Tales from the Trenches

The second part of this podcast mini-series on fourplexes gets into some problems that can arise after the deal closes. When buying a fourplex, or any property with more than one dwelling, you must do at least two things. Number one, check to see that the zoning allows the number of suites. And, number two, confirm that the proper permits have been issued with final inspections done. A real property report (RPR) with the proper zoning stamp is not enough. Checking permits, whose job is this?

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Now on to part two of “Fourplex Puzzle.” You will recall from the previous episode that our investor wanted to start purchasing multifamily properties and thought that fourplexes would be a good place to start. On the positive side, he already owned 10 wonderful single-family properties with positive cash flow and considerable equity. On the negative side he was out of money. The cash flow on his 10 properties wasn’t strong enough to handle a major refinance to do an equity take out, and he was conservative enough not to want finance things to the hilt anyway. The solution was to joint venture all of his 10 existing properties, which provided sufficient funds to purchase 2 fourplexes.

The first purchase went very well. He found a nice fourplex with three suites rented to good tenants and one suite coming vacant. As part of the offer to purchase, the seller agreed to do his best to lease the remaining suite, use our investor’s form of lease and give, our investor the right to approve the tenant. The fourplex was in an area with numerous other fourplexes. The zoning checked out as RF3, which allows fourplexes.

At closing the seller provided an older but very readable Real Property Report with compliance stamp confirming the RF3 zoning. The RPR, even though not brand-new, continued to reflect the current state of the property. Comparing the property with the drawing on the RPR showed nothing had been added or removed. The purchase was made, and on closing date a brand-new tenant had moved in after being checked out by our investor and signing our investor’s lease. All was going well.

Shortly after this purchase was finalized, another fourplex came up for sale on the same block. In fact, this fourplex was right across the street from the first fourplex. Even better, all four suites were rented to good tenants. This purchase went even more smoothly than the first. Our investor had just enough money for the down payment, found a very good mortgage, and removed his conditions. At closing, the seller’s lawyer provided a Real Property Report similar to the one the buyer got when he purchased his first fourplex. After closing our investor felt pretty good; this was going better than he expected.

That feeling lasted until one month after closing when our investor got a notice from the City Planning and Building Department that there had been a complaint that the fourplex contained illegal suites. How could this be? The zoning was RF3 and the block had numerous fourplexes, including our investor’s first fourplex right across the street. He even had an original RPR with that nice blue compliance stamp showing RF3. What went wrong?

The answer is that just because a property is zoned to allow a particular type of dwelling doesn’t mean you automatically get to build a fourplex. A building still has to be properly permitted. You need a development permit and a building permit. This is what our investor discovered when he talked to the city. His first fourplex had permits issued that allowed the building of a fourplex. The permits for the second building only allowed a duplex. “Fine,” said our investor, “I’ll just apply for the permits.”

As you might expect, it wasn’t quite as easy as that. The lot was a little bit smaller, which meant the square footage required to build the fourplex was just a little bit deficient, and building code rules had changed since the building was first constructed. To meet today’s building code regarding separate entrances, firewalls and other safety features, our investor would have to do substantial and expensive renovations.

If you’re buying a fourplex in Alberta, get Barry’s legal expertise to minimize your risk. Contact him ASAP!

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“Puzzle Pieces House Shape Real Estate Jigsaw Puzzle” image by AbsolutVision used under a Pixabay License.

In this episode, you’ll hear about things to consider when changing your real estate strategy from single-family to multifamily. How your success changes the attitude of family and friends. One way to raise your multifamily down payment.

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Our investor had a portfolio of 10 single-family dwellings, a nice mix of bungalows and town houses. All these properties were operating nicely, and the equity build-up was outstanding. But they took a little more work than our investor wanted.

His success was not going unnoticed. Family and friends had been watching his real estate adventures with interest. As the properties started to accumulate, and as so often happens, the comments changed from, “what, are you crazy?”, and, “the tenant problems will kill you.” Now he was hearing, “you know, I’m kind of interested in real estate,” and, “if you need any extra money, call me.”

At this point, our investor thought his real estate business might best be grown by moving on to multifamily properties; fourplexes were his first choice. The trouble was he was out of money. The obvious choice would be to talk to some of those possible money partners who were now singing a different tune. With 10 successful single-family properties, everyone wanted to throw money at him. That was great, but our investor had a difficulty.

He was extremely cautious by nature and didn’t know anything about multifamily investing. He thought it would be relatively the same as buying single family properties, but he didn’t know. He studied everything he could find on the subject. He knew he could do it, there were lots of checklists and other people had done it. Why couldn’t he?

The answer was, of course, that he could indeed be a successful multifamily investor. But he just had to do it on his own first. That’s the way his personality worked. Buy some properties just like he did with single-family, work his way through the problems and issues, set up the systems and then move on to attracting money partners. The last thing he wanted to do was dive into multi-family, get himself in trouble, and then have to explain that to his new money partners—especially if they were family.

