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Two Ways to Learn Real Estate Investing

Remember, it takes time to learn how to do anything—especially if you want to do it well. Real estate is no different. The most efficient way to learn is by acquiring the proper education. You might think I’m biased because I teach real estate investing workshops and sell home-study kits. But this episode of Tale from the Trenches shows how investing in your education can save you money in the long run.

Some people prefer to learn by using the “I’ll figure it out as I go along” method. As a lawyer, I can’t recommend that approach for anything to do with the law. Trial-and-error is not only a less efficient way to learn, but it’s always way more expensive when it comes to real estate!

What Is an Agreement for Sale in Real Estate?

Anyone familiar with my blog posts, podcasts, home-study kits, and workshops on Creative Real Estate Investing Strategies has heard of Agreements for Sale (AFS). But the key to learning is repetition, so let’s review.

AFS is a seller financing strategy. A seller becomes a buyer’s bank. The seller stays on the title and lends the buyer some or all of the sale price. The buyer makes payments to the seller on the loan as well as takes care of insurance, utilities, and maintenance on the property.

This can be a very attractive strategy for any buyer, but especially investor buyers. If the seller is your bank, you don’t need to qualify for a new mortgage!

How Not to Do an Agreement for Sale Deal

With that background, back to our story. Our seller wanted $375,000 for his well-kept three-bedroom bungalow with a legal, two-bedroom secondary suite. The buyer offered the choice of $345,000 now, or $365,000 in 18 months if the seller would agree to an AFS as the sale mechanism. Remember, this was four months ago.

My client (the seller) and I chatted about the transaction. I forwarded him some information on AFS and then didn’t hear anything until just last week. What showed up was a real estate purchase contract, which is often referred to as an offer to purchase. I could tell immediately that my seller client had found this contract on the Internet, and I could further tell that it was an American contract designed for the sale of US properties. Not good!

Overall, trying to use an American contract in Canada causes way more problems than it solves. No one is familiar with it, and so Canadian lawyers have to go over every word, always requiring massive amendment. I suggested to my seller that he try and work with the buyer to craft an appropriate contract. Fortunately, the buyer was agreeable.

And, of course, my seller client had not created a financing schedule either. With the cooperation of the buyer, we worked out a new contract, created that financing schedule and nailed down all the details of the AFS deal. The buyer was then able to take the signed contract to his lawyer and, between the buyer’s lawyer and our Field Law office, we then finalized this AFS deal.

Getting to the stage where we had a proper contract and schedule took way, way more legal time and therefore created a much bigger legal account. My client’s bill was likely $2,000 bigger than it would have been if he had done any training in how to make an AFS deal. It would actually have saved the seller money to have invested in taking one of my AFS workshops or home-study kits before trying to do the deal.

How to Use an Agreement for Sale the Right Way

Now we get to the point of this blog and the teaching moment. When you create a purchase contract to buy or sell by way of AFS, there’s a process to be followed. Taking the right steps in the right order protects both buyer and seller. It also takes less time and effort, which saves you money in lawyer’s fees.

First, start with the boilerplate contract that is specific to your area and will be familiar to professionals like lawyers and real estate agents. Here in Alberta, I suggest that you use the standard Alberta Real Estate Association (AREA) contract. Your friendly realtor can provide a copy.

Write up that contract the way you would write any purchase contract but with one key difference. You must add the following clause to the terms section: “This contract will proceed by way of Agreement for Sale.” Adding these words tells buyer, seller, and the respective lawyers that this is an AFS deal.

Second, whether you are a buyer or a seller, the financing schedule attached to the offer to purchase crucial. All of the most important parts of any AFS deal are found here, and they must be negotiated to the satisfaction of both parties.

The financing schedule sets out the details of the AFS transaction. It really is the nuts and bolts, with all pricing, deposits, how much money the seller is lending the buyer, other seller obligations, interest rates, maturity date, and renewal possibilities. Without this all-important financing schedule, no one knows what to do!

Lessons Learned:

1. The AFS strategy is alive and well here in Alberta and in many Canadian provinces.
2. To use an AFS, you need to understand how to write a purchase contract and financing schedule. Either you do it, because you have the training to do so, or you consult with your lawyer early on.
3. The School of Hard Knocks still charges “tuition.” You can try to learn on your own by making those inevitable mistakes, but be prepared to pay for that experience!
4. Educated investors are successful investors. Your best bet is to get some solid education on the topic of AFS and limit down those expensive errors.

Join us on Saturday, September 24th, 2022 in Edmonton, Alberta, Canada for an AFS Live Focus Workshop:

Read more – CAD $1,397.00

Or buy the AFS Home Study Kit in our online store!

Add to cart – CAD $997.00

“Speaker Training Coaching Board  School” image by Geralt used under a Pixabay License.

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Learn Creative Real Estate Investing for Beginners and Advanced Students at the Rapid Cash Program, May 7th and 8th, 2022!

Read more – CAD $3,497.00

“Home Equity” image by http://www.aag.com/ per their terms.

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Learn Creative Real Estate Investing for Beginners and Advanced Students at the Rapid Cash Program, May 7th and 8th, 2022!

Read more – CAD $3,497.00

“Home Equity” image by http://www.aag.com/ per their terms.

When searching for the ideal piece of real estate to buy, properties in foreclosure can be an interesting place to look. Are you an investor looking for a new rental property? Or maybe you’re a buyer looking for a dream home—or at least a property you can turn into your dream home. By considering foreclosures, you open up more options for yourself. Read or listen on to learn more about how timing a foreclosure deal can be tricky.

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Issues with Buying a Foreclosed Property

In Canada (and jurisdictions with similar laws), foreclosure is when someone defaults on their mortgage payments, and the lender takes control of the property. Lenders will try to sell the property to recuperate the mortgage money. Foreclosures are regulated differently by each Canadian province. These comments are on Alberta foreclosures, so make sure you check to see how it actually works in the area where you are buying. Here in Alberta, a Judicial Foreclosure is most common, which is when the Court gets involved with selling the property.

So, there are foreclosure properties to be had, and they might fit your requirements. Sometimes you are searching the bargain bin for badly treated properties without many redeeming qualities. Sometimes a foreclosure property is in great shape; the seller just can’t make the payments.

But, here’s the thing. Generally, the buying public has a rosy view of foreclosure purchases. Somehow, they think that foreclosures are a bargain or will be easier to buy. The reality is there is lots of demand for properties in foreclosure and prices are competitive, so it’s not as easy as it might seem.

Judicial Foreclosures add another layer of complication. Buyers can’t just roll up and convince the judge to sell for a sack of magic beans! Sometimes the issue isn’t winning the foreclosure competition; it’s actually closing the deal once the Court approves your offer to purchase. (Sometimes in Alberta called just the ‘offer’ or ‘purchase contract,’ it’s more properly referred to as the ‘real estate purchase contract,’ but in other provinces it’s often called the ‘agreement of purchase and sale.’)

Example of Timing in an Alberta Foreclosure Purchase

In a very recent foreclosure, my client fought hard, outbid three other buyers, and won the bid for what they thought would be an amazing property. The house had good bones, was in reasonably good shape, and was suitable for a secondary suite. The presiding Master in Chambers approved my clients unconditional offer on February 2 for a March 8 closing. (A Master is effectively a Judge that deals with repetitive, relatively non-controversial Court matters.)

Good timing, wouldn’t you think? About five weeks to close. Financing all lined up, let’s just close this deal!

Here’s what happened. The Master’s February 2 approval, as usual, took the form of a Court Order. To be effective, that is to be the ‘condition removal’ that every lender needs, the Order has to be signed by the Master and filed at the courthouse.

Because of COVID there is an ultra-slow down at the courthouse. It took until March 4 for the Order to be filed and returned to the foreclosing lawyer. The filed Order is required to make the deal unconditional. ‘Unconditional’ is an important point. Why?

