Tales from the Trenches

I introduced Agreements for Sale (AFS) in a previous blog post and podcast, and now it’s time to review with a bunch more examples. In essence, AFS is a type of seller financing and is sometimes called a bond for title or contract for deed. The seller retains the title, but the buyer takes control of the property—all without needing a bank. Nowadays, this technique is uncommon, but it used to be more popular during and immediately after the Great Depression. Take advantage of this little-known strategy to find great Creative Investing opportunities!

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

Mortgages are impossible to assume in Canada (even in Alberta) without first qualifying for the mortgage. An Agreement for Sale (AFS) is a seller financing strategy that give you control of a property without a bank! I repeat, without the bank.

You can buy a property or sell a property, and here is the correct terminology, ‘by way of agreement for sale.’ In either case, a real estate purchase contract (often called the ‘offer’ or ‘offer to purchase’) is submitted to the other party and the offer clearly says that the transaction is proceeding, ‘by way of agreement for sale.’ The buyer pays a certain amount of the purchase price by cash and the balance owed to the seller is described as the ‘unpaid seller’s equity.’

Remember, this agreement does not absolve the seller from making the usual mortgage payments. The buyer makes payments to the seller under the Agreement For Sale. If the seller has an existing mortgage, they must continue to make payments to their lender.

Depending on whether you are a buyer or seller, your AFS document needs to take care of things like assignability, insurance, taxes, upkeep, repairs, items of default, remedies payouts, renewals, interest rates and how they are calculated, responsibility for keeping existing financing up to date and what happens if it isn’t, and numerous other details.

N.B., if there is an existing mortgage, you usually want the term of the AFS to match up with the term of the existing mortgage. That way, when your mortgage is due, the AFS is also due. Big bonus: your AFS has a clause that allows for, and leaves you in control of, a renewal of the AFS that is tied to a renewal of the existing mortgage. Try hard for this.

Most law offices do not have a sophisticated version of the Agreement For Sale as it does not come up very much in their practice. We at Field Law are more familiar with these documents than most, so for AFS in Alberta, get in touch with us! Otherwise, we strongly recommend that you stay in control of the drafting of the AFS document. Make it clear if you are the seller, that the seller’s lawyer is preparing the Agreement for Sale document at the buyer’s expense.

Why is an AFS different? I can hear the wheels turning. “What’s the big deal? Isn’t this just like an assumption of a mortgage?”

Here is the key to the magic of the AFS: Title remains in the seller’s name!!

The seller continues to make his mortgage payments to his bank. You pay the seller.

If title isn’t in the buyer’s name, how does s/he protect her/himself? The buyer or buyer’s lawyer has the right (but not the obligation) to register a provincially specific notice against the title at the Land Title(s) Office. The notice claims an interest in the property as a buyer under an Agreement For Sale. However, that buyer will not get title until s/he pays off the seller, usually by arranging new financing. The seller then pays off her/his old mortgage with some of the AFS payout monies and pockets her/his profit. The buyer discharges her/his notice. In our experience, use of the AFS does not trigger an existing mortgage ‘due on sale’ clause and does not seem to bother any existing lender. Of course, a lender might take a different view and if the lender wants to fight, you don’t. Think about your exit strategy in these circumstances.

Sellers with mortgages often want to sell, but can’t do it in the usual way. Why?

Let’s look at some examples:

Buyer, (you), now controls the property. This is powerful! With a properly negotiated and drafted real estate purchase contract and AFS you can:

An AFS can work well for the above examples. Plus, sellers usually love that title remains in their name.

No matter the year or economic situation as you read this,

This strategy will give you another chance, another arrow in your quiver to ensure that, regardless of what happens with the economy in the future, you will thrive when others complain that the market is bad and there are “just no deals.”

If you come to one of my workshops or retain me as your lawyer, I can show you how AFS is a proven real estate investment strategy that will allow you to take control of properties for very little money down. Maybe one of the best things about AFS is that it leads to so many exit strategies. You actually don’t need a clearly mapped exit strategy right from the start. Yes, the deal has to work for you in a cash flow sense, but you don’t need to know your exit the day you get the keys.

Let face it, AFS is not a household concept. Many lawyers don’t even know what it is or how to advise on it. You will have to explain to sellers. Does that make AFS impossible? Absolutely not! Personally, I think this obscurity and lack of knowledge is great. Why? That means we have the AFS strategy to ourselves.

Remember, whatever strategy we use, make sure it’s win-win! No taking advantage. If a seller can achieve their objective without an AFS, tell them. Don’t tie up their home when you could point them in another direction. However, if your analysis tells you that an AFS will get them what they need, then full speed ahead!

Our Rapid Cash Program students tell the story in their own words.

Property Type: single family home

Seller Financing: $338,400

Seller’s Issue / Problem: seller wanted to build new house and was having trouble selling due to condition of the house

Potential Profit / Exit Strategy: 2.5 year Rent-to-Own client who purchased the property for $365,000. (this was one of my first deals and I did not get the benefit of mortgage principal pay down – if I had, I would have made another $10,000 or so…. Monthly payments were high, so cash flow was break even)

Profit after expenses: $22,500

Property Type: townhouse

Seller Financing: $224,857 bank mortgage

Seller’s Issue / Problem: could not afford payments

Potential Profit / Exit Strategy: Found a tenant who purchased the property in 6 months time for $245,000.

Profit after expenses: $14,675.00

Property Type: townhouse

Seller Financing: Bank mortgage $180,000

Seller’s Issue / Problem: were divorcing, no equity.

I moved in, did paint and carpet, sold one year later for $250,000.

Profit after expenses: $55,000

Property Type: Single family starter home

Seller financing: Mortgage. (About $20k in unpaid equity).

Seller’s Issue / Problem: cash-strapped and got second mortgage to alleviate financial stress, obviously not considering she would not be able to make the payment on the second. Plus house was half-renovated (and not very well), and the market for “project houses” is quite small. We flipped this one. Sold 4 months later for $362,000 (a new record high for the neighbourhood). Could have easily refinanced (to pay for renovations) and then done RTO. Would have been more profitable.

Profit: $87,000

Property Type: 2 fourplexes

Seller Financing: Bank mortgage

Seller’s Issue / Problem:  were divorcing, not good managers.

Exit Strategy: Long term hold – 8 doors… for NO money down!

Property Type: Single family home

Seller Financing: remainder seller financed (about $75,000 in unpaid equity, the rest mortgage) Payments would cover mortgages. No unpaid equity payout till maturity.

