Tales from the Trenches

A Transfer of Land is a document that allows the Land Titles office to register a property in the name of a new owner. In rare circumstances, you might be able to get this done without seeing a lawyer. In this Tale, our investor got a Transfer of Land from a highly motivated seller. Luckily, he also knew what other critical things he needed to do and who he needed to talk to in order to make the transaction go smoothly. This strategy doesn’t come up too often, but when it does, you need to know what to do so you can act quickly.

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“Keys” image by Merio used under CC0 1.0 Public Domain.

As a landlord, you need to be proactive about what is happening with your tenants. Be concerned if you suspect that a renter may be running an illegal business out of your property! This Tale is short and sweet because our investor took action as soon as they found out a tenant was on the wrong side of the law. Do you know what’s going on in your rental properties?

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“Merrymakers in an Inn” painting by Simon de Vos is public domain. Image from Wikimedia.

Paying off a mortgage early can result in penalties. However, there are ways of minimizing the financial repercussions. In this Tale, Barry works through some mortgage math that could save you money.

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Buying and/or selling Alberta real estate? Contact Barry now!

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“Mortgage” image courtesy of NYPhotographic.com used under Creative Commons Attribution-Sharealike 3.0.

Partnering up can be a good way to buy more property, but you still have to be careful. As with everything in real estate, due diligence is essential in joint ventures. In this Tale, you’ll hear about the all-too-common mistake of not getting an inspection. You’ll also hear about how not vetting the finder/manager properly cost an investor big time.

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Buying and/or selling Alberta real estate? Contact Barry now!

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

When dealing with trustees or lenders, there are many things that can delay a transaction. The type of payment can trigger a processing hold, the shipping method can be slow or unreliable, and sometimes clerks just overlook things. If you need a certain result, in a specific amount of time, then you need to lock down every stage of the process! In this Tale, you’ll hear just how many things can go wrong with getting a lump sum payment on an RRSP mortgage. Our client was trying to receive payout money from the borrower, but almost everything that could go wrong did go wrong…

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Buying and/or selling Alberta real estate? Contact Barry now!

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“Reverse Mortgage” image from https://www.aag.com/ is used under CC Attribution-ShareAlike 2.0

Investing has its ups and downs. Real estate has some definite advantages in smoothing out the bumps. Ultra-rich people usually have some properties in their investment portfolios in order balance out the volatilities of stocks. Even if you’re not wealthy (yet!), the same advantages sought by the ultra-rich also apply to any investor.

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

Tougher economic times make us question why we invest in real estate. Your property values may be going down, tenants are harder to find, and nobody knows if the price of oil is coming back anytime soon. Perhaps some of your friends are being foreclosed on. For a lot of people in provinces that depend on oil for commodities, these are not necessarily pleasant times.

When there is chaos all around, sometimes it’s beneficial to take a step back and revisit the reasons why we think real estate is a great investment.

Better yet, let’s take a peek at why the ultra-rich (let’s define ultra-rich as people have $10 million plus to invest) like real estate. Ultra-rich folks are ultra-rich for a reason. They make investments that are good over the long haul and that don’t lose them money. Let’s discuss this further. As a starting point, here’s what Simon Jochlin of StennerZohny Investment Partners (part of Richardson GMP in Vancouver) had to say[i]:

“Real estate is generally accepted as an alternative investment. It has the characteristics of an inflation hedge: yield, leverage, and capital gains. It does well in upwardly trending markets, it pays you to wait during market corrections, and typically it lags equities in market declines—it buys you time to assess the market.”

Think about that… yield, leverage, and capital gains. In other words, your money is working for you and paying what is effectively an interest rate on capital invested, you might have to only invest 20% of the value of a piece of property and, when you sell, you get preferred tax treatment by paying only capital gains. What’s not to like?

What about the other three factors? Yes, in upward trending markets property values go up; in downward trending markets, properly purchased and managed real estate does pay to wait. Property values may not be moving up anymore but you can still have low vacancy and positive cash flow. You can afford to wait. And since ultra-rich investors also invest in the stock market, they note that where the stock market can bounce up and down frantically, property values are much more stable. Trends are shallower, giving you time to really think about your investment.

Darren Coleman is a senior vice president and portfolio manager at Raymond James LTD in Toronto. He argues that, “real estate is very popular and one of the reasons, in my opinion, is that investors can actually see and touch their investment.” Mr. Coleman also thinks that real estate investors, whether they fit in the ultra-wealthy or perhaps have a little less money, are actually more logical than stock market investors. He says:

“For example, if you own a rental condo, and the one across the hall goes on sale for 30% less than what you think it’s worth, you wouldn’t automatically put yours on the market and sell too because you think there’s a problem. Indeed, you may actually buy the other condo. And yet when a stock drops on the market, instead of thinking of buying more, most people automatically become fearful and think they should sell.”

