Tales from the Trenches

A new real estate investor managed to avoid a rookie mistake. He was about to enter into a rent-to-own agreement with someone, but the paperwork was so vague as to be useless. Luckily he brought it to me, and I told him to run!

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

I once received a voicemail and a couple of e-mails from someone who had been approached to invest in what he described as a rent-to-own. Could I help? Details were a little sketchy on the phone call and in the e-mails, so I asked that the documentation be sent to me and I would have a quick look. As always, names have been changed to protect the parties. Tales will never name names so that investors understand they can tell their Tales, help others, and be confident that their privacy is protected. This is about learning, not embarrassing.

The material our investor sent me is so very instructive that I have included it in our Tales handout. So, for the purposes of this Tale, please read the next two documents. The first document has the ‘details’ of the agreement between the parties. The second document is, or purports to be, a promissory note.

Agreement between Brand New Investor (Brand New) & Rent to Own Inc. (RTO Inc.)

Date: May 30, 2012

Brand New will be investing $10,000 into the company and the money will be used to invest in real estate, specifically to acquire property(s) under contract for rent-to-own investing.

Brand New & RTO Inc. will split the profits from the rent-to-own in which her money is invested. He understands that the money will be invested for 1–3 years and that the return on investment is not yet determined.

RTO Inc. is prepared to pay him 10-18% once annually until the money is paid back in full. This will be paid up front but will come off his portion of the profits. A promissory note will be issued by RTO Inc. to Brand New as an addendum to this agreement as an instrument of security in acknowledgment of receipt of funds.

Both parties understand that there are many variables involved in the rent-to-own market and are prepared to work together. Brand New is putting up the $10,000 and RTO Inc. will do all that is necessary to carry out the plan that is agreed upon, to the best of it’s (sic) ability.

RTO Inc.                                                                     Brand New

Sign:                                                                            Sign:   

Date:                                                                           Date: May 30, 2012

PROMISSORY NOTE

PRINCIPAL: CAD $ 10,000                                                DATE: 06/01/2012

Address for Payment: 123 Bad Investment Crescent, Grande Cache, Alberta

FOR VALUE RECEIVED, RTO Inc. (the “borrower”) promise to pay to Brand New (the “Holder”), or order, at the above noted address for payment, the Principal, in lawful money of Canada, with 10-18% interest annually

The principal sum and interest thereon shall be due and payable as follows:

All payments shall be applied first to reasonable enforcement costs (if any, including reasonable legal fees on a solicitor and his own client basis), then to interest, and then to principal.

The principal balance outstanding from time to time shall be fully open and may be prepaid at any time and in any amount without notice, bonus or penalty, provided any such principal repayments shall be applied to the ultimate principal balance outstanding, and shall not reduce or affect the payments required above unless such payment is sufficient to retire all principal, interest and costs in full.

The Holder may assign all of its right, title and interest in, to and under this Promissory Note. All payments required to be made hereunder shall be made by the Borrower without any right of set-off, deduction or counterclaim.

DATED at Grande Cache, in the Province of Alberta effective the 01 June, 2012.

Well, what do you think? Ready to dive right in, sorry that you aren’t getting in on the ground floor? No? When I finished reading these two sheets of paper I was stunned, gob smacked, thunderstruck and a couple of other things, none of them good.

Without going at it too hard, we don’t know whether this is a loan or a share purchase, the interest rate is a maybe and the amount of money isn’t enough to do any type rent to own purchase let alone more than one.

There are probably five or six other fatal flaws.

If there is disagreement between the parties, my legal advice is that the document is unenforceable and probably void because of vagueness and uncertainty. What these two scraps of paper scream at me is that RTO Inc. is inexperienced with a complete lack of training and understanding.

Here’s what’s worse. Our member lost his spouse recently, is working three jobs to make ends meet, is trying to renovate his home so that his disabled brother can live with him and he needs money. He doesn’t own any investment property and his mortgage broker told him his debt load is too high to qualify for a mortgage. He thought this was a good way to get started in real estate and quickly raise capital to help with his financial needs. R2O Inc. seemed nice. When I asked probing questions, Brand New really had no hard information about R2O Inc. other than “I met him at a seminar.”

As a lawyer, my advice-giving style is to try and work with a situation. I almost always see things as neither black nor white; there is usually a nugget or two, something positive, something that could be improved and let’s move forward. In this case I was uncharacteristically but, I think, quite properly, very definitive. Brand New and I had another conversation. Here’s what I said. “Do not do this deal. Do not ask for clarifications or improvements. You will lose your money. Run away!!!” Now, what to say overall? There are so many critical observations to make but let’s go with three very important ones.

