Tales from the Trenches

A real estate purchase contract is a legally binding agreement. If the buyer doesn’t meet their obligations by closing the purchase, there can be financial repercussions. At a minimum, the buyer will lose their deposit. But it can be far, far worse. In this Tale, a BC real estate buyer didn’t close and ended up paying for it after the courts ruled in favour of the seller.

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Here’s the story in a nutshell. In August 2017, a buyer walked away from a real estate deal in BC and was sued by the seller when the house later sold for 28% less. Not only did the buyer lose his deposit, he was also on the hook for the difference in the sale price! Furthermore, the buyer was responsible for associated costs to the seller, adding to his loss.

Read the full story, as reported by the CBC: http://www.cbc.ca/news/canada/british-columbia/buyer-who-walked-away-from-real-estate-deal-ordered-to-pay-360k-1.4232844

For all your Alberta real estate legal needs, Contact Barry now!

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“Purchase Home House Purchase Real Estate Transfer” image by geralt used and modified under CC0 Public Domain Dedication.

Not too long ago, I wrote a blog post about the legalities of flipping properties using a Creative Investing Strategy called “assignment.” Now I’m making that topic available as a podcast because I want Canadian investors to have every opportunity to make money without getting on the wrong side of the law. In a hot real estate market, flipping properties by assigning your interest in the purchase can be lucrative. Just make sure to do it legally because the CRA is cracking down on so-called “shadow flipping” and undeclared income!

https://barrymcguire.ca/wp-content/uploads/2018/04/Flipping-or-Assigning-Properties-Dont-Go-To-Jail.mp3

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View the blog post HERE.

For all your Alberta real estate legal needs, Contact Barry now!

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“Handcuffs Tax Evasion Police Taxes Scam” used under CC0 Public Domain.

It might seem easier to invest in real estate with people you know and love because you already trust them. Actually, you still need to do the same amount of due diligence, if not more! When you get into real estate deals with friends and family, there’s more at risk than just money.  This podcast is about protecting your relationships if you choose to invest in property with the people closest to you.

https://barrymcguire.ca/wp-content/uploads/2018/01/Real-Estate-Between-Friends-and-Family.mp3

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The statistics are horrible. I’ve seen commentary that says 50% of the real estate deals you do with family go sideways. This situation is bad but it’s even worse when dealing with friends because 75% of those deals don’t work out. I’m not saying these are exact numbers or percentages. But, I know for sure that you face big risk if you enter into any kind of property transaction with friends and family.

Why would this be? After all, it’s often very easy to get into deals with friends and family. You know and trust each other and it just often seems to be the thing to do, it just makes sense. Dealing with third parties you don’t know can take a lot of time. Relationships have to be established, trust developed, and third parties almost always apply that wise real estate investment adage, “trust, but verify.”

When deals with friends and family go bad, you almost never recover your position. Because, what are you going to do, sue your friend or your brother? Almost no one does that because launching a lawsuit is the end of your relationship. Most people write off the investment in favour of preserving the relationship. Often, as time goes forward, no one talks about the issue, and any relationship becomes strained anyway.

What can you do? One basic investing rule is that you don’t commit to a deal until you have done your due diligence. This means that you have done enough verification in order to make an informed investing decision. Once you have accomplished sufficient diligence to make that investing decision, you can say to yourself, “I have done my due diligence.”

When dealing with friends and family this rule is even more important. You most likely have to do more diligence. Most friends and family deals have insufficient diligence done by both parties. Relationship overrides what you would normally do with any arm’s-length third-party. Actually, with friends and family, you have to do more diligence than you would with third parties just to ensure you are doing enough!

It’s difficult because it seems like you shouldn’t have to do as much diligence. Your friend or your brother will definitely not understand why you want to go through all of these diligence issues. “We trust each other, let’s just do it,” is essentially what you’ll hear. The bottom line is, even with a lot of diligence, investing with friends and family is fraught with peril. If it goes bad for any reason, it’s your fault, no matter how much diligence you did, or how much you explained, or how much paper you got everyone to sign.

For all your Alberta real estate legal needs, Contact Barry now!

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“Family Friends Community Group Team Linked” image by chachaoriginal used under CC0 Public Domain.

There is a whole section of the real estate investment world known as ‘flipping.’ Basically, flipping is when an investor gets control of a property by signing a purchase contract, but rapidly sells it to someone else for a profit. Don R. Campbell of Real Estate Investment Network (REIN) fame has long cautioned against the most common form of flipping, which is to invest in condominium pre-sales. This is a Tale about a client of mine who got caught trying to flip a bunch of properties

https://barrymcguire.ca/wp-content/uploads/2018/01/So-You-Want-To-Be-A-Flipper.mp3

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Another name for flipping is ‘assigning’ a property. You see, before the investor has to close on the deal, s/he ‘assigns’ her/his interest in the property to another party. The ultimate buyer completes the purchase contract and takes title to the property. The flipper’s profit is the difference between the sale price to the ultimate buyer and the purchase price from the seller/developer.

