then, at Thanksgiving dinner another family member was exclaiming about the great deal on at his bank. On an introductory basis he could get a line of credit (LOC) for more money than it would take to buy and renovate the fix and flip deal at an interest rate of prime -1%. The only condition was that the line of credit had to be activated immediately for the full amount and the loan had to be for at least three months. No problem, this renovation was estimated to take four months. Our members and the brother-in-law quickly struck a deal where the line of credit funded the complete purchase and renovation costs.

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

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“Financing on Chalkboard” image by GotCredit used under CC Attribution 2.0 Generic.

Let’s look at five different aspects of ensuring financial success for your real estate business. Banks like things plain and simple. You need to deal with conditions on a mortgage and names on the title before you can close. Make triple sure you are unconditional before removing ‘subject to’ from your contract. You also need to make sure to disclose to your lender any ‘creative’ approaches to investing.

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

The general rule is that a lawyer should only act for one client. Residential real estate is an exception to the rule. When we here at RMLO Law LLP act for you as a buyer, we are also usually the lawyer for the bank.

Over 40 years of acting for buyers and banks, we have picked up a lot of tips. Here are five of the best:

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

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“Financing on Chalkboard” image by GotCredit used under CC Attribution 2.0 Generic.

Lending policy changes, as does the interpretation of existing rules and regulations. Make sure you stay on top of the current situation with your lender, the government, and market conditions.

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

Let’s get real, folks. The hard reality is that lending is a dynamic part of investing. Here are three current aspects of financing you must pay attention to. Remember, lending policy changes from day to day.

More and more lenders are asking you on your mortgage application or requiring us at RMLO Law LLP as your lawyer to confirm that there are no what they call, “Third party beneficial interests.” For us as real estate investors, this typically refers to a joint venture partner who is not on title. If you own part of the property, but aren’t on title, then you have what is described as a ‘beneficial interest.’

If, when making your mortgage application, the lender asks, “Are there any third party beneficial interests?” ask them what they mean. Whatever your interest, disclose it fully to the lender. Ask the lender, “Do you mean my joint venture partner who is putting up all the money but isn’t going on title?” “Do you mean me? I’m not going on title but I have a joint venture interest.” Find out whether the third-party beneficial interest is permitted or not. If such an interest is permitted, confirm in writing with the lender, (not the mortgage broker). If your lender does not permit third-party beneficial interests, say goodbye and move onto the next lender. Ask this question early.

With the collapse of the real estate boom in 2007, lending rules have tightened up considerably. Maximum amortization periods for CMHC loans went from 40 years to 35 years to 30 years. Hundred percent financing disappeared. The governor of the Bank of Canada and Federal finance minister, along with other economic prognosticators, have been preaching over indebtedness, stop using your house as an ATM, and, generally, taking a negative attitude.

Line of credit loan to value ratios have been reduced. Some second-tier lenders are calling in their chips. Imagine our member’s surprise at mortgage renewal time when instead of the usual renewal notice you get a notice that says, “Your mortgage is due, pay up.” CIBC had a subsidiary called First Line Mortgages for mortgages originated by mortgage brokers. First Line, at one point, did over 30% of all the mortgage business in Canada; that’s billions of dollars’ worth of mortgages. Billions!! With lower interest rates and tighter margins, CIBC decided that they would do their mortgages in-house instead of through brokers. So, they put First Line up for sale. A billion-dollar company and no one made an offer. First Line is now shut down. It’s not as bad as the media makes out, but the lending rules have definitely tightened up.

Here is a story I’ve heard from a number of members. You go in to see a lender with your Sophisticated Investor Binder in hand. The lender is impressed; they like your plan and they’re very willing to help you reach your investment goals. The lender takes a lot of detail for your first loan but then, subsequent loans are very easy to obtain. This extremely helpful lender attitude is often accompanied by words like, “Buy all the properties you want, we’ll give you the money.” Everything goes along fine until the loans officer gets transferred or the manager changes and interprets policies differently or the lender’s head office tightens credit or change lending policies. You’ll be shocked that a warm, friendly accommodating lender turned instantly into an unhelpful, cold-hearted roadblock.

I suggest a regular review with your mortgage broker or lender of your investment goals, progress to date, and current lending conditions. Don’t get caught assuming everything is the same in the lending business as it was in last month let alone last year or perhaps five years ago when you last bought property. Keep your lending knowledge up-to-date.

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

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“Financing on Chalkboard” image by GotCredit used under CC Attribution 2.0 Generic.