For every real estate deal, including foreclosures, no paperwork goes out to the buyer’s and seller’s lawyers until the deal is unconditional. You can understand why. Paperwork sent to the lawyers before deals are unconditional can lead to confusion. Files get opened, work is done, client’s money is expended and then you get the news: “The buyer couldn’t get financing; this deal is dead.” Experience has shown that the only way to handle conditional real estate deals is to wait until they are actually unconditional.

All right, with that bit of explanation, and with this deal not being unconditional until March 4, only then did the listing realtor send out official real estate instructions. And, most importantly, only on Thursday March 4 was the mortgage broker able to tell the lender that the deal was unconditional and start finalizing the mortgage approval process. The mortgage broker was ready to go, had all the information from the buyer. But, only on March 4 would the lender start the mortgage application process.

So, there we are, this purchase is unconditional and ready to go on Thursday, March 4 for a Monday, March 8 closing, 1–2 days to close. Plus, my client lives out of province which always adds 2–3 days to the signing process. It didn’t take long for me to say to myself that this deal is absolutely impossible to close by March 8.

I immediately got in touch with the foreclosing lawyer to explain the situation and to ask for an extension. I wanted three weeks, he wanted to give me seven days. Back-and-forth we went with agreement that we had seven days to firstly confirm that mortgage instructions had been issued. If we got those mortgage instructions, the foreclosure lawyer would likely cooperate with a further extension. That further extension would give us enough time to prepare the mortgage documentation, send it out of province, get it signed, and get back to our office.

Every lawyer probably handles these things differently, but my approach when I run into this or any other tight timing situation is to immediately get in touch with the other side, which is most often another lawyer. In this case the ‘other side’ or other party is the foreclosing lawyer representing the lender. As much as timing on this deal was giving everyone a lot of heartburn, I believed that the foreclosing lawyer wanted the deal to go ahead. After all, it’s been a long slog for the foreclosing lawyer. First, in getting instructions from his lender, starting the legal foreclosure action, going through all the laborious processes that foreclosures take, finally getting into Court, sifting through the offers, and getting an offer accepted. That could have taken the foreclosure lawyer 6–12 months. At this point, he wants the deal to close. I want to make it easy for him to be cooperative and give us the time extensions we need. So, lots of communication, lots of explaining why the deal is going to close, and why they should listen to our extension requests. This approach generally brings good results where there isn’t really much controversy over what will happen, just the amount of time it will take.

My buyer’s mortgage broker did a great job and got us mortgage instructions before the seven-day period was up. I then negotiated a further extension with the foreclosure lawyer who, I have to say, was reasonably cooperative throughout the whole process. The deal closed 10 days later.

Lessons Learned:

1. Foreclosed Doesn’t Mean Cheap or Easy!
   Foreclosure properties are in demand and often sell at or near appraised value. They are still worth looking at, because it’s a whole other market where you might find your ideal investment or home. Just manage your expectations.

 

2. Get an Unconditional Offer to Purchase.
   If your foreclosure bid ‘wins,’ and you are getting a bank mortgage, your lender needs what lenders need for every deal. That is, a final, unconditional real estate purchase contract, (offer to purchase). For a Judicial Foreclosure purchase, that final, unconditional offer to purchase is the signed, filed, Court Order approving your deal. As a buyer you have to understand that most lenders won’t even start processing a mortgage application until there is that final, unconditional offer to purchase. As a realtor, you have to work very closely with your buyer’s mortgage broker.

 

3. Prepare for Financing.
   Make sure you know what the likely lender requires. It may mean an appraisal up front. And, very important, a backup plan, either a private mortgage or cash purchase, needs to be discussed with your mortgage broker in case the Court/lawyer do not allow any extension. We had a backup plan, however it would have been an expensive option.

 

4. Plan for Delays.
   Currently, COVID is affecting everything, but all kind of issues can slow down a real estate deal. Everything can take longer than expected, including anything to do with Court process including foreclosures. As a realtor working through the foreclosure process, do your best to make your client, the Court, and the foreclosure lawyer aware of timing. Your client might have made an unconditional offer, but, if closing depends on financing, they need time.

 

5. Amend the Standard Purchase Contract.
   As a buyer or realtor involved in a foreclosure, make sure the Court and the foreclosure lawyer know that your buyer needs two weeks to close AFTER receipt of the signed, filed Court Order approving your client’s purchase. Try to ask in your offer, or verbally if you are part of the Court application, for a clause like, “this purchase will close 10 business days after buyer’s receipt of approved, filed Court Order.”

Contact Barry today if you’re buying a foreclosed property in Alberta!

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

Negotiating an Offer to Purchase for a piece of real estate is about more than just the price. In this blog post, I’ll start by looking at two key points that must be worked out between buyer and seller: unattached goods and material latent defects. Then I’ll include a third topic that can be very important—but is often overlooked.

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When Buying and Selling Real Estate, Be Prepared for this Trio of Concerns

Hey… They Took the Bidet!

I was acting for a buyer purchasing her dream home. She was allowed a walk through 24 hours before the closing/possession day and, you guessed it, I got a call. “They’ve taken the bidet,” said my very upset client. I immediately called the seller’s lawyer but had to give my client the bad news that the bidet was gone and wasn’t coming back.

The bidet was an unattached good (what used to be called a chattel) and was not included in the sale. You can buy these products at Costco or Home Depot or online. It’s very simple: take off the old toilet seat, add a new splitter valve so water can get to the toilet tank and the bidet, plug it in, and voilà! an operating bidet. More importantly for this discussion, removing the bidet is just as easy. The seller removed it, replaced the old toilet seat, and, regrettably, my client is out of luck.

Getting this call reminded me that there are some basic principles that govern many parts of buying and selling a home, such as our bidet example. What is attached and what is unattached, in other words, what has to stay and what can the seller legally take?

Thinking about my client’s issue led me to other key topics for discussion when you are buying and selling homes. The other two things we’ll look at in this blog post are about knowledge. What does the seller know and isn’t telling you? What are they responsible to disclose upfront vs. what will the buyer have to ask about? What is the seller required to tell the buyer when asked?

Household Goods, Hidden Problems, and the Harshness of Infamy in Real Estate Transactions

Here is some basic information on buying and selling regarding what stays and what goes as well as who has to say what to whom. Let’s look at the guidance on those issues provided by the Real Estate Council of Alberta, to which I’ll add my own commentary.

Attached & Unattached Goods

Attached goods are items you cannot remove from the property without causing damage or that are physically attached to the property via pipes, screws, bolts, or nails. Attached goods stay with the property unless there is a specific exclusion in the listing agreement or in a buyer’s offer to purchase. These include:

• garburator
• water softener
• kitchen cabinets
• built-in appliances
• central vacuum system
• garage door opener

Unattached goods are movable items. Sellers usually take unattached goods from the property before the buyer takes possession. These include:

• wall art
• area rugs
• drapes hooked on curtain rods
• attachments for central vacuum system
• remotes for a garage door opener
• movable kitchen island

Attached goods are typically included with the property while unattached goods are not.

https://www.reca.ca/consumers/property-considerations/attached-unattached-goods/

Inclusions/exclusions: Inclusions are unattached goods that are packaged with the sale of a home. Naturally, exclusions are the things that aren’t part of the deal. Both buyer and seller must be specific with inclusions/exclusions in any offers and counter-offers.

If as buyer you want any unattached goods to be bundled into the transaction, make sure to list them as an inclusion on the Offer to Purchase.

If you are the seller, you can either agree to the inclusion when you accept the offer or else you need to remove the unattached good in your counter offer. You can also specifically list exclusions to make it clearer.

 

Material Latent Defects

A material latent defect is a physical defect that is not discernible through a reasonable inspection, and makes a property:

• dangerous or potentially dangerous to the occupants
• unfit to live in
• unfit for a buyer’s purpose, should that purpose be known to the sellers or by the industry professional

These are defects that may not be discoverable during a reasonable inspection of the property, even by a professional home inspector.