Seller’s Issue / Problem: hated being a landlord. He had a string of bad tenants and got tired of huge repair bills. We later learned he also used high-interest debt to pay the repair bills. Seller requested for us to cash him out early so he could eliminate debt. In exchange, price was lowered to $410,000. Property is rented for $2600 per month. Will likely do RTO after this tenant leaves. Property appraised at $485,000

Predicted Profit: $75,000 + cash flow

Property Type: Single family (2 storey)

Seller Financing: $220,000

Seller’s Issue / Problem: need to move immediately- unable to sell traditional method because daughter and her family also live there, not easy to show house or stage it for proper sale

Potential Profit / Exit Strategy: House valued at $320,000 at time of purchase….used as my primary residence initially and then one year later I turned into a Rent-to-Own….. renter will purchase home Oct 30/15 for $396,000. The total profit from this home will be $126,000 plus monthly cash flow of $500 per month x 36 months = $18,000….

Predicted Profit: $144,000 over a 4-year period.

Property Type: Single family (w/legal suite)

** This was a referral from the client in example #1 **

Seller Financing: $ $250,000

Seller’s Issue / Problem: Seniors wanted to move into retirement home…did not want the hassle of traditional sale and saw how easy things went with a relative in the above example.

Potential Profit / Exit Strategy: Since I only had financing for 9 weeks while I did some updates and repairs, I chose to sell the house…. (if it could not sell I did have financing arranged) initially I was told the value of the house would be $325,000 with small repairs ….but in the end had multiple offers and sold it for $369,000. Total profit was $109,000 – (down payment of $50,000, realtor fee of $20,000 and repairs and legal costs of approx. $9000) ….. I owned the property for a total of 6 weeks.

Total profit of approximately $30,000

Property Type: Single family home

Seller Financing: $109,000 (bank mortgage)

Seller’s Issue / Problem: Empty house…. Huge problems with plumbing (tree roots) and needed many house repairs and updating.

Potential Profit / Exit Strategy: Initially I was going to do the repairs and either do RTO, sell or a regular rental (I had 3 years for mortgage payout on the AFS) But in the end, because this property is one hour away, and many complicated repairs needed… I choose to do an assignment of the contract to a contractor. With repairs ($25-30K) to this house, the new value would be at $180- $200 K. I sold the assignment for $10,000, still leaving the contractor plenty of room for a nice profit once repairs completed.

Profit $10,000

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

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“House, Property, Real Estate For Sale Sign” image by Mark Moz used under CC Attribution 2.0 Generic.

Rent-to-Own (abbreviated as RTO and often interchangeably called a Lease-Option) is a two-part strategy. You start with a lease (the ‘Rent’ part) and add an option to purchase (the ‘Own’ part). In a Rent-to-Own scenario, the renter is, for some reason, unable to finance at the moment. Examples of financing problems are: bad credit, not enough down payment, self-employed, new job, or new immigrant. Yet, all these tenants want to make the transition toward home ownership immediately, usually for personal or emotional reasons.

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

Typically, Rent-to-Own tenants are looking to stop renting and finally move into a place they can call their own. They don’t want to continue bouncing from rental to rental, and are looking to settle down once and for all.

Rent-to-Own is a great Win-Win strategy; you’re helping renters become homeowners. These deals can be extremely profitable, while helping everyone involved in a truly powerful way. No matter the year or economic situation, it’s a great time to get started in Rent-to-Own.

Whenever the real estate market takes off, stores are flooded with books, CDs, and courses promising to make you rich. During times of economic crisis, investors are shown ways to become rich from investing in foreclosed property. Very few find great financial success using any of these concepts.

The difference between these “bandwagon” strategies and Rent-to-Own is that Lease Options will work in any market.

No matter the year or economic situation as you read this, it’s a great time to get started in Rent-to-Own. This strategy will ensure that—regardless of what happens with the economy in the future—you will thrive.

We will show you how Rent-To-Own is a proven real estate investment strategy that will allow you to gain positive monthly cash flow in any market. You will enjoy an appreciation gain at the end of the investment, while having a clearly mapped exit strategy right from the start. These three aspects alone (positive monthly cash flow, appreciation, and an exit strategy) will ensure success when using the Rent-to-Own strategy.

Let face it, Rent-To-Own had, and maybe in some circles still has, the reputation of being a ‘scam’ used by nasty landlords to take advantage of poor unsuspecting tenants. Why?

Well, because there were a number of unscrupulous investors who took advantage of tenants. They set the deals up so that it was inevitable the tenant would default and lose their option money, often in the tens of thousands of dollars.

That’s not what we do! Remember, it’s win-win! No taking advantage. If a tenant buyer just doesn’t have a chance, tell them and don’t take their money. If your analysis tells you that the tenant buyer could actually qualify with a mainstream lender, point them in that direction.

Don’t put them into a Rent-to-Own if they can get their own mortgage and buy on their own. If your deal is going bad, you can be firm but try to make things work, small defaults are not the same as big defaults. You get the idea, be a decent human being and don’t take advantage; always make it a win-win!

You know, that’s a perennial question. As soon as we start talking about Rent-to-Own, the naysayers are in full chorus: “Rent-to-Own, who would do that? If they can’t get their own mortgage, why would we want to get involved? And, don’t these people all have shredded credit? Why get involved with someone who can’t make their payments?”

Actually, I kind of like to hear the great unwashed making these sorts of comments. To me that means they won’t put in any effort learning about and understanding RTO, which is really a fantastic Creative Real Estate Strategy. The more people who think like that, the easier it is for people who will put in the time and effort to learn about it. FYI, I cover this strategy in some of my Focus Workshops, coach it through my Rapid Cash Program (RCP), and have also prepared a home study kit called Rent-to-Own Success in Canada.

Those who don’t know (the critics) think that only the credit challenged would be interested in RTO. The truth is that RTO is interesting to a wide range of would-be homeowners. Rather than the credit challenged, we focus on other groups.

Think about someone just starting a new job. Often lenders want substantial history at the new job and proof of ongoing monthly income before they will approve a new mortgage. What about if you have just started a new company? Some lenders want two years of financial statements prepared by an accountant to show appropriate income before they’ll even look at a mortgage application. 50% of Canadian marriages fail. In many cases, income falls by 50% and these now single people can kiss goodbye their chances of getting a mortgage. New Canadians, forget about it. Hoops must be jumped through to prove net worth and show our cautious Canadian lenders that fantastic credit in your homeland means anything here in Canada.