Here’s what happened to an inexperienced client of mine at RMLO Law LLP in Edmonton. With only one purchase of a house under his belt, my client made offers and had 10 purchase contracts accepted for condominium units in a brand-new building. The seller/developer’s contract was typical, a 50-page contract drafted by a big downtown law firm. It said the contract was ‘un-assignable’ without the permission of the developer, which the developer might provide if he was paid a percentage of the purchase price in order to consent.

Now, these were relatively inexpensive condominiums, so if my client-buyer was going to occupy a unit as his personal residence, there would be GST rebate to factor into the purchase price. What my client didn’t understand was that if he wasn’t going to be an owner-occupier, he wasn’t entitled to that price-reducing GST rebate until much later. It could not be factored into the purchase price now.

When the completion date arrived for my client’s deal with the seller/developer, uh oh, my client had only sold/flipped two of the units. He had no buyers for the other eight units. And, being inexperienced, he used the standard Multiple Listing Service (MLS) contract for his ultimate buyer. That contract says that GST is included in the purchase price. So, here’s the scenario. The seller/developer essentially said to my client, “if you are buying 10 units, I know you’re not an owner occupier therefore no GST credit. You pay full price.” On behalf of my client, I suggested to the ultimate buyer’s lawyers that I wanted the purchase price to be, ‘plus GST.’ They laughed and point to the clause that says GST is included in the purchase price.

Did I mention my client was only able to sell 2 of the 10 units he had contracted for? I was instructed to call the lawyers for the seller/developer and request a refund of the 8 deposits of $7,125 because my client couldn’t close. That was a wasted call and for the second time in this deal, lawyers for the other side were laughing at me. They said, “Why would we refund deposits? That’s what deposits are for, good faith money.” Furthermore, the lawyers for the seller/developer mentioned that if they couldn’t sell the units to someone else for the same or a better price, they would consider suing my client for the difference.

When you need a real estate lawyer in Alberta, Barry McGuire is the best you can get.  Contact Barry now!

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“Mortgage House” image by Clcker Free Vector Images used under CC0 Public Domain.

This is a Tale of woe about property insurance, including some ideas about how to make sure you have enough coverage. After heavy rains in Edmonton, a bunch of my clients had flooded basements. Not surprisingly, many of them couldn’t make insurance claims to cover the damage. Why, you ask? Because insurance policies are intricate legal contracts, and insurance companies won’t pay unless your problem is covered exactly by the terms and conditions…

https://barrymcguire.ca/wp-content/uploads/2018/01/Insurance-Realities.mp3

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Once upon a time, a nasty storm flooded many basements in Edmonton, Alberta, where I live and practice law. Over the next couple of weeks you could tell the extent of the damage by the number of houses that had big piles of soaked carpet and water damaged drywall on their lawn or in the driveway. Anecdotally, I consulted with my investor and non-investor clients, and none of them were satisfied with the response of their insurance companies. Most clients commented that insurance companies were slow to react, then unhelpful, and tried to limit my clients’ claims.

When I say ‘insurance companies’ I mean the insurance adjusters appointed by the insurance companies to investigate claims and report back to the insurance companies. Insurance Adjusting is a whole separate, stand-alone business. Insurance adjusters are hired by insurance companies to make sure that any claim is covered by the claimant’s insurance policy. The world is filled with contracts and an insurance policy is a contract. The difference is that insurance policies are one of the most incredibly detailed types of contract one can find. Try reading your own property insurance or car insurance policies. I guarantee that you will find such reading very difficult. It’s legalese taken to the extreme and very hard to understand.

The reality is that the most successful insurance adjusters are those who produce the best results for their clients, the insurance companies. By best results, I mean the smallest dollar claims. I know, I know, there’s more to insurance adjusting than just limiting losses. But, overall, that’s the biggest thing. Insurance adjusters read and understand those complicated policies and then, on behalf of their client insurance companies, make sure that any claim is exactly and specifically covered by the policy. If not, they deny the claim. What can you do to improve your insurance coverage experience?

When you need a real estate lawyer in Alberta, Barry McGuire is the best you can get.  Contact Barry now!

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“Hands Home Protection Protect Guard Concerns Care” image by geralt used under CC0 Public Domain.