Material latent defects may also include:

• defects that would be very expensive to repair
• when a seller has received a notice from a local government or authority that something about the property must be fixed
• when the seller does not have appropriate building or other permits for the property

https://www.reca.ca/consumers/property-considerations/material-latent-defects/

It’s illegal for a seller to hide the above kinds of problems. The seller’s realtor wouldn’t know about these details unless told, and so they must be disclosed during the listing process. If the buyer discovers defects during a home inspection or document review that should have been disclosed but weren’t, it could sink the deal.

Property Stigma

A property stigma is an unfavourable quality in a property or one that makes the property less attractive or unattractive, but that is unrelated to the physical condition or features of the property. Stigmas may include:

• a suicide or death that occurred in the property
• the property was the scene of a major crime
• the address of the property has the wrong numerals
• reports that a property is haunted

What one person finds unacceptable may not be a stigma to another.

https://www.reca.ca/consumers/property-considerations/property-stigma/

As a seller you are not legally required to disclose stigma to potential buyers because they are not material latent defects. Buyer’s may ask about possible stigma, but sellers are not required to answer. But if you as seller choose to answer, you must be honest. If you refuse to answer, the buyer will have to decide if they’re comfortable proceeding without the information…

Lessons Learned:

1. Attached and Unattached Goods


   Despite the rules and definitions around attached and unattached goods (formerly fixtures and chattels, respectively), there is often confusion about what stays and what goes. The best policy as a buyer is to say specifically (include) what you want. For a seller, exclude anything you want to keep. Be specific.
2. Material Latent Defects
   Not revealing known problems can cause a seller serious harm. Discuss this issue carefully with your realtor when listing the property.
3. Property Stigmata
   Stigmatized properties are rare but certainly not unknown. As a buyer think about how you would feel if you discovered that a murder or crime had been committed in your dream home. Why not ask the questions? As a seller with a stigmatized home, think about how you would answer those questions.

Contact Barry today if you’re buying or selling a home in Alberta and get the help you need with (un)attached goods, latent defects, and stigmas!

“Japanese Toilet Controls” image by Rob Lee used under CC Attributions-NoDerivs 2.0 with a few pixels cropped away.

Dishonest, fly-by-night, or even inexperienced renovators can leave a trail of heartbreak. Buyers happily move into their newly-purchased, freshly-renovated home, but problems often don’t show up till later. Here are three recent scenarios from my real estate law practice in Edmonton, Alberta. First, I’ll discuss the problems, then I’ll talk about how best to avoid them.

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Three Renovation Disasters

1. Slapdash Basement
   One year after closing, minor flooding in the basement. Two months later with a heavy rain, major flooding occurred. Removal of drywall shows badly repaired horizontal cracks, most likely a do-it-yourself job. Now, exposed wiring is revealed to be improperly installed. Studs on 24-inch centres instead of required 16-inch centres. The plumbing and the HVAC also had numerous deficiencies, and the house was developing mould. After much consultation, it appeared that the whole basement would have to be torn out and done again—after the foundation cracks were repaired. Two repair estimates at $90,000 and $100,000.
2. Piping Problems

   Sinks aren’t draining properly and there is occasional odour of sewer gas. Three different plumbers can’t locate the problem. Finally, drywall is removed and the new piping and venting has not been done according to code, numerous mistakes. Replace piping, drywall, painting and some new carpet $20,000–$25,000.
3. Dumpy Sump Pump
   Buyer notices dampness in one corner of the basement. It turns out the sump pump is leaking. Further inspection shows that the new sump pump is undersized, improperly installed, and in the wrong location. Our buyer is still getting estimates for repairs, but it won’t be cheap.

The common thread is that each property had a nicely done, completely renovated basement. These are all previously owned homes where the seller supplied a current RPR and compliance, no issues shown. There were no secondary suites, just family rooms, bedrooms, bathrooms, and storage. Our first two examples had a property inspection. The third one didn’t.

Renovations and Municipal Permits

After the problems revealed themselves post-closing, further investigation showed that none of the properties had permits. And, of course, no permit means no final approved inspection by the City.

Now, all these problems occurred in Edmonton, Alberta, where I have my law practice. The City of Edmonton has its own rules around renovations and permits. I’m pretty sure that every municipality and county all across Canada and in the US have their own requirements. Make sure you investigate your own local requirements if you are planning renovations or if you are trying to recover from a bad renovation.

According to the City, a finished basement requires a development permit, a building permit, and separate permits for HVAC, plumbing, and electrical. In some circumstances they might issue a home improvement permit, which fulfills the function of the development permit and the building permit.

From the City of Edmonton’s website (accessed 11 Nov 2020):

Do I Need A Permit?
Permits are required for common renovation projects such as:
Changing the exterior finish material of a house
Adding or changing the size of a window or exterior door
Building or finishing a living/recreation room, bedroom or bathroom
Repairs due to fire or flood damage
Structural changes

Important Information About Permits
Inspections may be required at various stages of your project. Review your building permit conditions to understand when to request inspections.
Projects may require both a development permit and a building permit. Separate permits are required for heating and ventilation, plumbing, gas, and electrical work.

How to Deal with Permits—or Lack Thereof—When Buying Real Estate

Now, back to our three scenarios. If a home inspection doesn’t reveal problems (maybe it should have in the third scenario), what should buyers do? What might help but may not be a final solution is for any buyer and the real estate professional assisting them to recognize the potential problem.

My conclusion is if you as a buyer or a realtor see or know about a finished basement, especially a recently finished basement, the only potential way to protect yourself is to start the conversation about permits. Ask for copies of permits and final inspections. Show these to the home inspector before they do their inspection.

Copies of permits or not, tell the home inspector to carefully consider what they can say about the state of the finished basement. Sometimes inspectors can’t really say anything because they can’t see anything. If your inspector always does non-destructive testing, is there anything else they can do on the non-destructive side? What about minor destructive testing that can be repaired? Ask the inspector what they would do if they were concerned about permits and inspections?

If the seller doesn’t have permits or doesn’t know if permits have been obtained, then you seriously have to consider whether to insist that a term or condition in the offer to purchase such as:

Condition: “Subject to seller providing all permits required for basement development along with final, approved City inspection on or before, (pick a date well before completion date)”, or

Term: “Seller will provide copies of all permits required for basement development along with final approved City inspection three business days before the completion date”

If after going through this kind of review and negotiation, it turns out there are no permits or the seller refuses to provide permits, are you going to take the chance? It’s wishful thinking to believe permits were not required, and that the work was properly done, and there will never be any blow-back or problems for you to face. Even if the seller seems like a decent person, it’s wise to trust but verify.

And, one last thing, the City of Edmonton is much more aggressive about following up on permits and permit issues lately. If permits were applied for but a final inspection was never done, I’ve had clients tell me the city has banged on their door five years after they purchased the property wanting to do the final inspection. That will be the subject of another post.

Lessons Learned:

1. No matter where you live, there are many fly-by-night renovators who don’t follow the rules.
2. For any renovation, get your home inspector to specify what can be certified in terms of the development being properly done and what can’t.
3. Without the proper permits and a final inspection approved by the City, be very careful about purchasing a property.

Contact Barry today about terms and conditions for your purchase contract of a home with a renovated basement.

“Building destroyed destruction” image by Free-Photos used under a Public Domain dedication.

Recently, some Alberta homeowners finally ran out of patience when their property was flooded—again. They lived on the lower end of a sloped street, and water flowed down the block from the higher end when it rained. The curb had slumped in front of their home, allowing water to run over it, across the neighbour’s driveway, and onto the homeowner’s property, causing damage. After the third occurrence (yes, that’s right, three floods!), the homeowners decided to sue the municipality. This Tale discusses the ensuing court case and why people usually lose against City Hall.

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Suing the City for Flood Damage

The homeowners claimed damages of $7,160.97. In court, they were able to establish that rainwater did, at least partially, flow along the curb and then up and over the curb and across the neighbour’s driveway onto the homeowner’s property, and that they suffered some erosion to their property with resulting damage. They also established that the municipality knew of the slumping curb but decided not to repair it. Further, they were able to show that they tried to resolve the problem the first two times flooding occurred. They also proved that, before launching their lawsuit, they had gone directly to the municipality to talk to them about the problem, trying to get the municipality to fix the curb.