Wanting to buy multifamily properties and not having any money is not a good mix. Where to get the money? The obvious answer was to tap the equity in his 10 single-family properties. He could re-mortgage, but that would impact cash flow and move it out of his comfort zone. What about joint ventures?

In anticipation of growing his business by joint venturing, our investor again began studying. He became a regular on a joint venture forum. To top things off, he took my Joint Venture Focus Workshop.

Next, he took the financial and other information from each of the properties and worked it into a presentation showing how the properties had performed since acquisition and projected how they would perform in the future using very conservative numbers. He worked out a letter of intent and a joint venture agreement.

Then he went to some of those suddenly interested friends and relatives and offered them interests in his 10 single-family properties. Most money partners were happy with the standard 50-50 joint venture although a few wanted a slightly higher percentage because, after all, “they had the money.”

In the end he negotiated enough successful joint ventures to start the hunt for multifamily properties. Fourplexes continued to be his first choice.

Interested in Joint Ventures? Check out the Rapid Cash Program Home Study Kit, which features many Creative Strategies using Joint Ventures!

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“Puzzle Pieces House Shape Real Estate Jigsaw Puzzle” image by AbsolutVision used under a Pixabay License.

This episode delves into commercial financing of real estate (usually six units or more ). NB, it’s quite different than retail/residential financing. Lenders have their own lawyers and require more diligence. If buying in a corporation, your lawyer usually has to provide the lender’s lawyer an opinion that your corporation is properly incorporated with the power to make a purchase and mortgage property. Your minute book must be up to date or delays will occur. Lenders usually won’t lend to someone who has gone bankrupt. In a joint venture ask your partner, “have you ever been bankrupt?”

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Most real estate investors are involved in the retail side of it. That is, they buy homes, townhouses, other condominiums, duplexes ,and fourplexes. If there is new financing, the same lawyer usually acts for the buyer and the lender. Lender’s instructions to lawyers are not near as tough as they are if there is commercial financing. Typically, once you are buying more than four or five units, lenders structure loans under commercial financing rules. Is the cut off point four units, or is it five units? You have to ask your mortgage broker.

One big difference between retail loans and commercial loans is that very often the lender has their own lawyer. Now you have a lawyer for the seller, a lawyer for the buyer, and a lawyer for the lender. The lender’s lawyer has a lengthy checklist of diligence that needs to be done before he will give the lender his legal opinion that the loan can be safely made. Here are a couple of recent scenarios that came across my desk.

In the first scenario our investor was entering into a joint venture in his personal name with an incorporated money partner. We knew the investor and had acted for them previously. We didn’t know the money partner. Our law firm was acting for the joint venture, buying a small apartment building. As is typical, the lender had their own lawyer.

We got the checklist from the lender’s lawyer and one of the items was his requirement for our law firm to give him our legal opinion on the status of the money partner’s corporation. To give our opinion we need to examine the corporation’s minute book. This is a three ring binder that contains all of the incorporating documents, the certificate of incorporation, the initial and annual resolutions, share certificates, and annual returns. In other words, it’s all the paperwork that tells you basically everything about the corporation.

We got in touch with the contact person at the corporation; let’s call him Bill Director, and asked for the minute book. On receipt, our review showed that the minute book was in terrible shape. Share certificates were not issued, they were behind one annual return, and there were no resolutions confirming the current officers and directors.

The minute book had to be cleaned up in order for the corporation to properly execute lender paperwork and for our law firm to give our legal opinion. When we called Bill Director to advise what needed to be done, he was resistant and even combative. He thought that because he owned 40% of the shares and was running everything he could issue shares and sign resolutions. Well, no he couldn’t.

It took some time to get him to understand that the apartment purchase was going nowhere until the outstanding corporate issues were taken care of. He called the corporation’s lawyer and got it moving. This issue took two weeks to resolve and delayed the closing.

The second scenario involves another joint venture between two investors. Again, this was a commercial loan with the lender having their own lawyer. Lender’s lawyers do lots of searches, more than for retail loans. One of the searches they did was a bankruptcy search. The non-member had been discharged from bankruptcy five years ago. Once the lender learned of the bankruptcy, they denied the loan.

Our investor lost the deal because he was unable to find a replacement money partner within the time allowed for the financing condition and he was unable to obtain an extension from the seller.

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

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“Mortgage” image by Nick Youngson attributed to Alpha Stock Images used under CC Attribution ShareAlike 3.0 Unported.

This Tale is about the problem with getting behind on your paperwork as a real estate investor. Not filing your annual tax return is serious business. Big fines or potential jail time. Not filing your annual corporate return with corporate registry will have your company dissolved. Would you invest in a badly run company?

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The phone message sounded very concerned. A client was interested in jumping right into quick-turn creative deals, probably fix and flip. He wanted to use his existing corporation in order to get the best tax treatment on expected profit. His brother-in-law had big pile of cash not doing anything and was ready to invest on a joint venture basis. So far this sounded okay. My client had construction expertise; the brother-in-law had the money, what was the issue?