Going back to the benefit of leverage Mr. Coleman adds: “banks love to lend against it (real estate). Over time, this lets you own a property with a much smaller investment than if you had to buy all of it at once.” Again, as an investment professional who sees many types of investments, Mr. Coleman believes buying real estate with a 5 to 1 leverage based on 20% down is a much safer investment than buying stocks on margin with 20% down. Any drop in the market gets a margin call and has wiped out many an investor. The ups and downs of real estate are much more gentle and high net worth people like that gentle ride.

On the downside, real estate is not particularly liquid. Real estate can be sensitive to interest rates and if you are in the development end of the game, timing can be critical. New projects coming on in Calgary are not looking good.

And, lastly, these are words that every investor should heed. Says Mr. Jochlin:

“Timing is key. You do not want to chase the performance of a hot real estate market. Buying at highs will significantly reduce your overall return on investment. You want to buy in very depressed markets at a discount. In other words, look toward relative multiples, as you would an equity.”

So, there you are folks. In these tough economic times, think about those really rich people who know real estate is a great investment, and heed the advice of the people that make a good living advising ultra-rich people how to invest.

[i] All quotes in this Tale are taken from the following Globe and Mail article:

http://www.theglobeandmail.com/globe-investor/why-the-wealthy-are-heavily-focused-on-real-estate/article28789073/

Buying and/or selling Alberta real estate? Contact Barry now!

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“House and cash” image from Nemo on Pixabay is used under Creative Commons Public Domain Dedication.

Lead pipes are a very real risk with older houses; it’s a toxic metal and can make the water unsafe to drink. In this Tale, my client was given notice by her water utility provider that her rental property might have lead pipes. She took lengths to protect her tenants, as well as make sure her insurance would cover her in case of any issues. When dealing with older homes, it is essential to do diligence on the possibility of lead pipes and how to address it.

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

Recently a client called me very concerned about a notice from Epcor, the company providing water and power to the City of Edmonton.

“IMPORTANT NOTICE re: YOUR TAP WATER SERVICE

According to EPCOR’s best available records, this address may still be receiving tap water from a lead service pipe on the city property, and/or the private property.”

The notice said a lot more about the history of water service piping and materials, the availability of free testing and filters, what to do when renovating, how to maintain good water quality, recommended actions from Alberta Health Services and Health Canada regarding lead levels, and other recommended actions from Alberta Health Services. The notice went to the property addressed to ‘Current Resident.’ The tenant sent the notice on to our client.

In her own words, here’s what happened next.

I own an older property (Built 1960) in Edmonton. In May, 2015 my tenant provided me with the attached note from Epcor.

I reviewed the letter from Epcor and concluded that making sure the tenants were aware of the problem was the proper thing to do (even though the notice was delivered to their doors by Epcor). I sent a copy of the notice to the tenants with a covering e-mail advising them that they should follow Epcor’s instruction and make sure that they filter their water or refrain from drinking it.

I had just rented the lower suite of the home to a tenant who happened to be employed by Alberta Health. My main floor tenants have resided at the property for 4 years and have two very young children. The lower suite tenant was extremely upset upon receiving the notice … and she advised me that had she known about the circumstances, she would not have moved into the suite.

Action Steps:

My action steps after formally notifying the tenants of the letter that came from Epcor were as follows:

Outcome:

After six very long weeks, I had to contact Epcor to find out whether or not the results had been determined. Epcor advised me verbally that they found that the drinking water at my property was good for consumption and that it did not contain lead that exceeded health guidelines.

I asked Epcor to send me the report in writing. Epcor e-mailed me the report, which advised that the results of their test on the tap water indicated that the lead level met Canadian Drinking Water Guidelines and no further action was required.

In the end, Epcor was wrong because their records were incorrect. My property did not have lead service pipes. My tenants did not move. 

Buying and/or selling Alberta real estate? Contact Barry now!

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“Lead Pipes” image by Mitch Barrie used under Creative Commons Attribution-ShareAlike 2.0.

When trying out a new real estate investment strategy, it’s important to know when to walk away. In this Tale, an attendee of one of my creative investing workshops was ready to try an Agreement for Sale, and contacted me for help with a Letter of Intent. The deal turned into a Joint Venture, but there were too many red flags. Our investor walked away, and we can all benefit from the lessons learned!

https://barrymcguire.ca/wp-content/uploads/2016/10/diligence-timebombs-and-letters-of-intent.mp3

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

After my recent Agreement for Sale (AFS) Focus Workshop, an attendee called me up. He had done some marketing and, guess what? Marketing works!