In real estate, as in all facets of life, things change. A detailed contract or written agreement can protect your investments, but you’re still vulnerable if you don’t follow the terms exactly. A client of mine organized a joint venture with 15 investors to buy an apartment building in Alberta. They used a written Joint Venture to structure the deal, but later changed some aspects with only verbal agreement. This Tale is about what happened when one of the investors passed away and lawyers for the deceased’s estate began insisting on the original terms of the Joint Venture.

https://barrymcguire.ca/wp-content/uploads/2018/01/Keep-Your-Joint-Venture-Up-to-Date.mp3

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It was time to cash out. My entrepreneurial client had found a 30-unit apartment building in Alberta for a very decent price, organized 15 people to put up the money, and closed on the deal. He did get a decent Joint Venture Agreement signed by all parties and then started managing. Over the years he did some renovations, changed the tenant mix, and produced reasonable positive cash flow for his 15 investors. Every year my client would send all the investors a T-776 Statement of Real Estate Rentals, which they could then give to their accountant to complete their tax returns.

Fast-forward to seven years later and it looks like it’s time to sell. The building had been condominiumized, the market is hot, and all the investors agree it’s time to implement the second part of the classic investor mantra, “Buy low-Sell high.” My client retains a realtor experienced in marketing projects, they work up a marketing plan, and sales begin. Things are going well.

The first couple of sales are completed and, sadly, one of the investors passes away. The deceased investor’s estate is now not nearly as cooperative as the deceased investor had been. For the next round of sales, my client (through his lawyer) gets in touch with the lawyer for the estate requesting a discharge of the investor’s joint venture caveat. The estate refuses. The estate lawyer says that on reviewing the Joint Venture Agreement and the deceased’s financial records, it appears that my client never provided financial statements. The Joint Venture Agreement clearly said that my client would report to all the investors on a quarterly basis and provide accountant prepared financial statements once a year. There were a couple of quarterly reports but that was it.

Where were those interim and yearly financial statements, the estate lawyer wanted to know. My client indicated that after doing the first couple of quarterly reports, the investor group said they didn’t really care if they got that paperwork. As long as they were getting positive cash flow cheques, that was good enough for them. And, of course, they needed their T-776 Statement of Real Estate Rentals, which summarized their share of profit (or loss) for the year. That’s all there was, my client told the estate lawyers.

What, no financial reporting? The estate lawyers were now very suspicious. They demanded that my client provide his tax returns for the year, bank statements, property manager’s reports, and any other piece of paper they could think of that they could forensically examine to prove their suspicions that my client had been taking all the investors for a ride. The fight was on!

It took a long time and a court application to calm down the estate lawyers so that they would consent to future sales. In fact, the joint venture lost a couple of sales because they couldn’t promise to remove the investor caveat. All in all, it cost the joint venture substantial time and money before everything was sorted out.

Barry McGuire is an Alberta real estate lawyer who knows the ins and outs of investing.  Contact Barry now!

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“Money Home Coin Investment Business Finance Bank” image by nattanan23 used under CC0 Public Domain.

A client of mine found a four-plex in Alberta with a motivated seller, but soon discovered that he would have to deal with problems caused by the seller’s inexperience. The location was good, with a tenant profile that fit the type of people that my client liked to rent to. And, the price was very good. Listen to the podcast or read on to learn about documents you can use to protect your interests when buying from sellers like this who haven’t been very good landlords.

https://barrymcguire.ca/wp-content/uploads/2018/01/Get-the-Details.mp3

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As I said, the seller was motivated. He was the classic kind of seller that we all look for. The seller thought getting into real estate would be a great investment, part of his retirement plan. Obviously many of us think that investment real estate is a good idea, but this seller didn’t get past the good idea stage before he bought. He did no research, took no training, didn’t read any books and didn’t ask any questions. He just bought. He made all the classic mistakes that any rookie investor makes, and then he made more because he was an untrained rookie investor who did no diligence before he bought.

One of the seller’s classic mistakes was to take any tenant who came along. If the proposed tenant could pay the first month’s rent and the security deposit, then the seller would rent to him. He didn’t even have an application form. That lack of training and lack of paperwork led to my client’s issue.

During the negotiations, my client and his realtor asked the seller to review copies of the leases and in/out reports. The seller said he didn’t have any. My client then asked for a written statement detailing the rents and security deposits for each of the four units. The seller said, “the rent was $650 per unit so the security deposit should be the same, right?” My client responded, “well, are the security deposits for each unit $650 or some other number?”

Seriously, the seller did not know, but thought it didn’t matter because all the tenants were leaving anyway. That was fine with my client because the current tenants did not fit his tenant profile and he would be renting to a completely different tenant group at higher rents. As it turned out, two of the tenants had not given notice and said they weren’t leaving.

When I got the paperwork from the seller’s lawyer there was no credit to my buyer for any of the security deposits. It was a bit of a dogfight with the other lawyer but he wouldn’t give in, and we closed without $1300 of security deposit credits for the two ongoing tenants. What if the tenants ended up claiming $1000 each? What could my client have done differently?