Many individuals and families

Our students’ experience is that there are many interested RTO clients in the aforementioned categories, enough to fuel any new RTO business. You simply are not going to run out of possibilities. How do I know that? Just recently, two of our RCP Focus Workshop graduates have come up with two new categories of possibility for implementing your RTO program.

New Category #1: Bridge Financing

A very nice couple replied to our member’s RTO website. On further investigation, the story was that they had found their dream home up in Edmonton and quickly signed an unconditional offer to purchase. Now, they already owned a home, and to purchase their new home in Edmonton, they had to sell their existing home. No trouble, right? Their existing home is beautiful and there had certainly been lots of demand in the last year or two. However, with a slowing economy offers were hard to come by and the closing date for the new purchase was looming without a sale of the existing old in sight. What to do?

Yes, you’ve got it! They were very happy to take advantage of a one-year RTO with a substantial, five-figure upfront option payment. Both husband and wife have good jobs and money in the bank. However, no bank would give them a new mortgage. Banking rules are that if you want to rely on your equity in your old home, you need an unconditional sale before the bank will give you what they call bridge or interim financing. So, our RCP grad is happy to set up the short-term RTO customized for the situation that will produce an amazing Return on Investment (ROI).

New Category #2: Credit Stupid!

I don’t know any other way to say it. There are lots of people who have great jobs, earn a ton of money, but are babes in the woods when it comes to credit. Firstly, they don’t even know that anyone is keeping track of them and their credit. They don’t know what credit means unless it appears in the sentence, “I’ve maxed out my credit card.” And, they have absolutely no idea that buying a house means this mysterious thing called their “credit” has to be pristine, especially in these tougher economic times.

Let me give an example of what one of our RCP grads has discovered.

Once a potential RTO candidate shows up, one of the diligence steps is to have the RTO candidate get a copy of their credit report and give it to you. You want to review that credit report to see what various credit reporting entities are saying.

What our RCP grad discovered is that there are numerous RTO applicants who do things like never paying their cell phone bill on time. They always pay, but they are always late. Every late payment is a credit black mark. Every late payment lessens their ability to qualify for a mortgage.

The next thing our RCP grad discovered is that credit stupid folks make multiple applications for credit.

Here’s an example. The credit stupid RTO applicant wants to buy a car on credit. He goes around to 15 car lots and each one of them does a credit check with one of the two big credit-reporting agencies, Equifax or Trans Union. Did you know that every time a credit inquiry is made (except when you pull your own credit report) it lowers that person’s credit rating? Credit stupid applicants absolutely do not know this. Their credit rating plunges every time they walk on a car lot.

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

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“For Rent sign”  image by Mark Moz. Used under Creative Commons Attribution Generic 2.0

What is Creative Real Estate Investing? It is a method for making money with real estate that uses strategies like Rent-to-Own, Agreements for Sale, and Wholesaling, among others. This is an area not too many people know about, but it offers some tremendous opportunities. One of the things that differentiates Creative Real Estate Investment from the traditional Buy & Hold approach is that it works on a much shorter timeline.

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

Now, if this is all brand-new for you, then read on for a quick summary of how we look at Creative Real Estate Strategies. But first let me tell you about some of the exciting things I have in store!

I run interactive Focus Series Workshops on these techniques and also offer ongoing mentoring through my Rapid Cash Program; now I’m planning on bringing more Creative Strategies to my blog and podcast too. Attendees of my events get to learn from experts, listen to actual telephone calls made by our specialists to potential sellers, do hands-on exercises in how to write up deals, and get individual coaching from our Focus Team.

What’s the best part? Some folks think it is the six months of post-Workshop coaching that really seal the deal for the Rapid Cash Program (RCP). My wife Donna and I are determined that every one of our Workshop participants has every opportunity for success. We think that means not just a fantastic teaching and learning event, but also coaching and mentoring over six months to ensure your enthusiasm and Workshop knowledge is actually put to work.

The next best thing to attending my Focus Series and/or signing up for the RCP is the home-study program I’ve been putting together for Creative Real Estate Investing, starting with Rent-to-Own Success in Canada.

Our amazing Rapid Cash Program is relevant no matter where you live in Canada. When we did our Focus Workshop in Edmonton, we had lots of people from BC and Ontario. When we did our Workshop in Toronto, we had lots of people from Alberta, BC, and other parts of Canada. Anyway, enough about me telling you how great the Workshops and RCP are. Let me tell you a bit more about the Creative side of things.

Most of us follow the classic, time-tested Buy & Hold strategy for real estate investing. We just like, understand, and appreciate the rock solid, fundamental aspects of Buy & Hold. I bought my first investment property in 1972. Since then, 90% of my purchases have been Buy & Hold, and my sweetie pie Donna and I still own 22 doors. We love Buy & Hold!

Let’s say it again. We think that Buy & Hold underpins any long-term real estate investment plan. There’s just no substitute for solid properties in great areas filled with amazing tenants who treat our properties well, make our mortgage payments, and pay us positive cash flow every month. We think everyone’s long-term real estate success is well served with the Buy & Hold strategy.

But, there is a whole other world of possibility

These strategies generate cash now, or at least in a much shorter time than traditional Buy & Hold. If you put in the time and effort to educate yourself about these techniques, you will learn to recognize opportunities as well as have the detailed knowledge to take advantage when one presents itself. Or, instead of just waiting for an opportunity to present itself, you might want to build a new aspect of your real estate business with one or more of these Creative Strategies that will augment you our existing Buy & Hold approach.

Over the last few years, interest has increased dramatically in Creative Strategies. I like to think we led the way in rehabilitating Lease-Options from its often sleazy, scammer reputation to a point where there is considerable discussion and great interest, not only in Alberta, but also across Canada. A number of educational groups and other real estate organizations are now preaching the benefits of Lease-Options. Seller financing strategies are alive and well.

I have been getting more and more questions about aspects of Lease-Options, Seller Financing, and Creative Joint Ventures that go beyond the straight legal side. These questions surround issues like marketing; how do you actually find deals or clients? Once you find them, how do you pitch the deal quickly and in everyday English that anyone can understand?

What about due diligence on your potential tenant buyer or Joint Venture Partner, how do you analyze or qualify them? What about a team; you can’t do all this on your own, can you? What about keeping those deals and clients on the straight and narrow as you work your way through some of these shorter-term Creative Strategies?

Financing is also important. What do lenders think about Creative Strategies; is it possible to access take-out financing? And, how to close deals where you aren’t the titleholder? With lenders and title insurance companies being edgy about mortgage fraud and money laundering, how do you deal with title issues?