So, what’s your guess? Do the homeowners win their lawsuit? They do not! In a nutshell, here’s what the court said: the homeowners failed to prove how much water came from the rainwater that flowed up over the curb versus how much water came directly from their neighbour’s property. Moreover, they also couldn’t prove the City had acted negligently or in bad faith.

You see, Section 530 of Alberta’s Municipal Government Act gives immunity to municipalities in relation to how they maintain their property or don’t maintain it. That immunity protects the municipality unless the homeowners can prove that systems/inspections were implemented negligently or not in good faith. The plaintiffs failed to prove either.

Losers in court cases usually have to pay the winner’s court costs, which can be substantial. The Court threw the homeowners a bone and said that the municipality had to pay their own costs and could not collect from the homeowner. Cold comfort when to any objective eye, it looked like the homeowners did everything right and were very patient.

Lessons Learned:

• • In court, even what’s ‘obvious’ must still be proved.

    In this case, the amounts of water attributable to the municipality were not clearly or quantifiably separated from that of the neighbour.

• • Municipalities are a big, fat target—but they are protected.
    Big Albertan cities like Calgary and Edmonton, as well as smaller towns and regional service commissions, have huge infrastructure responsibilities. That’s why Alberta’s Municipal Government Act protects them unless, generally, they do things negligently or in bad faith. Without that protection, municipalities would spend all their time fighting lawsuits, so this sort of law in common in other jurisdictions, too.

• You can’t fight City Hall.
  Realistically, it’s tough to sue and win against any level of government. They make the rules!

Contact Barry today with all your Alberta real estate concerns.

“2017 Quebec Floods – Montreal” image by Coastal Elite used under CC Attribution Share-Alike 2.0.

Seems like I’m always finding examples to write about regarding real property reports (RPR) and how they fit into a real estate transaction in Alberta. Land surveys, as RPRs are also known, should be simpler than they are. The standard AREA/MLS contract says that the seller will provide an RPR showing current improvements on the property along with written evidence of municipal compliance or non-conformance. Pretty straightforward, right?

Regrettably, no. There are an endless number of circumstances and questions surrounding provision of that required RPR.

Today’s case study comes from one of my referring realtors trying to make sense of a particular situation: Title Insurance as a replacement for a current Real Property Report. This blog post works through some of the nuances in this specific case in order to make some broader recommendations. Let’s start with the email from my referring realtor.

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Re: Title Insurance Instead of RPR

Hi Barry

I hope you are doing well and enjoying the new digs of Field Law.

I have a question about title insurance, and I want to make sure I understand the nuances of what title insurance actually covers.

My clients are interested in an up/down duplex built in 1977 in Richie. The sellers want to provide an RPR from 2007 with the acknowledgement that they added back stairs to the deck with no permits. They do not want to provide a new RPR.

Would title insurance cover my clients if the seller does not know whether the stairs comply or not?

Thanks for your help.

My answer comes from the perspective of what is best for the buyers. If it was the seller’s realtor asking the question, I would have a different response.

So, if the sellers did what the contract says they should do, or at least what would be best for the buyers, they would apply for permits for the stairs and get a final, approved inspection. Then they would call a surveyor, probably the one who did the original RPR, and have the RPR redone to show the stairs. Next, the seller would send the RPR to the City in an application for a new compliance.

But, if the seller doesn’t want to take this course of action and offers to pay for the buyers Title Insurance in lieu, what does this mean for the buyer? Is Title Insurance the same as, or just as protective/good as, the contractually required RPR and compliance?

How Title Insurance Works and What It Covers

Ah yes, Title Insurance (TI) is always a puzzle. It covers way less and works in fewer circumstances than most folks realize. Title Insurance, like all insurance products, is a contract that requires absolutely full disclosure.

When a seller says, “I will give you Title Insurance in lieu of an updated RPR,” the seller doesn’t order the TI policy. The seller’s lawyer gives the buyer’s lawyer a credit on the statement of adjustments for the cost of the policy. Then it is up to the buyer’s lawyer to order the policy. When the policy is ordered, the title insurance company quizzes the buyer’s lawyer/secretary, including asking if there are any known defects.

The steps without permit are a known defect that would have to be disclosed and the TI company would then likely exclude the stairs from coverage under the policy. So, if there is any future trouble over the stairs, no TI coverage.

The second thing that not too many folks understand is that TI only comes into effect if there is enforced removal of the offending structure/issue. All in all, TI doesn’t cure problems, it just covers them up leaving a tough insurance claim or a buyer having to deal with this situation when they sell somewhere down the road.

Wow, that was pretty negative! But it is the reality of TI.

An Alberta Real Estate Lawyer’s Advice 
When the Seller Doesn’t Want to Provide a Proper RPR

Option 1: Perhaps the buyer is in a decent negotiating position and can take a harder line, demanding the seller get permits and a new RPR and compliance. Perhaps the seller’s realtor thinks TI is an answer to the problem, and, if they understand it isn’t, the seller might be a little more cooperative.

Option 2: Assuming that the stairs have at least been properly built and the City would likely issue an, ‘as built’ set of permits, the buyer could take on the permit application and RPR responsibility. If the seller is prepared to give the usual TI credit of about $250, maybe they would also add on a further credit for the permits… The permit apps, new RPR, and compliance are, if the stairs are properly constructed, probably in the $1000–$1200 range.

The buyer could ask for a credit of $250 for the TI and then some other sum (at least $350) for taking on the responsibility of the permits and RPR. With this approach, the buyer and seller are sharing the cost of the problem. Remember, this is based on the premise that the stairs are permit-able and well-built, not requiring any changes.

Option 3: Or, if the seller just won’t co-operate but the buyer wants the home, the buyer can take on the problem knowing about the issue. Post closing, the buyer can decide whether they want to fix the issue by getting the permits themselves and updating the RPR and compliance.

If the buyer doesn’t want to do that, then when it is time to sell in the future, first and really importantly, the buyer has to remember they have this problem! Once the problem is remembered at the listing stage, but before negotiations to sell get started, the buyer and buyer’s realtor have to discuss their approach. Is the problem going to be fixed now as part of getting ready for selling? If so, carry on with the process as set out above. Get the permits, get a new RPR, and submit that for a new compliance.

If the buyer doesn’t want to fix the problem, then the buyer has to be hard-headed enough to be able to do the same thing to their buyer in the future that the seller is doing to them now. This approach by a buyer when they turn into a seller usually works as long as the problem is known at the listing stage. The listing realtor and now seller need to be of one mind on how to attack it at that time in the future when the property is being sold.

Right now, for this deal, the buyer plans on getting as much of the credit for TI and anything else that they can on the statement of adjustments. The buyer will just keep the money without taking any action at this time. Then they’ll have to negotiate hard in the future when it’s their turn to sell.

Lessons Learned:

1. Always try to get a current Real Property Report:
   As a buyer, your best protection is a new RPR and clean compliance. At the minimum, a buyer needs an RPR that shows the current improvements on the property along with written evidence of municipal compliance or non-conformance. This could be an older RPR that is still current.
2. Negotiate with reluctant sellers:
   When a seller does not want to supply what is best for you as a buyer, don’t roll over and play dead! Push back, negotiate hard, do your best to get what is best for you. If you can’t get the RPR, use its absence to get credits (i.e., price reductions), which will show up on the Statement of Adjustments in your favour.
3. Know the consequences of not having a current RPR and compliance:
   If, after negotiating, the seller will not supply the contractual RPR and compliance, have a chat with your lawyer and realtor to discuss the subtleties and issues in your particular situation. Make sure you understand what the seller is offering and make your decision from a position of solid knowledge.

Get legal help with Title Insurance and Real Property Reports in Alberta. Contact Barry today!

Would-be Calgary Landlord Builds Legally-Approved Secondary Suite but Gets Stifled by Restrictive Covenant on Title for Neighbourhood’s Single-Family Dwellings.