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

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Images of house and trap combined under Creative Commons Public Domain Dedication.

People often add onto or subdivide their properties, which can make diligence tricky for investors. Did the seller have a permit for a secondary suite? If so, did they actually build what they were supposed to? You need to figure these things out before purchasing or else you might not be able to use that extra suite.

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

My wife Donna and I once went to Hong Kong to visit my number one and only son Colin. His thesis topic for his PhD in ethnomusicology was “music in the martial arts.” Because martial arts have such a huge Asian component (hello Bruce Lee) Colin was at the Chinese University of Hong Kong learning Chinese and doing research. I knew Hong Kong was limited in area and very densely populated. But, it’s one thing to have some vague idea and another to actually be there and see what happens where there are a lot of people jammed into not very much space.

Every square inch of space seems to be covered with buildings, almost all of them high-rises. Walking around one day I saw an advertisement on the one of the charming British style double-decker buses that seemed to be about illegal suites or additions. Then I saw another one. In discussions with Colin, he said that space is so limited in Hong Kong that un-permitted suites and additions are the rule rather than the exception. The Hong Kong government has a huge campaign to crack down on all these illegal buildings. My observation is that it doesn’t seem to matter where you are; illegal, unpermitted suites and building are something real estate investors must watch out for. Questions about illegal suites are the first or second most asked question in my real estate practice.

For your purposes, on a very practical basis it’s up to you to understand how it works in the area where you invest. Remember, it’s not the same in every jurisdiction. Different municipalities have different bylaws. Where they have similar bylaws, they often enforce those bylaws differently. Some municipalities are strict and vigorous about enforcing their illegal suite bylaws. Some municipalities are less diligent and more flexible. I thought it would be useful to provide a point of first contact for six of Alberta’s major cities. Following are links:

Edmonton      http://www.edmonton.ca/city_government/urban_planning_and_design/secondary-suites.aspx

Calgary          http://www.calgary.ca/PDA/pd/Pages/Permits/Projects/Applying-For-A-Secondary-Suite.aspx

Red Deer   http://www.reddeer.ca/business/planning/permits-and-applications/secondary-suites/

Fort McMurray (Wood Buffalo)      http://www.rmwb.ca/Municipal-Government/municipal_departments/Emergency-Services—Law-Enforcement/RES/Fire-Prevention/FireCodesConditions/SecondarySuiteStandards.htm

Lethbridge     http://www.lethbridge.ca/Doing-Business/Planning-Development/Permits-Applications/Pages/Secondary-Suite.aspx

Lloydminster http://www.lloydminster.ca/index.aspx?NID=350

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

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This Tale follows up on the previous one about what you can do when a tenant passes away. Our example shows the steps taken by a landlord to deal with next of kin, and what happened when the family didn’t end up taking responsibility for the tenant’s estate.

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

In the last instalment of Tales from the Trenches, I talked about what I thought was a fairly rare situation: having a tenant pass away. As it turns out, this is not such a rare experience! Afterwards, at least five people took the time to tell me that they too had had tenants pass away. One of them (who is also a property manager) indicated they had eight—count ’em—eight tenants pass away. So, it’s not near as rare as I thought.

This week I had someone followed up with me on how their deceased tenant situation had ended. The tenant was low income and their personal possessions in the suite were of very little value. Certainly the value would have been well under $1,000. Our landlord could have chosen to treat the suite as abandoned and the remaining personal possessions as abandoned goods. The Residential Tenancies Act (s.31(2)) says that for abandoned goods worth less than $2,000 the landlord can “dispose of the goods.”

So, that’s your legal right. But, there were a number of family members who seemed interested in helping out. One family member particularly continued to show interest and said that they would take care of removing all the deceased tenant’s personal possessions out of the suite and distributing them to other family members. Our investor was happy with this. He knew his rights and really wanted to get the suite rented again, but he didn’t want to simply clean out the suite and throw everything away even though he was legally entitled to do so. Our investor wanted to do the right thing. If there was a grieving family member who wanted to take care of the last, pitiful possessions of a poor circumstances human being, was our investor going to be a hardhearted Scrooge of a landlord and just pitch everything in the dump?

You can tell where this is going. Our investor did his very best to work with the tenant’s family member. He made numerous appointments to meet her at the suite so she could pack up and take away. All those appointments were missed and communication ceased. So much for trying to do the right thing.