Over the past five years, documentation has changed. With new interest in Creative Strategies generating more deals, the diversity of clients and situations has led to numerous improvements in our supporting documentation at RMLO Law LLP and through my Investor Tools.

But to sum up, the last few years have brought a huge number of multi-pronged questions, not only on Creative Strategies generally, but on the numerous technical aspects of how to successfully implement those strategies.

Maybe the thing to do is give everyone a chance to get an overview of strategies with more focus on the subtext of each individual approach. My Deal-Ready Documents are a helpful supplement here, but the last few years have shown us that it’s not just about documentation. It’s also about understanding the strategy, marketing, pitching the deal, qualifying those clients, creating a successful system, and actually closing the deal. Stay tuned for more on Creative Real Estate!

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

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“Home Yellow” stock image by nikcname. Used under Creative Commons Attribution Generic 2.0

The practice of selling one’s interest in a real estate purchase contract—a.k.a. an assignment—has been getting a lot of bad press in BC lately. In fact, the situation there may be changing thanks to government intervention. Contract assignments are a widely used and entirely legal procedure, but the laws governing them vary by location. We’re discussing BC, and then focusing on Alberta here. As always, the principles I explain are widely applicable—as long as you consult your local regulations.

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

British Colombians are growing increasingly irate about the misuse of contract assignments, otherwise known as ‘shadow flipping.’ Take a look at the following headlines.

Barbara Yaffe: Vancouver Sun Feb.8, 2016

“Pure, naked greed” driving real estate agents to flip a property multiple times, says Clark. New rules will require original seller to give informed consent for multiple sales, profits to go back to seller.

News 1130 Website

CBC.ca April 1st, 2016

Infographic from a damning Globe and Mail investigation.

A lot of attention in BC has focused on realtors who purportedly are not living up to their professional obligations and responsibilities.

Complaints have been heard that enforcement against realtors by the 11 separate Multiple Listing Service boards are lax and confidential. And, further complaints surrounded the perception that the British Columbia Real Estate Association (BCREA) was paying lip service to enforcement, which the BCREA vehemently denied. In fact, they said the Christy Clark government was playing politics with their proposed legislation, not allowing the BCREA to do their job.

The BC Premier has now announced that the real estate industry in that province will no longer be self-regulated, but rather will fall under government oversight (see the Globe & Mail article). Keep reading to find out more about updates to BC law concerning the assignment of real estate contracts that occurred since the audio for this Tale was recorded!

It’s really not fair to blame realtors, as the vast majority are honorable and serve their clients well. In fact, there is some criticism of homeowners who listen to the first person who bangs on their door and offers to buy their home where the homeowner accepts without doing any kind of diligence, let alone due diligence. It’s not like the red hot Vancouver real estate market is a secret! Instead of taking a low price that only seems high relative to what the homeowner paid 25 years ago, a much better course of action would be to, at the very minimum, hire a realtor to provide an up-to-date, professional view of the market and other market possibilities.

And, you have to love those loopholes.

So, what the heck are assignments, legally speaking? Let’s get some definitions.

An assignment is an agreement that transfers your contractual rights to a third party.

“An assignment (Latin cessio) is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee”[1]. Typically a third-party is involved in a contract with the assignor, and the contract is in effect transferred to the assignee. (From Wikipedia [edited)

“What is ASSIGNMENT?

In contracts. 1. The act by which one person transfers to another, or causes to vest in that other, the whole of the right, interest, or property which he has in any realty…”

From Law Dictionary (By Blacks Law Dictionary 2nd edition, edited)

Now for some facts. Following, in italics, is a section from the recently updated Professional Standards Manual of the Real Estate Council of British Columbia:

[05/16/2016 the following section updated]

this contract must not be assigned without the written consent of the seller; and

the seller is entitled to any profit resulting from an assignment of the contract by the buyer or any subsequent assignee.

For those interested in doing contract assignments in BC, I highly recommend going to the original documents to read more!

Now, let’s move over to Alberta.

Alberta Land Titles Act

154(1)                        Any contract in writing for the sale and purchase of any land, mortgage or encumbrance is assignable notwithstanding anything to the contrary contained in it, and any assignment of any such contract operates according to its terms to transfer to the assignee mentioned in it all the right, title and interest of the assignor both at law and in equity, subject to the conditions and stipulations contained in the assignment.

154(2)                        Nothing in this section affects any rights at law or in equity of the original vendor or owner of the land, mortgage or encumbrance, until notice in writing of the assignment has been either sent to the original vendor or owner by registered mail or served on the original vendor or owner in the way process is usually served…

Let’s repeat again the nugget and difference between Alberta and BC.

“Any contract in writing for the sale and purchase of any land, mortgage or encumbrance is assignable notwithstanding anything to the contrary contained in it…”

What this means is that, in Alberta, you don’t have to say a contract is assignable because it is by law. And, no one can contract out of this right as they can in BC. This is similar to Residential Tenancy Act (RTA) legislation that says your security deposit can’t be more than one month’s rent or that you have to give a certain amount of notice. It doesn’t matter that your tenant might have agreed to a two-month security deposit or less than the usual notice; those agreements are unenforceable because the RTA says so.

Assignment Basics

Again, here is my definition: An Assignment is an agreement that transfers your contractual rights to a third party.

A Contract of Assignment, usually just called an ‘assignment,’ is useful in any real estate market. You can make big money in BC and less in most other places. Here’s how they work. You write a real estate purchase contract offering to purchase a piece of property and the seller accepts your offer. This gives you control of that piece of property. You can then sell your interest in the property by way of an assignment before or after you go unconditional on the purchase contract. The assignment contract itself is usually just a page or two but it’s important. It sets out the parties, timing, assignment monies, and other details in writing.

CAUTION: Assignments are a sophisticated investor strategy. Don’t dive into these without some initial real estate experience.

Why Use An Assignment?

There are three basic scenarios, two of which are relevant for this Tale.

Scenario I

Let’s call this scenario the ‘Big Gap’ scenario, you just want to tie up a property because you believe the after repaired value (ARV) worth more than you agreed to pay. Typically, this is an ‘ugly property’ where the cost of repairs adds at least double the repair cost to the ARV. If you could find a buyer that wants the property and agrees it is worth more money, then you can `assign’ them the contract.