And now for the main event! This Real Estate Regulation League title fight is scheduled for five rounds in the heavyweight division. At stake is the Secondary Suite Championship Belt! The reigning, defending, undisputed champion, Restrictive Covenant, is the long-time king of title encumbrances, boasting a hundred-year track record of steamrolling opposition. The challenger is Calgary City Hall, sporting a feisty new bylaw that allows secondary suites in RC-1 zoning areas.

Download the audio file HERE.
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What Is a Restrictive Covenant?

Often ignored—but hugely powerful—restrictive covenants are registrations against a title that prevent the titleholder from taking certain actions. They are described as ‘running with the land,’ meaning they bind the current owner and all future owners. Restrictive covenants can be very old, but they don’t usually expire automatically, so don’t ignore them because of age. While restrictions on title can be altered, it’s time consuming and tough to amend them—even tougher to remove them.

Restrictive covenants are common in new subdivisions where developers file them against all individual titles during the subdivision process. Restrictions on title can govern many aspects of what a homeowner can do with, or how they can use, their property. They can also specify what kind of siding, shingles, and landscaping are required (these are only examples, read a particular covenant for exact details). Every property owner can enforce them, as we will see in the following Tale, where some titleholders didn’t approve of legal secondary suites being built in a subdivision where a restrictive covenant prohibited them. First, let me set the scene.

A Tale of Two Alberta Cities: Secondary Suites in Edmonton and Calgary

In Edmonton where I practice law, City Hall fairly recently turned their secondary suite policy upside down. By secondary suites, I mean self-contained living spaces in basements, garages, back gardens, etc. The City is actively encouraging legal suite development and the legalization of currently illegal suites.

Old Policy: no secondary suites allowed in most areas.

New Policy: secondary suites are allowed in most areas.

Calgary resisted Edmonton’s wholesale rezoning by taking a more cautious approach. Applications for secondary suites were dealt with on a one-off basis. With many applications and much demand for safe secondary suites, Calgary made a number of attempts to find a comprehensive policy that would satisfy numerous stakeholders. Tough sledding for Calgary! There was huge opposition to any wholesale rezoning. In March 2018, the City of Calgary finally took the bull by the horns and amended its bylaw to allow land zoned as RC-1 to have secondary suites.

The Fighters Square Off: When Secondary Suites Are Legal, but a Restrictive Covenant Stands in the Way

Set in Calgary, here begins our Tale from the Trenches. In a very recent Court of Queen’s Bench decision from April 2020, we have two parties. Defending are the Suite Owners/Landlords, pensioners who in September 2019, shortly after the bylaw changed, applied for and were granted permits to install a secondary suite in their University Heights property.

Suing we have one Homeowner representing a group of University Heights residents who are united in their opposition to secondary suites. The Homeowner says the secondary suite is contrary to the restrictive covenant. He asked the Court to grant an interim or permanent injunction requiring the Suite Owners/Landlords to comply with the restrictive covenant, halt any further construction on the secondary suite, and to stop renting the secondary suite. 

The parties are in court, because the first appeal by the Homeowner to Calgary’s Subdivision and Development Appeal Board (SDAB) was denied. The SDAB said they didn’t have the authority to enforce or determine the validity of a restrictive covenant. So, off to the Court of Queen’s Bench for further argument.

In defending, the Suite Owners/Landlords said there was no clear breach of the covenant, and that the restrictive covenant has not been enforced previously or was largely ignored. In the alternative, they argue that the character of the University Heights community has changed. They say that both non-enforcement or change of character of the community render the restrictive covenant unenforceable.

Let’s Go to the Judge’s Scorecard for a Decision on Round One

After much legal argument, Justice C. S. Anderson said, “I find that the applicant (Homeowner) has met all parts of the tripartite test for an interim injunction requiring the respondents (Suite Owners/Landlords) to comply with the restrictive covenant pending the outcome of trial.” Translation: The Suite Owners/Landlords have to get rid of the secondary suite. 

But, just as in the world of combat sports, no defeat is the end of the line and retirement is rarely permanent, Justice Anderson postponed enforcement of the interim injunction for six months. Why?

Because the Suite Owners/Landlords are applying to the City of Calgary to discharge or modify the restrictive covenant. Furthermore, there is a tenant with a six-month lease.

First round to City Hall and its flexible new bylaw. But the Secondary Suite Championship Belt is still at stake! Does Restrictive Covenant have the endurance to outlast bylaw changes? Or will City Hall pull off a tricky submission to take the title?

Stay tuned for an update once the parties move on to the next step.

Lessons Learned:

1. Title Search: When buying a property, a title search is basic diligence. This type of document investigation means requesting the deed to the property from the municipality. 

   
   
2. Title Review: You and/or your realtor and/or your lawyer need to actually review and consider anything registered against the title and particularly restrictive covenants.
   
   
3. Restrictive Covenants: Where normally the content of a restrictive covenant doesn’t affect what most purchasers would do with a property, it might. And, restrictive covenants are very difficult to remove or modify. If the restrictive covenant says you can’t do something, then the odds are way more in favour of, you can’t do it!

p.s., A great case to read. It’s only seven pages long and very instructive on how restrictive covenants work: http://canlii.ca/t/j6fdf

Get expert legal counsel on secondary suites, bylaws, title searches, and restrictive covenants in Alberta. Contact Barry today!

“Cage Fight to Fight” image by Streetcombatsystem used under CC Attribution-ShareAlike 4.0 International.

This is the third Tale in my recent mini-series on Real Property Reports (RPR), municipal compliance, and building/development permits. Our first two Tales dealt with the maze of bureaucracy that surrounds permits and the dangers of not getting a clean RPR with compliance when buying real estate. As per usual, my examples are from Alberta, because that’s where I practise law, but these issues are relevant across Canada and beyond. My third and last instalment is actually three Tales in one, full of RPR/permit related situations or circumstances that turned up for some of my clients. I’m going to talk about how the City isn’t always right, what happens when a seemingly correct compliance is wrong, and why old inspection issues can come back to haunt you…

OK, let’s get started.

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The City Is Not Always Right

Recently, I acted for a client selling her beautiful home. One of the many attractive features was a large deck on the south side of the lot. My client was a widow, and when I visited her to get documents signed at her long-term care facility, (pre-COVID), she spent some time telling me how much she and her husband and her family enjoyed their times in the backyard on their deck. This was a custom-built home that they lived in for 25 years.

Her husband had passed away, the house was too big, and it was time to sell. Today’s standard real estate purchase contract requires the seller to provide the buyer with a current Real Property Report (RPR) and written evidence of municipal compliance. My seller did not have a real property report. Her realtor, having established that when taking the listing, ordered a new RPR from an Alberta Land Surveyor. On receipt, she sent it to the City of Edmonton for compliance.

The Compliance Certificate from the City said that the house and garage were fine, but there were no permits for the deck. The City went on to say how to apply for the permits and what those permits would cost, which is substantial. (I’m not putting that information in this post because the process and the cost changes frequently at the City. Whenever you need to get permits, check in your own municipality for up-to-date information.)

My seller is elderly and was not up to the task of all the things that permit applications require. She definitely did not want to do construction drawings, take pictures, perhaps get an engineer’s report, or fill out all the paperwork and pay the substantial fees that the City would require. She said to me, “Barry, this was a new home and the deck was part of our new home built at the same time.” She told me the name of her very reputable builder and something didn’t seem right.

I discussed the situation with my client’s top-flight realtor and she said, “Barry, I think our client has the blueprints to the property.” Guess what? When our realtor looked at the blueprints, there was the deck, part of the original plans.

Back down to the City, roll out the blueprints on the development officer’s desk, noting the big, bold, APPROVED stamp from the City and voilà! A new compliance certificate was immediately issued fully approving the property, no issues.

Lessons Learned:

No city, town, or county office is perfect. Mistakes are made in the best run municipal offices. Any time you make an inquiry, if the answer doesn’t seem right, it might not be. Don’t be afraid to do a little more digging to see if you can reverse an original, negative answer—especially if you have evidence to support your position.