In the end, I believe our investor struck the right balance of being respectful and careful by hiring someone to go through the tenant’s possessions and pick out anything of a personal nature. Those items filled two office-sized tote boxes. The balance of the tenant’s possessions were then removed and disposed of. Our member will put those two tote boxes in his garage and if any family member ever shows up, at least there will be something to give them. The suite was re-rented with only a half-month’s rent lost.

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

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“Mort” image via Wikipedia used under Public Domain.

What do you do when a tenant dies? Most landlords will want to re-rent their property as a soon as possible, but wills and estates can take a long time to resolve. There are, however, still legal ways of preceding that can be quicker.

https://barrymcguire.ca/wp-content/uploads/2015/07/dead-tenant.mp3

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

In the last month, two landlords have called me to say, “Help, one of my tenants died, what do I do?!” Fortunately, neither tenant was a hermit that died on the second of the month just after paying rent only to be discovered 30 days later!

In one case, the tenant was discovered by his mother on a visit to the suite. Mom called our investor. In the second case, the tenant who normally paid his rent like clockwork missed a payment. A call to the emergency number on the tenant application (see, that’s why you have emergency numbers) revealed that the tenant had passed away while visiting relatives.

For both landlords/investors, their question was, “now what?” “I want to re-rent the suite, but what do I do with all the tenant’s possessions?”

Legally speaking, when someone dies, his or her “estate” is now dealt with according to the deceased’s Will—or lack thereof. Their executor, if they have a Will, or administrator, if they don’t have a Will, (for this Tale let’s just call the person in charge the executor) steps into the deceased person’s shoes. It is as if the executor is the deceased person. They have complete authority to deal with all the deceased’s issues.

So, that’s great if you can locate the executor. And, when I say executor I mean the executor recognized by our courts because they are named in a Will or through what is known as a Grant of Administration where there is not a Will. The process of getting official court authority is lengthy and complicated. For a landlord who wants to deal with an empty suite and get it re-rented all in one month, it is highly unlikely that there will be any official executor to deal with.

From a very practical perspective and on a compressed timeline for re-rental, if there is no one in an official capacity, whom do you deal with? What you do with the security deposit? What is your liability if you allow someone to remove all of the tenant’s possessions, but it turns out it’s the wrong person?

Every situation will be different and must be analyzed on an individual basis. The absolute safe way to do it is to take extensive photos and video of the suite. Next, you remove everything from the suite and store it securely. Then, you wait to hear from the official executor making sure to get a certified copy of what’s known as the Grant of Probate (or Grant of Administration where there is no Will) that confirms them as the official executor. On receipt of that official Grant of Probate, you can release all of the tenant’s property including security deposit to the executor. Now you’re done and you can re-rent the suite.

That’s super safe but, generally, completely impractical as going through that official court process can take six months or more. And, sometimes estates are of such little value that there is no point in obtaining a Grant of Probate and so no one is ever officially in charge of the deceased tenant’s estate.

I think your practical answer is twofold.

This approach could be useful if the estate still has value and you need to watch your liability. In Alberta, you would then deal with anything left in the suite under the Abandoned Goods section of the Residential Tenancies Act. This allows quick action under an official framework. If the tenant has next of kin who say they are in charge and who appear to be helpful, using the abandoned goods approach is a bit harsh but it most likely protects you from any allegation that you dealt improperly with the tenant’s possessions. Of course, if during the abandoned goods process anyone shows up with an official Grant of Probate, then you should deal with him or her.

This works best if the tenant appears to have low-value personal possessions in the suite. You would need to discuss the tenant’s situation with the next of kin who say they will deal with the tenant’s possessions. Allowing such a person to remove everything from the suite is most likely not going to bring future claims against you.

Again, before you let anything be taken out of the suite, take extensive photos and video. Get next of kin who want to take charge of the tenant’s possessions to sign something identifying themselves and promising to deal appropriately with the tenant’s possessions and security deposit.

As far as security deposits go, I might even hold onto that for another 30-90 days after you give up possessions just to see if anything official turns up. Money responsibility is different than dealing with low/no value tenant possessions.

If you have real estate-related issues with Wills and Estates, contact Barry now.

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“Mort” image via Wikipedia used under Public Domain.

Purchasing a condominium unit as an investment can be tricky business because of the many other parties you need to deal with. There are also laws surrounding condos that you need to take into account. As always, due diligence is the key to avoiding a bad deal. This Tale looks at a condo that seemed fine, but turned up a puzzling array of problems upon closer inspection.

https://barrymcguire.ca/wp-content/uploads/2015/07/rubiks-cube-condo.mp3

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

Due diligence can be tough work, and it’s tougher than normal for condominiums.