How much you can `assign’ for, or in other words, sell the contract for, is a function of hidden value in the property, market psychology, and simply how much your ultimate buyer (assignee) is willing to pay. Once you have established that number, your ideal scenario is that you prepare your Assignment, both of you sign it, you staple it to a real estate purchase contract, and your assignee gives you the Assignment price along with any deposit you have already paid. Your part of the original real estate purchase contract is now finished. You walk away and your Assignee closes the deal.

Scenario II

Let’s call this scenario ‘Rising Market.’ Classic examples of the rising market are what we have seen in British Columbia, particularly Vancouver, and in Toronto over the past few years rising to a crescendo in 2016, at least according to the breathless media. When prices rise dramatically, there is money to be made. Sometimes listings drop as sellers wait to see how the market will proceed. The idea is to get control of a property in a hot market. Try for a longer closing to give a little more time for the market to rise further and give you time to find a buyer. Then, sell your interest by way of assignment before closing on the property. You (the ‘assignor’) get your deposit back and whatever your ‘assignee’ (new buyer) will pay you for taking over your position in the original contract. Of course, if the market drops you may not be able to assign. Obviously, BC and Ontario are in a rising market. Alberta is not, however, during these times of low oil prices and a depressed economy.

Scenario III

This scenario involves members who are looking to do Joint Ventures (“JV”). They are the `Finders’ of property who have real estate expertise but may have run out of money. They have a JV relationship with the `Investor’ or `money person’ and have agreed that the Joint Venture wants to buy property. The Finder goes out and ties up a property with an offer to purchase. Then, if the Finder and Investor agree that it is an appropriate property, the Finder assigns all or part of his/her interest to the Investor. The Investor then applies for financing, either on his/her own or in conjunction with the Finder. This scenario is more of the technical explanation of how to transfer a portion of your interest to your money partner or investor.

Points To Remember:

Let’s talk about some of the issues surrounding Assignments

An assignment is a sale of a contractual right, not a real estate transaction

Pay Me The $$!

This is a simplified example, but if you were selling a car, would you give it to the buyer and let him drive away before you got your money?

In a recent transaction, a buyer (Assignor) assigned his interest in a purchase contract for $8,000. In other words, this is Scenario I where the Assignor is selling his interest in the real estate purchase contract. My previous firm, RMLO Law LLP, acted for the ultimate buyer (Assignee). After closing, the Assignor called me and asked when I was going to send him his Assignment monies of $8,000. I had to tell him that I didn’t have his $8,000 and it wasn’t my job to collect it for him.

If you are a Scenario I Assignor, your job is tying up the property, finding your Assignee, negotiating the Assignment, and collecting your assignment funds. Don’t release the assignment document to the ultimate buyer until you have all assignment monies and return of deposit in your hands. Then your part of the assignment is finished.

Timing

Watch your timing. In a busy market, everyone in the real estate chain is busy. Realtors, lenders, surveyors, house inspectors, and lawyers all take longer to do their job than it takes in a quiet market.

No matter which assignment scenario, the assignment process usually shortens the amount of time available to close the transaction. Make sure everyone in your chain knows there is an assignment involved.

Liability

What happens if the ultimate buyer (Assignee) does not close on the property? Who does the seller look to when his sale collapses?

Whether you are Scenario I ‘Big Gap’ (selling) or Scenario II ‘Rising Market’ or Scenario III (JV’ing), the seller will look to the Assignor. Why? Because the seller signed the original contract with the Assignor (first buyer). The seller has no contract with the Assignee (the ultimate buyer). When sellers learn of an Assignment, they usually cooperate in dealing with the Assignee (better cooperation with the 7.6 disclosure clause, but that doesn’t mean there is a contract between the seller and the assignee).

Therefore, before you remove conditions on a contract, either hoping to assign the contract or even with an Assignee already lined up, you better be ready to close on the deal yourself.

Due Diligence

Doing diligence is ultra-important. You must do enough diligence so that you are confident of your buying decision. Only then have you done your due diligence. Getting to the due diligence stage is important for all buyers. In the most recent batch of assignments coming through my law office, we have seen the following:

As Assignors in whatever scenario, especially Scenario I & II, you must be incredibly careful to make sure your Assignee knows what you have done about due diligence. It’s fine, but not recommended, not to do any diligence or even some diligence, but your Assignee must understand. Assignees are often less experienced buyers and they usually, without even saying it, are relying on you to tell them this is a ‘good’ property. As always, early written disclosure is best and provides you some measure of protection from an Assignee who later says you misrepresented the property.

What Specific Things Can You Do?

Lessons Learned:

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

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

In Western Canada, title insurance was created to cover problems with real property reports, but did you know that it also covers many other issues? In this Tale, we have a case where the lender got title insurance, but the buyer/homeowner did not. When there was a $21,000 claim made regarding gap registration, the matter went to court. This problem could have been avoided with a mere $50 of extra insurance! Many of the Tales I tell are like this one, which is all about helping you avoid other people’s mistakes.

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

$21,000. That’s what it cost a recent Calgary buyer who failed to buy a title insurance policy!

Briefly, when you purchase property, title insurance is available for both the lender’s interest and the buyer’s interest. Among other things, title insurance covers registration gap, survey, building permits, municipal compliance, or fraud coverage.  Some lenders require title insurance to cover their interest; it is always a choice for the buyer. The title insurance company involved here was First Canadian Title (FCT).

Lewis & Dayo v. FCT:

Consider the recent judgment of the Alberta Court of Queen’s Bench in the case of “Lewis v First Canadian Title, 2015 ABQB 726 (CanLII), retrieved on 2016-06-23”

FCT was asked to insure a mortgage being used to purchase a residential property in Alberta. The lender’s title insurance policy was purchased for $179, however when the homeowner policy was offered for an additional $50, it was declined. This decision not to purchase a homeowner policy was documented and provided to the homeowners in writing.

Claim Details:

In this instance, the mortgage was still in good standing and therefore the lender had not suffered a loss, meaning it had no claim to make under its policy of title insurance. The claim was denied and the uninsured homeowners were left with the responsibility for clearing the $21,000 from their title. The homeowners sued FCT, seeking coverage for themselves under their mortgage lender’s policy.

Had the homeowners purchased the additional homeowner policy when it was offered for $50, they would have been covered and FCT would have paid the $21,000 claim on their behalf.

Unfortunately, without a policy in place, the homeowners did “not have the benefits of any of the coverages associated with the policy including registration gap …” and as a result, the Court ruled in FCT’s favour.

Lessons Learned: 

1      Reading between the lines, I’m not sure the buyer’s lawyer fully explained title insurance. Ask your lawyer about title insurance, how it works, and whether you should buy it.