Compliance Not Correct

Our client had bought a property in 2015. At that time, the seller provided a real property report and compliance letter that said permits were required for a partially covered deck. We required the seller’s lawyer to make the permit applications, and, in due course, we received a follow-up letter from the City of Edmonton indicating that the proper permits had been obtained and a final inspection done. We reported on that basis to our client.

In 2019, we heard from our client that the city had given them a violation notice indicating a lack of permits for an addition to the property being a balcony and exterior alterations to provide a separate basement entrance.

Folks, this is four years later, four years after the purchase! Our client has a nice clean compliance letter.

What’s going on?

On further examination, it appears that when the seller applied for their deck permits the City bylaw officer told them that they should also apply for the addition and they could do that on the same application as for the deck. The seller didn’t do that. 

Four years later the City reviewed their file, saw that there had been no application for the addition, sent the bylaw officer out to look and then without any further ado issued a notice that said unless the permits were applied for, work done, and final inspection fully approved in a very short period of time, a $1,000 ticket would be issued. Plus, the compliance officer reminded our client that city would charge double permit application fees because the structures existed without permits.

Lessons Learned:

This is a tough one. If you get a Compliance Certificate saying that a property needs deck permits and then you get proof that permits have been granted, the structure approved, and a new, clean Compliance Certificate, why would you or how would you know to dig deeper?

Maybe you would know that creating a new basement entrance is an exterior alteration requiring a permit. More likely, you would not think of this as a permit situation. But it is—at least in the City of Edmonton.

To be really on your permit diligence game, I think you need to look more closely at any property being purchased. Has anything been done to the exterior? If so, does it need a permit? Some things do and some don’t. Remember, the RPR is a two-dimensional drawing of structures located on the property. The Compliance Certificate issued by the municipality is based on the RPR. The RPR doesn’t show anything on or about the interior and it wouldn’t show or tell you that a new basement entrance had been installed.

One way to help out in this difficult diligence situation is to ask yours home inspector if anything has been done to the property that requires a permit. You could also in the negotiation process, ask if the seller has made any changes or done any renovations whatsoever to the interior or the exterior of anything located on the property

Inspection 14 Years Later

Talk about mad!

Our client was absolutely incensed that, 14 years after he purchased a property, he got a notice to remove his addition (rear covered deck enclosure). The City said that, according to their records, no development permit had been issued, and that our client had to get the permits and have the property inspected and approved in one month or face fines starting at $1,000! (Just so you know, the City of Edmonton is much more aggressive in the lack of permit situations. I have a number of clients who have complained that a fine has been issued without even a warning.)

It was quite a nasty letter from the City.

In response, my client emailed me and said, “I purchased the property in question back in 2006, and have never built any additions to the property. So, I don’t know why this is a problem at this time, especially during the coldest time of year and 14 years after my purchase. The property is just like it was when I first purchased it and I never received any notice before regarding any addition or outside structure since I have owned it. Furthermore, they say they have inspected the property, but I am not aware they ever stepped foot on the property and I have no trespassing signs at the rear and at the front, so they are either lying or never came onto the property or they totally ignored the signs that would keep them from trespassing. Either way it’s not very professional or a safe way to conduct the affairs of the City.”

My client went on to say that he believes his neighbour complained, because his neighbour is always complaining.

If someone complains to the City, a bylaw officer usually goes out to have a look. Although my client thinks that the City could not have set foot on his property, they most likely just looked over the fence, saw the deck, checked the records, saw no permits, and then issued their violation notice…

Although I act for this particular client now, I didn’t act when he purchased 14 years ago. I asked him about his real property report and compliance. What did the compliance certificate from the City say? Answer, “I didn’t get an RPR and compliance, I got title insurance”.

The immediate answer to my client’s problem with the City was to down and speak to a development officer in person. They agreed that if he would apply for permits right now, he would just have to pay the normal permit application cost and not the double charges that would normally be in place. He got the permits and had a final inspection done, which approved the deck as built. So, this problem is now not an issue and will not cause my client trouble when he sells sometime in the future.

Lessons Learned:

• There is no limitation on the timeline for the requirement to get appropriate permits.
• Title insurance did not assist our client. It only covers enforced removal. Since the deck stayed, there’s no help from title insurance.
• When purchasing, a current RPR and clean compliance certificate is your best bet, even if not 100% protection against bylaw and permit problems.

Solve your problems with building and/or development permits, Real Property Reports, and municipal compliance in Alberta. Contact Barry today!

“Building Permits – Planning and Zoning” image by Teofilo used under CC Attribution Generic 2.0

This Tale from the Trenches is the second in our ongoing mini-series on permits for real estate. You know, those sometimes-nasty bits of paper that towns, cities, counties, and other municipalities require before you can do certain types of work on a property. From my perspective as a real estate lawyer, I think it’s fair to say that the permit landscape has changed over the last few years in Alberta (and elsewhere across Canada), so it’s good to survey recent developments. In this episode, a client of mine faces off against municipal bureaucracy to get a legal secondary suite approved, getting snagged up by rules and regulations for parking.

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Steps to Get a Permit for Changing Real Estate

Typically, you start with a development permit at the Planning Office in your municipality. The development permit reviews what you plan to do and secures a broad brushstroke approval or perhaps a conditional approval for your concept. That’s the first step.

The second—and more important—step is the actual building permit. Whereas the development permit is a more general document, the building permit gets into the details of your project.

Changing Municipal Attitudes on Permits

Where permits, or the requirement for permits, were often ignored in the past, municipalities are now much more vigorous about enforcing permit requirements. As an example, the City of Edmonton formerly did not pay much attention to illegal secondary suites. They would only take action if someone complained.

Then, in the face of demand for more rental accommodation, the City changed the zoning bylaw to allow secondary suites in almost all areas of the city. That change from not allowing secondary suites, (or garage suites or garden suites) to allowing suites almost everywhere led the City to now enforce their bylaw. Instead of not really caring whether permits were issued, the City of Edmonton now actively pursues illegal secondary suites. On the other hand, the City is very cooperative about working with owners to legalize existing suites or add new suites.

Struggling to Secure Permits for a Secondary Suite

Recently, a client emailed to tell me about his experience in trying to get a permit for his new secondary suite. Rather than me paraphrasing, I thought it would be better and more descriptive to hear about the issues from the horse’s mouth. Here’s what he said:

Subject: Permit experience

Good morning Barry,

I finally found a minute to sit down and write this out for you.

We came across a house in Fort Saskatchewan that we then discovered would be perfect for adding a secondary suite. It was on a corner lot and also had a double driveway with a double detached garage. The property had enough room to park plenty of vehicles before impeding on any neighbouring properties. I looked into the zoning, and it was zoned to accommodate a secondary home. Perfect because I have the experience and time to install the suite.

We purchased the house in June with a possession date of Aug 7th. While we were waiting for our possession date, I looked into getting all the permits set up and ready to go so we could start the renovation process on our possession day. After talking to the City, they said we did not meet the parking requirements, and we would need to add an additional double-size parking pad to get the permits approved. In addition, we could not apply for the permits until the day we owned it (Aug 7th), and then we could not start any construction until approval of the permits, which would be four to six weeks. I had a three-month timeline to complete the entire project, so this was a huge setback.

After looking into some other suited properties in Fort Sask, I found that very few of them had the proper parking requirements but were still legal. I looked into this a little further and found out that the last 20 permits had been appealed on the parking issue. They all won because of adequate existing parking and therefore did not require additional parking.

I talked to the City about appealing the parking, and they said it was fairly common and again said it would be about a six-week timeline and no work could start until permits were approved.

I went back to Planning & Development and we came up with a solution that would allow me to start construction on possession day as well as potentially save me money on adding additional parking.

What we did was applied for the secondary suite with the intention of it getting denied. Then we would appeal the additional parking requirement pretty confident we would win our appeal as the last 20 of 20 have won.