Condos are creatures of the legislature, and in Alberta they are governed by the Condominium Property Act and its regulations. There are multiple owners, competing interests/agendas, common property, management companies, and layers of bureaucracy that sometimes make it difficult to try and figure out just what the heck you are buying!

Hi Barry,

Here are the details regarding my near-miss at Grandin Village in St. Albert.

Our first concern was special assessments. I reviewed the condo docs and doing the calculation and the total is $25,200 (3mill/10,000 X 84) (assessment/10,000 X unit factor)!!!

The property was a bit older (1968) but it appeared in decent quality to the eye and cash flow $117-217 depending on rent $1300-1400. There were some minor flaws such as 60w service aluminium wiring and original insulation in the attic which had deteriorated to about an R4 but Park was willing to ensure and hey I wasn’t going to be paying the heat bill.

There was also a special assessment of $2898.00 that the Seller was going to pay before sale of the building. This my first of two offers for me and my REIN partner that we put in on the same day so we were excited but quite cautious.

After the property inspection we had the condo docs inspected by Sharyn Basler of Revington Condominium Management & Consulting Inc. It is not her job to tell us to take or not to take a property only to review and inform as impartially as possible.

Turns out there were a number of problems. I may have been able to find some of them on my own but I shudder to think what would have become our brand-new JV partnership if we declined professional help in this case.

Here are the other problems that were uncovered:

There had been no change of Board members registered since 1995. This goes to show that condo board had let proper protocols slide considering Section 28(5) of the Condominium Property Act states that the corporation shall, within 30 days of the Annual General Meeting, file at Land Titles a notice stating the names and addresses of the members of the Board.

The Reserve Fund Study had several flaws. The effective lives of some components were increased inappropriately, ‘contingency only’ costs for several components also inappropriately assigned, some components just omitted, and a 0% inflation rate factored into future replacement costs.

A Study Provider incorrectly noted that caulking around windows and door is the Owner’s responsibility. Several Owners paid for the repairs before this was brought to general attention of Owners.

An auditor noted that financial statements indicated co-mingling of trust and general funds for the past 3 fiscal years. This is in violation of the Regulations to the Act, Section 27(2). Also there were no contributions made to the Reserve Fund for fiscal year ending March 31, 2011 as funds were ‘not available to make the transfer.’

Condo Bylaws indicate that the windows and door are the responsibility of the Owner, as was amended in 2001. However, it appears that this amendment was not registered at Land Titles, and therefore is not enforceable. Minutes indicate that approximately 50% of Owners have already paid.

Special Assessment of $345,000 is noted in the minutes of December 5, 2011. One Board member stated that the Assessment ‘was not really about the infrastructure repairs but about getting the Reserve Fund up to the proper amount.’ However at the same meeting the Board noted that underground infrastructure would be the primary concern. Other notes indicate $1.6 million in assessed repairs. Yet other notes indicate $3 million in assessed repairs.

One Special Assessment of $345,000 has already been levied, as mentioned, but a loan of $3 million has been approved (5 year amortization)… it is unclear what the Board intends to do because request for further information was ignored.

The cost to repair the sewer lines far exceeds the Reserve fund.

It is unclear who has signing authority on the Corporation’s accounts.

Current reserve fund balance $6,072.00 on Nov 30, 2011.

The condo infrastructure was so ignored that sewer, roads, walkways, roofs all need to be repaired immediately.

Some other notes uncovered but not listed in the report:

An accountant/book keeper was asked to create financial statements without any access to bank statements or records.

It seems that the former Property Manager ran the property so poorly that it was only a matter of time before the proverbial sh*t hit the fan. The board members met but didn’t appear to read any reports or notes handed in by reserve fund assessors or accountants. So they were unaware of co-mingling of funds.

It appears that the Board intends to begin repairs to sewers, roads/sidewalks, roofs March/April 2012 (with a reserve fund balance of $6,072.00) total assessed cost $1.6~$3 million dollars. How will this be paid for?? Hmmmm maybe with a loan with a 5-year amortization period to be paid by more special assessments (to the tune of $13,440-25,200 + interest) and dramatically higher condo fees. Provided all contracts are within budget.

We wondered about spending money on getting the condominium documents reviewed. Well, I will tell you… it was the best $440.00 we ever spent. We never would have been able to do the diligence/find out the horrible details. Diligence helped us avoid what would have been an absolutely devastating purchase.

If you’re buying or selling a condo in Alberta, get in touch with Barry today!

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“Rubik’s cube inside” image by Hangsna via Wikipedia used under CC Attribution-ShareAlike Unported 3.0.