The issue was his corporation. He was using it for a sideline business run mostly on a cash basis. It wasn’t very active. Record-keeping was spotty to say the least. He usually didn’t file his annual return with Alberta Registries until it was at least two years late and only after he got those annoying notices saying that if he didn’t file they were going to strike him off the corporate register! In fact, he had just received one of those notices in the mail two months ago but had not yet done anything. With luck, his corporation would not yet be struck off the register. The missing annual returns would have to be filed, but he would not have to go through the laborious and expensive process of reinstating his corporation.

Worse yet, it turns out that our member had not filed a corporate tax return with the Canada Revenue Agency (CRA) for at least 10 years, it could have been more, he just didn’t remember. The CRA takes a dim view of this practice. Here is an excerpt from the CRA website:

News release

Director and corporation fined for not filing tax returns

Thunder Bay, Ontario, December 17, 2009 … On December 7, 2009, Premier Floor Fashions Inc., 1561272 Ontario Inc. and Steve Dukarich, a director of both companies, of Thunder Bay, pleaded guilty in the Ontario Court of Justice in Thunder Bay to six counts of failing to file tax returns. They were fined a total of $6,000. In addition to the fines imposed by the courts, individuals or corporations convicted of failing to file tax returns are still obligated to file the tax returns and pay the full amount of taxes owing, plus interest, as well as any civil penalties that may be assessed by the Canada Revenue Agency (CRA).

In the case above, it could actually have been worse. The fines can be higher. Occasionally, when a taxpayer ignores the CRA they can do some jail time. This is serious business. It was most likely the small, cash nature of his business that had not already caused the CRA to descend on him like a ton of bricks.

Back to my client. We suggested he immediately file voluntary returns, pay any tax owing (plus penalties and interest) to get back in good standing.

Right now he doesn’t know what to do. His cash business meant terrible record-keeping. Since the CRA hasn’t caught up to him so far he is considering just letting his corporation die and forming a new corporation for his fix and flip real estate business. Maybe the CRA won’t ever bother him.

My client asks, “what do you think?” My answer, “I don’t know if that will work, but it’s not a good idea.” It’s impossible for any professional lawyer or accountant to answer that question in good faith.

Contact Barry McGuire now. He and his colleagues at Field Law will solve your legal problems with tax, corporations, and real estate.

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“Tax” image by Phillip Ingham on Flickr. Used under Creative Commons Attribution-NoDerivs 2.0

In this episode, Barry talks about the differences between buying a property from a developer vs. a previously owned home through a realtor. Developers have custom contracts, which means nothing is standard. You must do more diligence, and you should also customize the contract with a clause to protect yourself.

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I received a fantastic e-mail recently that so clearly sets out various diligence issues. The e-mail was so good that it is absolutely worth reproducing it for everyone to read.

Dear Barry,

Right now I owe you a 20 million dollar thank you….I don’t know how I will accomplish that, but on a new level I know I really do appreciate the advice you give in ‘Tales from the Trenches’. You might be interested in my story:

Last Friday I put in an offer to purchase on 3 lots from a developer. They use a non-standard purchase contract. That especially prompted me to remember one of your Tales From The Trenches. So, I added one line: ‘offer is subject to purchaser’s lawyer’s approval’. Another red flag, the representative at the developer’s office has a real estate licence but he had a big challenge writing up the sale. Anyway, we got it done and I sent the contract to my lawyer for review.

Just before my appointment to pay my deposit and remove conditions, my lawyer called with a myriad of issues with the contract.

The vendor was listed incorrectly…. I had been told that the builder who originally had purchased the lots now was selling, and the developer was acting on his behalf. The builder’s name was listed as the seller. This was not necessarily the case. The builder has a contract with the developer, but I’m not sure he is the legal owner of the land…. probably isn’t.

The developer told me the builder has folded. In fact, they, or another company with a similar name, filed a lawsuit against the developer in December. How do I know this? My lawyer searched the title and said it showed a certificate of lis pendens. My lawyer explained means, ‘lawsuit pending’. I understand that these properties are possibly tied up in this lawsuit.

The developer’s purchase contract said that I would waive my rights under the Canada Interest Act and pay 18% interest if I didn’t pay on time. My lawyer told me this was not a good idea; there are often delays that might not be my fault, plus, it’s a crazy rate of interest.

The last one is the worst, though. As far as I understand from my lawyer, the title is heavily encumbered by mortgages, which I would be signing that I would be responsible for. One is for $20,000,000. My lawyer said that the developer’s contract should have but did not state that the developer was responsible for paying off all of his development financing

So I won’t be removing my conditions until all this is sorted out. Would still love to purchase these lots, but am reconsidering….

So I thank you for making me stop and think before I signed a contract on these three properties without the condition written in.  In appreciation…

Buying an Alberta home from a developer? Contact Barry now.

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“New Home Construction” image by Paul Brennan used under a CC0 Public Domain Dedication.