2      Yes, the buyer could sue their lawyer for not explaining and sue the seller for failing to clear the title, but having title insurance take care of the problem would’ve been so much easier.

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

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“family-protection-hands-home” image by geralt used under CC0 Public Domain Dedication.

I’ve got a real bee in my bonnet about Asset Planning & Protection (APP). I have done Focus Workshops all about Legacy Planning, Asset/Corporate Structure, Insurance, and Tax Planning, but now it’s time to bring this focus back to my blog and podcast. It’s hugely important for all of us, but we are all so busy buying, selling, and managing real estate that APP always takes a back seat. I want you to have a much better general understanding of Asset Planning & Protection. Are we trying to turn you into lawyers, accountants, financial planners, or tax experts? No, absolutely not. But we are trying to help make you more informed and prepared!

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

Let’s start with some basic considerations.

“Asset and wealth protection should not be seen as the bailiwick of the unprincipled and desperate. Planning for the protection of our wealth and assets, modest or abundant, is prudent if we are to enjoy our lives, care for our families, contribute to the needs in our communities and contribute to meaningful change in our world.”

(Asset and Wealth Protection by Kelly R. Doyle LEXIS-NEXIS 2009)

Economic uncertainties are influential and happen even in our closely regulated, stable economies. Think of the oil price collapse, Bernie Madoff, subprime mortgages leading to world economic collapse, and everyone hates the oil sands. Climate change will be a huge driver of economic decisions. All these macro events have an effect on you. What about politics? We are relatively stable here in Canada but our neighbours to the south are big, pushy, and look out for themselves (e.g., Keystone). Think of the Trans-Pacific Partnership, the Patriot Act, and Arctic sovereignty. ISIS, the growing refugee crisis, and the rise of China and India as world powers are just a few of the issues that affect Canada and, ultimately, every one of you.

“There is no bulletproof theory, no impenetrable legal fortress. For asset protection to work for you, you must be able to look the judge in the eye and honestly proclaim confidence in the abilities of your planner who… gave you sound professional advice that you followed in the course of a perfectly legitimate personal, financial and business planning.”

(Asset Protection: Concepts and Strategies for Protecting Your Wealth by Jay Adkisson and Christopher Riser, McGraw-Hill 2004).          

We all need to be very clear on what assets we have, plan to have, the best way to protect those assets, pay appropriate tax on those assets, how to use assets for our own and family enjoyment, how to leave legacies for our loved ones, and how to contribute to our community. (Did I mention that I feel strongly about this?!) With that introduction and summary on the various aspects of APP, let’s get on to a Tale that illustrates why a properly drafted asset plan always has elements of asset protection.

Now, as real estate investors we always seem to worry about our third-party liability in terms of a tenant slip and fall. Or, perhaps we worry about a joint venture partner suing us. In my experience, these two situations do not come up that often. So, yes we have to guard against these situations but there are so many more circumstances that could bite us.

In this Tale our client was a mid-level manager in a very successful employee owned company. He came to see us when his company was spending money and acquiring assets that would pay off big time down the road, say 7–10 years, and then for a period of 10 years. His payoff was going to be $1 million per year.

At the time our client was 50 years old with a daughter age 10 and a son 14 years old. He was worried that just when his share of the company’s investment was starting to really generate some cash, his children would be roughly 20 and 24 years old. As we worked on his asset plan, he kept saying, “I know what I was like when I was in my early 20s. I’m surprised I survived till now!” Whatever else we did, the asset plan had to ensure that his children did not necessarily get big chunks of cash when they were too immature to manage that cash in a sensible way.

Of course, when you think about any asset plan, a review of tax reduction strategies is always a major consideration. And, of course, the more income or gains you are generating, the more important it is to reduce tax. With our client thinking that his income would be in the $1 million per year range, we are now talking substantial tax.

After much reflection and research, the answer was to create a Family Trust. Our client was the trustee and he, his wife, and their two children were the beneficiaries. The Trust was discretionary in that the trustee had the authority to distribute the income of the Trust as he saw fit. He was not bound to distribute evenly to each beneficiary or to any particular beneficiary at all.

Fast forward 12 years. The first real test came when our client’s daughter, now 22 years old, was off at University and fell in with the wrong crowd. She foolishly tried some Oxycontin at a party and was soon hopelessly addicted. Like many addicts, she would do anything to feed her addiction. She cheated, lied, and stole from her parents, her friends, and brother, but she would not accept treatment.

She desperately wanted her usual distribution from the Trust, which was relatively small, enough to pay for University and living expenses. But, of course, she now wasn’t going to school and all the money went into drugs.

Our client tried all the usual assistance’s and interventions, but, in the end, had to apply tough love. He completely cut off her distribution from the Trust and kept it that way even though it cut him like a knife to see his daughter living on skid row.

Distributions from the Trust now went to him, his wife, and their son with nothing to the daughter. Again, the ability of our client as trustee to vary distributions and protect against beneficiary claims was an immense benefit in this difficult situation. The good news is that the daughter fought back, is now clean, and has remained drug-free for three years. She is now participating again in the Trust distribution.

The second glitch came when our client’s company hired a new CEO. The CEO thought of himself as the new broom sweeping clean. Our client had been with the company for 30 years but the new CEO saw him as baggage that was not contributing. And, worse than that, accused our client of making bad business decisions that enriched himself at the expense of the company.

The result was that the new CEO purported to fire our client for cause, in other words, they had good and valid reasons for firing. Our client sued for wrongful dismissal and the company counterclaimed for alleged negligence and harmful conduct committed by our client. The company claimed a huge sum of damages and, guess what, specifically named our client’s Family Trust as where they thought our client held his ill-gotten gains.

This lawsuit never got to court as the CEO’s lawyers advised him that, on further investigation, there was no proof that our client did anything wrong and, perhaps more importantly depending on how you look at it, that the company could not successfully attack the Family Trust. So, this was the first test of whether or not the asset plan contained in the Family Trust did something other than freeze our client’s income at a point in time, and allow a much more tax friendly distribution of income.

When you think about guarding against liability, you can rest assured that our clients never contemplated being sued by his own company, which was the vehicle for generating the wealth in the Family Trust. The cool thing about a Trust is that no-one owns it—so by definition, it cannot be taken away by a third party.

Now, on the tax planning side, the Trust was working perfectly. Potential tax bills of $350,000 were reduced to $200,000 and the Trust was able to distribute Trust income in a way that best suited the tax circumstances and real life circumstances of the four beneficiaries.