During negotiations, when it turned out there were no leases and no in/out reports, my client could have added a clause that required the seller to provide a ‘Tenant Estoppel Certificate’ or a ‘Rental Confirmation.’ These are forms filled out and signed by the tenant. The Tenant Estoppel Certificate is a lengthier form that asks for a whole bunch of tenant details. The Rental Confirmation is a much simpler form that basically asks for the tenant’s name, contact details, whether s/he has a written lease, rental amount, security deposit amount, and whether or not s/he has any side deals with the landlord or any prepaid rent.

Need help with the legal side of buying or selling real estate in Alberta? Contact Barry now!

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Lease Agreement by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

This Tale is about taking good notes when you appear in court as the buyer of real estate in foreclosure. My client was a creative kind of guy and he found a property in Alberta where the mortgage payments weren’t being made. The seller was still living in the home but trying to sell and get out from under the foreclosure. After some conversation, my client put together a creative deal that the seller and the seller’s lawyer both liked. Now, in addition to being in foreclosure, the seller was in way more financial trouble and he had actually filed for bankruptcy…

https://barrymcguire.ca/wp-content/uploads/2017/10/Foreclosures-Creative-Deals-and-Court.mp3

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A professional called a bankruptcy trustee is the one in charge of sorting out the bankrupt’s affairs. In this case the seller had hired the bankruptcy trustee, but sometimes they are appointed. Now the trustee was in total charge of all of the bankrupt’s financial situations. Here’s a point to remember; as much as the bankrupt hired the trustee, the trustee is working for the creditors, all those people that the bankrupt owed money to. The trustee’s job is to gather in all of the assets of the bankrupt and sell them for as much as possible, distributing the money amongst the creditors.

Some trustees are pretty reasonable to deal with and others aren’t. When my client contacted the seller’s bankruptcy trustee and told him about the deal, the trustee had no interest because there wasn’t any equity in the property. If there isn’t anything coming out for creditors, most trustees don’t care. The trustee provided a letter indicating that he knew about the proposed deal and had no objection to it going ahead. Remember, if there is a trustee in place, you have to go through them and get their comment good, or bad.

Next step was to go off to court to get the judge to approve the deal. The foreclosure lawyer already had a court date set where he wanted to move on to the next step in taking away the property from the seller. So, that was the day my client showed up in court. He went by himself without a lawyer. Having some experience with foreclosures, he knew that he had the right to stand up in court. He made sure the foreclosure lawyer knew he was there and when this foreclosure (number 19 out of 50 on that day’s court docket) was called, he stood up. The judge said, “And you are?” My client introduced himself and said that he had an offer to purchase that he would like the court to consider.

After some discussion, the judge approved my client’s offer and gave an order accordingly. During the whole process my client had his notebook out and took very careful notes. Sometime later the foreclosure lawyer sent us his hardcopy version of the judge’s order. I sent it to my client and he said, “That’s not even close to what the judge said.” Reading from his carefully taken notes, he gave me the details on what the judge really said. I replied to the foreclosure lawyer with a request for a revised order, and with some argument he reluctantly agreed that my client was right. In due course, a corrected order arrived and the transaction proceeded.

If you’re buying up foreclosure properties in Alberta, get in touch now. Barry is the Investor Lawyer and he can help.

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“Sign of the Times – Foreclosure” image by Jeff Turner. Used under Creative Commons Attribution Generic 2.0

Registered Retirement Savings Plan (RRSP) mortgages, the supposed Holy Grail of private lending. I hear it all the time. Borrowers of all stripes believe there is a vast pot of money held in RRSP accounts just waiting to be lent to them. And, to some extent, that’s true. There are lots of folks with lots of RRSP money tucked away. Maybe you’ve thought about leveraging your RRSP to become a lender yourself.

But, like everything else run by the government, there are rules to follow if you want to lend your RRSP money as a mortgage.

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According to the Canada Revenue Agency (CRA), mortgages, like stocks, bonds, and GICs, can be what’s known as a ‘qualified investment’ for an RRSP. The operative words here are, “can be.”

For an RRSP mortgage to be a qualified investment, it must be:

In this post we are going to focus on the commercially reasonable side of things. If the CRA decides to audit your RRSP, will you be onside or offside their rules? So, let’s chat about what makes a mortgage commercially reasonable.

The best way to figure this out is to compare your loan against what happens out in the marketplace. How do bankers and commercial lenders underwrite their loans to figure out whether it is risky or not? If you’re going to act as a lender, then you may as well take a page from the pros!

Lenders rely on valuations of the property.

Calculate the Loan-to-Value (LTV) ratio.

Interest rates are important.

Interest rates should have a relationship to the LTV ratio.

The lesson here is, be a careful lender. Even though I believe the risk of CRA audit is small, there is a risk. Prepare for that risk and more importantly for you, protect your hard-earned RRSP funds.

“mortgage-hypothecary-credit-loan” image by OpenClipart-Vectors under CC0 1.0 Public Domain Dedication.