He got a call from some folks who were trying to live their dream of operating a semi-rural spa and wellness centre. Let’s call them the spa folks. They had started building a beautiful house with spa facilities and they ran out of money. They stopped making mortgage payments to TD Bank five months ago and went through the usual round of phone calls and a demand letter from TD collections, which then moved on to TD’s foreclosure lawyers. At the time our member got the call, the foreclosure was well in progress.

As is often the case with sellers in trouble, the spa folks just wanted out. They had soured on the spa idea. Realizing they didn’t have near enough money, they wanted to exit the situation and start over. They really didn’t even want much money. Stopping the foreclosure and getting rid of the stress was the biggest thing for them

My client’s original idea was to purchase by way of Agreement for Sale (AFS), but he soon realized that AFS doesn’t work very well with a mortgage in foreclosure. The plan was to enter into a Joint Venture Agreement (JVA) with the spa folks and a second joint venture with two other sets of people. Let’s call them the ‘Finder’ and the ‘Money Partner’ respectively.

The Finder side of the second JVA would be my client as well as the folks who brought him the deal, knew contractors, and would manage the renovation. The Money Partner would come up with enough money to stop the foreclosure ($20,000), complete the home and landscaping [($30,000 plus legal and closing costs ($3500) and miscellaneous cost ($1500)].

The after-repair value minus all input costs and paying out the mortgage showed there was probably equity of about $100,000. The JVA split would be 20% to the spa folks and 80% to my client. That 80% would be shared 50/50 between the Finder and the Money Partner. Already pretty complicated, relationship-wise.

This seemed like a pretty good deal as my client explained it to me in our first conversation. He had worked on a Letter of Intent (LOI), which is an amazing tool in the creative real estate process. I like an LOI on most deals because it makes you reduce the zillions of words to, presumably, a nice clear deal summary in a maximum of a couple of pages. Once you start doing the LOI, if it doesn’t just roll off the tongue and really flow along, then there is more work/negotiating/explaining/getting agreement or combinations of all those things, to be done. An LOI is just a real good tool to capture a point in time before all the expense of moving on to diligence, drafting documents, etc., etc.

Now back to our story. I took the LOI and did a little bit of reworking, not much, and our member was away to the races. Time to do some diligence. The biggies were:

First up was the foreclosure lawyer, where the estimate of $20,000 turned out to be $30,000 at the point in time when they wrote their letter.

(I have to make another general comment that the actual costs of bringing a mortgage into good standing are always substantially more than what the homeowner/mortgagor thinks. This is a classic foreclosure experience. You are always behind the curve in foreclosures with the homeowner because they never quite know how many payments they are behind. And they have no idea where the foreclosure lawyer is in the process as foreclosure costs mount. You have to get a written statement!)

That extra $10,000 to stop the foreclosure was the start of this project going in the wrong direction.

For further details, let’s see what my client wrote to me when the deal collapsed. I asked for his analysis and three reasons why the deal didn’t go ahead.

Good evening Barry,

I absolutely agree with your comment that not going into the potentially bad deal was definitely a good decision and I see it as a learning curve and a success.

Honestly there were probably more than 3 reasons why we didn’t go ahead.

I also ended up chatting with my friend for a second opinion from the outside (also an investor, was a residential realtor, owns a real estate office). I gave her all of the numbers, the home photos and the full scenario and her response was iffy. Exactly how I was feeling about it. Was nice to confirm it wasn’t just me seeing the deal was looking shaky.

So, I had the task of giving the spa folks the bad news. I couldn’t help them, but, you know, they actually understood what I was saying and thanked me for trying.

That being said I very much appreciate your advice, consultation and the LOI you put together for me. I’ve got it saved in my files now and will use it as my template for other deals going forward. I’ve had a lot of response on my website so hopefully something good will come up from all the leads I’m getting!

Thanks again,

You know I like to say that the goal of my Focus Workshops is to have attendees do, “One Damned Deal!” If you can do one deal you can do more, so the first one is the hardest and the most important one. But the backdrop is that you don’t want your first deal to be a bad deal. In this scenario my client was initially enthusiastic, but analysis and diligence proved that the deal would chew up time and resources with no reasonable expectation of a decent profit. So, that’s a bad deal, don’t do it. On to the next one.

Buying and/or selling Alberta real estate? Contact Barry now!

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