Family and Trust matters were all looking rosy until the now 26-year-old son discovered that his wife was cheating on him and his marriage collapsed. The cheating wife hired a very aggressive divorce lawyer and the fight was on.

Essentially the cheating ex said that she would disappear if she got a big payout from the Family Trust as part of their matrimonial property settlement. And, if they didn’t want to just pay the money, then a lawsuit would commence to force our client to compensate his son’s soon-to-be ex-wife. The lawsuit commenced.

In the usual exchange of documents between lawyers, the wife’s lawyer was given a copy of the Family Trust. After not too much back and forth, the wife’s lawyer advised her that they could not attack the Trust and she disappeared without very much more trouble. To be clear, the wife didn’t just want a part of the assets owned by the Trust, but rather she wanted the income from the Trust to be included in calculating her spousal support. She failed in both regards!

So, there you are. This is a good example of how a properly drafted asset plan also has important elements of asset protection. N.B. that APP is never a cookie-cutter. Everyone’s individual circumstances are, if not unique, at the very least substantially different from anyone else’s individual circumstances.

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

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To mark the 75th episode of Tales from the Trenches, we have a Special Extended Edition all about foreclosures. This Tale is so packed full of helpful information that it had to be nearly half an hour long! The recent economic downturn in Alberta triggered by a collapse in oil prices means that many people are faced with a dilemma: what do you do if you can’t make your mortgage payments? It’s best to be proactive and not wait for the bank to come calling, and this Tale will help you figure out some options. We’ve also got some creative solutions for real estate investors that can help them keep their businesses above water in tough times.

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

This is the fourth installment of our Tales from the Trenches series on mortgages and foreclosure. For a good overview of how foreclosures work and some comments on quit claims, look to our other Tales,

Can’t make your mortgage payments? You are not alone, especially in Alberta.

The drop in oil prices from over $100 per barrel to, at one point, less than $30 a barrel has created economic disaster in Alberta. Energy and energy-related companies of all kinds, big and small, have been devastated. Capital spending has been slashed and layoffs are widespread as companies try to deal with how to survive in an environment where the sale price of a barrel of oil may be less than the cost to produce it. Job losses now exceed 65,000. For most workers, no job means no income unless you want to count Employment Insurance. Savings quickly disappear.

If you can’t make your mortgage payment, sooner or later your lender/bank will foreclose. Every province and state has their own particular rules around mortgages and foreclosure. Some of our discussion has general application but be sure to get your own local advice. This Tale is focused on Alberta.

Alright, if it looks like you won’t be able to make your mortgage payment, don’t panic! The best way to avoid foreclosure is to be proactive.

No matter what avenue(s) you take, it benefits you to check out possible solutions and to do that before you miss a payment. Let’s have our eyes wide open. A solution is always better. You don’t want to be foreclosed and lenders don’t want to foreclose. They would far rather have your payments than a lawsuit.

Even though lenders don’t want to foreclose, after you miss a payment or two they will phone, and if you still can’t pay, they will write you letters demanding payment. Sooner or later, if you don’t catch up on your payments, the lender will send it to their legal counsel who will also write you a letter demanding payment.

If the mortgage is not caught up and all expenses of the lender paid, the lender’s legal counsel will start a foreclosure action by issuing a legal document known in Alberta as a ‘Statement of Claim.’

So, if you know you are unlikely to meet your mortgage obligation, the first thing you should do is call your lender. It’s painful, but you should do it.

Don’t be embarrassed or ignore mail from your lender; that will just accelerate the foreclosure process. Take the lender’s calls even though that can be an embarrassing, awkward conversation when the whole conversation is about, “when can you pay?”

It is especially awkward when you can’t promise your lender any specific amount of money at any specific time. But, please be aware if you aren’t paying, your lender will call. And, they keep notes of your conversations.

Depending on your situation, here are some options you or your lender might suggest. (N.B., it is strategically better and mentally more comfortable to discuss these options before you miss a payment.)

As we said above, lenders don’t want to foreclose. It’s bad for you and bad for their business model. If you have a reasonable chance to catch up, your lender might agree to wait before taking legal action against you or they might suspend a foreclosure they have already started.

For instance, if the reason you can’t pay is job loss but you have a new job starting in say, three months, your lender may not start a foreclosure action or put one on hold that has already been started. The more proof you can give your lender of the certainty and salary/income from your new job, the more likely they are to listen to your plan. No guarantees here because every lender is different.

All mortgages are amendable; some because you and the lender might negotiate amendments, some because your existing mortgage allows adjustments. For instance, a variable rate mortgage where your current interest rate generates higher than the required payment can be adjusted downward to lower your payment.

Or, if you took out a mortgage with a 20-year amortization period (being the number of years it would take you to pay off the mortgage), your lender might extend the amortization period to, say, 30 years. That would lower your monthly payments. As part of any reorganization, you could ask (some lenders may offer) to add your missed payments to the principal balance of your mortgage. That would spread out those missed payments over the balance of your mortgage.

If you made a down payment of less than 20% of the purchase price, you most likely have a loan made pursuant to the National Housing Act (NHA) where various insurance companies, the largest of them being Canada Mortgage and Housing Corporation (CMHC), insure lenders from any loss. If a lender forecloses on you and loses money, they make a claim to their insurance company, who pays them their loss.

Naturally enough, no NHA insurance company wants to pay a claim. They may have programs to assist you with some form of relief by way of forgiven missed payments or interest-only payments. Check your paperwork and if you find the name of any of the following three insurers, check with them further.

– Guaranty Mortgage Insurance Company

If none of these more traditional approaches suit your particular circumstances, let’s talk about non-traditional concepts that may have a chance to help you keep a property. Here are some options that non-creative, professional advisors may not suggest:

If your issue on your personal residence is that you can’t make payments, how about a joint venture? With any decent amount of equity in your property, you can sell a percentage of ownership to a joint venture partner. Once you have funds from selling an interest, you can make up delinquent mortgage payments and perhaps give yourself a chance to get on your feet.

If foreclosure has already started, you will have to deal with the lender as part of paying those delinquent payments along with the lender’s legal fees and any other costs, which when done will result in the foreclosure stopping. Yes, now you have a partner in your home, but that may be better than losing your home.

What about if you are an investor? If you just can’t rent the property and because of personal circumstances can’t make the mortgage payments, you might be able to find a joint venture partner who would put up some money to buy a portion of your equity, which you can then use to make the mortgage payments. However, without any equity and, for whatever reason, no tenants, you would have to make a very strong case for future prospects to have any joint venturer put up money to carry you through the tough times.