As well, we would apply for a basement development permit in order to start the construction. You can develop a basement to the same standards as a secondary suite, but you just can’t install the stove wiring until you have the secondary suite permit.
After 6 weeks of owning the property, I had my parking appeal. I went into it with all kinds of information including recent approvals in the area, the less strict parking guidelines in neighbouring cities, as well as photos showing how much street parking we have, showing the ETS bus stop out front and proof showing newer duplex developments have almost no parking.

I came out of the appeal feeling pretty confident I should win. I was shocked when I got my denial a week later!

As you have taught us at your Focus Workshops, “always have a Plan B.” Very glad I did have a Plan B, because when I lost the appeal, I was already prepared.

So off to plan B I went. I would just meet the parking requirements and get a standard permit. No issues, or so I thought.

I called the city and asked what the minimum parking requirements would be so I could obtain the permit and move forward. Then they dropped a bomb on me when they said that, because I lost my appeal, I cannot reapply for the same permit for 6 months!

This didn’t make sense, because now I was just asking for a permit where I would meet all requirements. Not asking for any relaxations whatsoever. I kept asking questions because I really thought that if I was going to comply with all requirements, there must be something that could be done. Firm NO!

I tried again by talking to the Manager of Planning & Development, and he said he would talk to the Director. But he wasn’t sure if there was anything that could be done. A week later, I got a call from the Director, and he said the only thing I can do was again reapply for the permit. Once they denied the new permit application (based on their rule that once a permit is denied you can’t apply for 6 months), then I could file another appeal. This time my appeal would ask for a relaxation on the six-month clause.

In the meantime, I actually constructed the parking pad, which met the additional on-site parking requirement.

On Nov 7th, exactly my three-month mark, I was sitting in front of the appeal board once again asking them to allow this permit. I showed them that I had built the parking pad and now comply.

The next week was a little stressful not knowing which way they would decide to go, but they went in my favour, and I won my appeal.

So now for the third time (at almost $600 each time), I was able to reapply for the secondary suite permit and wait for the approval.

The approval just came in on Nov 27th and I had the final inspections on Nov 28th.
Long story short, I learned a lot about how the permit process works—the hard way.
I hope you can share this story with others in hopes that they don’t make the same costly mistakes that I made.

Thanks again for all your help Barry!
Sam and Wendy (names changed).

An Expensive-but-Valuable Experience with Permits

So, to some extent, all is well that ends well. But it would’ve been so much better had the municipality agreed with how my client proposed to deal with the parking issue. It just seems so obvious that the application should have resulted in an approved permit just like so many similar permit applications before his. And he wouldn’t have had to go to the effort and major expense of pouring concrete for the extra required spaces.

I think that final bill was about $8,000 for the parking spot, but what about the extra time, big stress, and two extra permit application fees at $600 each?

Lessons Learned:

1. Any permit application that doesn’t meet the rules needs a variance.
   Variance of municipal bylaws is a discretionary matter. When something is discretionary, to a large extent, the decision is wide open. Further, municipalities have Development Appeal Boards (DAB). If you disagree with the decision of the Planning Officer, you can appeal to the DAB. When membership of the DAB changes, however, policies change, and that’s actually what happened to my client. To sum up this lesson, when asking for a variance, you can’t depend on previous positive discretionary decisions being applied in your favour.
   
   
2. Permits equal bureaucracy and rules.
   Bureaucrats live by the code that “rules are not meant to be broken,” which leads to illogical circumstances. Specifically, I am pointing to the rule in this Tale about losing an appeal and not being able to apply for the same permit for six months. The silly part is that my client would have been re-applying for the permit without a variance. In other words, he would have met all the permit requirements exactly. Why did they say he had to wait six months? Because it’s the Rule! You have to know the rules.
   
   
3. You need a Plan B.
   I know many of you have heard this from me before, but you always need a backup plan. Most of us don’t make permit applications on any kind of regular basis, so, understandably, we just aren’t as familiar with the rules and subtleties as we might be. When you don’t know the subject upside down, backwards, and forwards, things come up, stuff happens. Insure yourself against unexpected circumstances by always having a Plan B… and maybe even a Plan C!

If you’re dealing with development and/or building permits for secondary suites in Alberta, you need an experienced real estate lawyer. Get in touch with Barry today!

“Building Permits – Planning and Zoning” image by Teofilo used under CC Attribution Generic 2.0

This episode of Tales from the Trenches is shocking! A client had retained my legal services to help with purchasing her dream home in Edmonton, Alberta. The seller provided a brand-new real property report (RPR) to my client, who in turn sent the RPR to me for review. There were a few red flags, but not even decades of experience as a real estate lawyer could prepare me for what happened…

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Documents Needed for a Real Estate Purchase Contract

Here’s the background. According to the current version of the Alberta Real Estate Association (AREA) contract, it is the seller’s obligation to provide the buyer with a current RPR and evidence of municipal compliance or non-conformance. The AREA contract also has a seller warranty that there are no encroachments for which there is not already a registered agreement or an agreement in writing allowing the encroachment.

The seller didn’t have a current real property report so he obtained one from his surveyor. Then, before sending the RPR to the City of Edmonton for the compliance application, he sent it to my client. I took a look at the RPR and identified at least three issues.

Three Problems in the Real Property Report

1. Private Encroachment: There was an encroachment of the seller’s concrete, side-yard, retaining wall of 2 inches (5 cm) onto the neighbour’s property. This is what is known as a private encroachment.
2. Public Encroachment: There was also an encroachment of the seller’s fence onto the alley of about 2 feet (60 cm). This property belongs to the City, so it’s a public encroachment.
3. Missing Permits: There was a hot tub in the backyard with no municipal permit for it.

The seller told his realtor that he realized there were two encroachments. The retaining wall really fit with and complemented a concrete patio on the neighbour’s property. He had a cooperative neighbour, and it would just make no sense at all to get out the concrete saw and start sawing off the 2 inches. He sent photos, and I took a look. Yes, it appeared that the retaining wall and neighbour’s patio complemented each other, and it would be silly to make any adjustments. So, I wasn’t too worried about the private, encroaching, retaining wall.

Now, the fence that encroached into the alley was a different matter. It was only 2 feet of fence. The worst-case scenario is that the City could come along and say they were going to do some work in the alley. If my client didn’t remove the offending 2 feet, the City would do it for her. Not a real big deal, but still, this is the seller’s problem, so why accept it?

There is a process at the City of Edmonton to apply for an encroachment agreement. The City charges an application fee and then an encroachment fee plus GST, which I believe is in the range of about $500 plus GST in total. My advice here was that we should require the seller to make the encroachment application for the back-alley fence with the City and get that encroachment agreement registered on the title so it wouldn’t bother my client in the future.

For the hot tub, I told my client that the City requires permits. Hot tubs, like swimming pools, are attractive to children and perhaps other adults or children that do not live in the property. The City is pretty careful in their permitting of hot tubs, because anything with water in it has drowning potential and is therefore a safety issue.

My careful client had retained a top-notch home inspector who commented that the hot tub was a good brand and well installed. He didn’t see any issues from the inspection side. Further, the home inspector said that the house was really in great shape and had been taken care of well. Based on this inspection, my client felt reasonably confident that a permit from the City wouldn’t be a problem.

Three Complications of Real Property Reports Versus Compliance

1. An RPR Doesn’t Tell the Whole Story: As much as I have a good idea of City compliance requirements, I couldn’t guarantee that the two encroachments and a potential non-permitted hot tub were the only issues.
2. A Compliance Report Is Different from an RPR: When you get an RPR without a compliance, the best approach is to actually send the RPR to the City and then review the results of the compliance application. Once you have the actual compliance certificate in hand, only then can you deal with all identified issues.
3. Compliance Problems Don’t Go Away: And, as I tell all my clients, if you don’t solve your RPR and compliance problems when you buy, then you may have to solve them at greater expense, time, and trouble when you sell.

My client said to me, “what should I do?” I told her that the best bet was to tell the seller he would have to apply for the compliance, get it to us for review, and then we could move forward. So, we told the seller through his realtor, and that’s what the seller did.