This is the first and most obvious move in your chess game with the lender. Sell, pay real estate commission, pay the penalties on your mortgage, pay your legal fees, and just be done with the property. This only works if you actually have some equity in the property that can pay your costs of sale.

Or, you can try and sell the property yourself. Or, you can try to work with a reduced-commission realtor if you have confidence they can sell, since commission takes such a big chunk of your sale proceeds when you have a small amount of equity.

In a rapidly deteriorating market, one key success factor is listing at a price that will actually attract buyers and promote the sale. The object isn’t to squeeze every last penny from the sale. The object is to actually sell! Many sellers make the mistake of listing their property at last week’s or last month’s price. As prices continue to drop, the sellers have to continually adjust their price downward, essentially chasing today’s value but never quite getting there. Eventually sellers capitulate and sell at whatever number they can sell at, potentially reducing their sale proceeds substantially. Price your property to sell and take your beating. An actual sale is what this option is all about.

Along with an outright sale, you could look at selling to either another investor or to someone looking to move in. This option works in the proper circumstances, depending on a number of factors that include but are not limited to:

Sales techniques could be the Lease Option more often described as a Rent To Own (RTO). Or, you could sell by way of Agreement for Sale. None of these techniques will likely be effective if your existing mortgage exceeds the value of the property by a substantial amount. But, I have seen deals put together where sellers with a mortgage principal $20,000 more than the current value of the property actually contributed $20,000 to the sale. They did not want their credit ruined by going to foreclosure.

If your property is okay except for negative cash flow, then in these tougher economic times, you might consider carrying $200, $300, or even $400 per month negative cash flow for a substantial period of time.

You can especially consider this option if the alternative is complete loss of the property and your substantial original investment along with ruination of your credit. If you bought a property for $300,000 with 20% down, that is $60,000. If you were negative cash flow $300 per month for two years that is $7,200.

This is something to consider when you compare it against the loss of your $60,000, bad credit, and a recognition of the fact that real estate markets are cyclical and our current downturn will certainly turn up sometime in the future. Obviously, the question is when?

Some owners have used this process to stop a foreclosure quickly after it has started or to stop it from getting started. This process has you transferring the property back to the lender. You give the lender a transfer of land and sometimes a quitclaim and the lender stops the foreclosure.

Titles-in-lieu of foreclosure will probably ruin your credit to the same extent as a foreclosure would, so there isn’t any real benefit there. Why would you do it? This method prevents or ends the foreclosure process quickly and may give you some room to negotiate with your lender. There are a number of situations where you should be able to negotiate.

In Alberta (but not in the rest of Canada) some mortgages are non-recourse. Briefly, if you have a conventional mortgage (that is, a mortgage not insured by CMHC or other insurer) in your personal name, whether it is your personal residence or an investment property, all the lender can do is foreclose and take away the property. If the property is worth less than the mortgage, they can’t come after the homeowner for the deficiency. You might be able to turn your non-recourse mortgage into an advantage.

For example, I believe you have some room to negotiate if your property is substantially underwater and you have a non-recourse mortgage. Let’s say that the mortgage principal is $40,000 more than the current value of the property. The lenders legal bill for a very plain vanilla, no wrinkles foreclosure will be $2500–$5000. A smart lender will understand that if they foreclose they will lose $42,500–$45,000 being the sum of the deficiency and their legal costs. A smart lender would listen to your offer to pay the lender a portion of those noncollectable losses.

Remember, this is a negotiation. How much should you offer? Hard to say, this is a negotiation. For example, it might be a good deal for you if you paid the lender $10,000 and agreed to transfer the title to the lender without a foreclosure with the further agreement by the lender not to make a credit report.

It might even be a good deal for the lender if they just got the property back without having to spend $2500–$5000 on their lawyer.

Caution: lenders often seem incapable of seeing what might be in their best interest. All they understand is their basic policy when the mortgage is in default, and they are often incapable of stepping outside the policy. For any of these negotiated settlements to work, you will have to move up the authority chain beyond your local branch or the lenders 800 number help desk.

For many homeowners and investors the above suggestions won’t solve their problems. They are just in too deep with no real chance of ever catching up. Any attempt using the above suggestions would be only a temporary fix or delay. Really, unless you take other action there is just no reasonable hope to make up those back payments. The bank/lender will start a foreclosure action. The ultimate result of foreclosure is you lose your house and your credit is ruined for a lengthy period of time.

Other than discussed above and if none of those solutions/improvements work for you, then your input into that typical foreclosure might be as follows.

When the lender’s lawyer starts the foreclosure action by way of a legal document known as a ‘Statement of Claim’, you can:

Caution: Be very careful if you think you don’t have to worry because you have a non-recourse mortgage. I can hear someone saying right now, “Let the lender foreclose, all they can do is take the property. They won’t be able to collect the $50,000 that they will lose because my property is worth so much less than the principal on my mortgage.”

You have to be a little careful here. Yes, if your mortgage is a plain vanilla, non-recourse mortgage, you may not have anything to worry about. But, lenders aren’t stupid. They understand about non-recourse mortgages in Alberta.

Lenders are constantly trying to get around the protection in s.40.1 of the Law Of Property Act, and the way they do it is to try to turn those non-recourse, plain-vanilla mortgages into loans with an enforceable personal covenant. The lending trend has been way in the direction of other than plain-vanilla mortgages. Credit unions start out with a promissory note or other loan agreement secured by a mortgage. Other lenders use various kinds of loan agreements including lines of credit agreements, which are again secured by collateral mortgages. These are often described as HELOCs (home equity lines of credit). Scotiabank has their STEP (Scotia Total Equity Plan) mortgage.

STEP mortgages include a form of in-branch loan agreement with a collateral mortgage having a face value of 100% of the purchase price funded to a maximum of 80% of the purchase price.

The theory is, as the value of the property increases, the lender can advance further funds without redoing their paperwork. Some STEP mortgages have the ability to tie loans to your VISA card. HSBC has their EPM (Equity Power Mortgage) being their form of mortgage, collateral to some form of loan agreement.

When these mortgages go bad, lenders sometimes take a run at you, the borrower. The lender says your mortgage is recourse and they should be able to collect any deficiency. So, we say again, if you don’t know whether you have a non-recourse mortgage, it is absolutely important to consult legal counsel and get an opinion.

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

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