He made his application for compliance and when the City replied, guess what? That’s right, they noted the fence encroachment and the non-permitted hot tub. As usual they made no comment on the private encroachment of the retaining wall, because they view that as an issue between neighbours and not something they regulate. Again, my buyer client was just not worried about this 2-inch retaining wall encroachment that complemented the neighbour’s concrete work and patio.

My client agreed with me that our best bet was to have the seller make applications for an encroachment agreement for the fence and permit applications for the hot tub. The seller hemmed and hawed. He didn’t have the time. He was leaving town, so it was too much trouble. He countered, how about if my client took a $1,000 price reduction?

Again, my client said to me, “what should I do?” I explained that reducing the purchase price of the home by $1,000 would cover the costs of the encroachment agreement or moving the fence if that was required in the future, as well as the costs of the hot tub permits with a little money to spare. But, the big, hidden issue is that we don’t know what the City’s requirements are for the hot tub development and building permits. Until you actually make those permit applications and give the City all the detail they require (they require a lot of detail), then you just don’t know what it will take to get those permits or how much it will cost.

My client again spoke to her home inspector, who confirmed the hot tub was a good brand, well installed, and that there were no issues from the inspection side of things. She checked with the City to confirm that having a hot tub was allowed, and so the development permit would not be an issue. It was really just a matter of the building permit, so my client thought “what could go wrong?”

Consequences of Accepting a Price Reduction Instead of a Real Property Report with Full Compliance

In the end, my client decided to accept the RPR and dubious compliance provided by the seller, along with a $1,000 reduction in the price of the home. The purchase closed on that basis. After closing, however, my client said to me that she wanted to do the encroachment application and the hot tub permit applications. She felt that those were outstanding issues that she should get settled now while the transaction was still fresh in her mind, and she had the money to do it from the price reduction. Then she could carry on knowing that when she sold the property, unless she had made other changes during her ownership, she would have the RPR and compliance issue all sorted.

The encroachment agreement went smoothly for the fence in the alley. The City provided the usual encroachment agreement, which my client signed, and we registered it against the title.

The hot tub permit applications were more difficult. As expected, the development permit was granted, no issues. But the building permit? That was a different story. My client retained an electrician to help her make the applications.

One of the City’s requirements was that the electrician had to confirm for the City how much load all of the home’s electrical requirements would draw. Once the electrician had provided his load review, the City said that the existing 100-amp electrical panel was not sufficient.

The electrician went back to the City and said, “listen, the only way the existing 100-amp panel won’t be sufficient is if every appliance in the home plus the electric mower and block heater are all being used at the same time. That’s never going to happen, not even close.”

The City stuck to their position. As the saying goes, you can’t fight City Hall. The solution was a new 150-amp panel, which required a heavier, upgraded power line into the home provided through EPCOR.

And the cost of all this, are you ready for it? $3,600!!!
That’s right, THREE THOUSAND SIX HUNDRED DOLLARS!

Lessons Learned

1. You Don’t Know What You Can’t Know: You can’t know a municipality’s development and building permit requirements, and the cost of meeting those requirements, until those applications are made.
2. RPR and Compliance Problems Can’t Be Ignored: If you don’t know, understand, and solve your RPR and compliance problems when you buy, you will likely have to solve them at greater expense when you sell.
3. Don’t Accept Other People’s Problems: Why take on a seller’s responsibilities? Whenever you buy, insist on a new RPR and clean compliance certificate.

If you’re dealing with real property reports and compliance in Alberta, get yourself an experienced real estate lawyer. Get in touch with Barry today!

“Whirlpool, Hot Tub, Garden, Summer” image by Pezibear used under a Pixabay License.

Like all things tax related, non-resident tax is complicated when it comes to buying and selling real estate in Canada. In February, 2016, I posted a lengthy blog on non-resident tax and how it can affect buyers, sellers, and realtors. Lots of liability and dangerous situations here, folks, so don’t treat non-resident tax lightly. If you have a non-resident tax situation, please read the previous post (link), and then dive into the case study below. This follow-up blog post provides a recent example from Edmonton law firm (RMLO Law LLP), which I’ll use to show some principles that can be applied to non-resident tax issues in general.

Download the audio file HERE.
Download the PDF file HERE.
(control click or right click + save as)

What Is Non-Resident Tax and How Does it Apply to the Sale of Property in Canada

In brief, the Canada Revenue Agency (CRA) says a buyer of real estate from a non-resident seller is responsible for the non-resident seller’s tax, if any, that might be due on sale of the property. Why does the CRA takes that position?

The reason is that non-Residents have basically no restrictions on them when they buy non-farmland property in Canada. And, even then, only a few restrictions in a few provinces. So, a non-resident comes to Canada and buys a property, no problem. What happens if that same non-resident pulls up stakes, sells their property, and leaves Canada? If they made some money on the purchase, but didn’t deal with any tax that might be payable, it leaves the CRA chasing a non-resident who has left the country. Not a good situation if you are the CRA.

To get around the problem of having to chase non-residents in foreign jurisdictions, the CRA has placed the liability for the seller’s tax squarely on the shoulders of, guess who, the buyer! Depending on whether the sale is of non-depreciable property or depreciable property, the tax can be 25% or 50% of the gross sale proceeds. Nope, that’s not the equity in the property or any profit the seller might have made, but rather it’s the total sale price. Yikes!

Case Study on Non-Resident Real Estate Tax in Alberta

For example, I acted for a seller in the recent sale of a principal residence, which was a non-depreciable property with a price of $580,000 and a remaining mortgage balance of $475,000. The CRA rule states that 25% of the sale price of $580,000 ($145,000) must be held back by the buyer until the seller produces a Certificate of Compliance from the CRA stating that the seller has paid all applicable tax, if any. My seller believed that he would have no tax to pay, because not only had he suffered a loss on the sale, but he was also selling a principal residence and could take advantage of the principal residence exemption. The buyer said that was all well and good, but they wouldn’t know for sure whether the CRA agreed with the seller until they received CRA’s Certificate of Compliance. Therefore, the fact that the seller is selling his principal residence at a loss does not affect the buyer’s responsibility to withhold 25% of the sale price.

You can see the problem. A sale price of $580,000 with expenses of $475,000 to pay out the seller’s existing mortgage, $24,400 for real estate commission, and $1,500 for the seller’s legal account leaves about $79,000. If the buyer is obligated to hold back $145,000, the seller won’t receive enough sale proceeds to pay off his existing mortgage—let alone his other expenses. And, of course, the buyer wanted a clear title with the old seller’s mortgage paid in full. My seller could not make up the shortfall, because he had no access to extra funds. All his money was tied up in the property.

To add to the problem, the seller cannot apply for the Certificate of Compliance from the CRA until he has an unconditional deal with his buyer. This tax problem was preventing the deal from becoming unconditional.

The CRA takes variable amounts of time to process Certificate of Compliance applications. But a pretty good guess is a minimum of three months in a relatively simple situation to get a favourable answer in the form of the Certificate of Compliance.

Sample Solution for Dealing with Non-Resident Tax Problems in Canadian Real Estate Transactions

What to do? The two realtors involved worked hard to find a resolution. Could the completion date the postponed for three months? That would give the seller time to make his Certificate of Compliance application to the CRA. The buyer loved the home, but circumstances wouldn’t allow waiting another three months. Plus, everyone was fixated on the fact that the CRA rule said the buyer should hold back $145,000 and there wasn’t $145,000 to hold back. What if the tax payable was more than $145,000?

The next proposal was that the buyer would rent the property for three months while the seller made his application to the CRA. The buyer would have the right to close sooner or extend the lease depending on the CRA response. Again, the uncertainty of the situation prevented this scenario from becoming the solution to the problem.

In the end I drafted an addendum to the real estate purchase contract. That addendum contained all the facts around the seller’s original purchase price, including substantial upgrades, and comparing it to the sale price, which showed the seller was losing $130,000 on the sale. All paperwork was available for the buyer’s review. The seller confirmed that he had retained chartered accountants to prepare his application for the Certificate of Compliance for this sale of his principal residence. As the seller’s lawyer I agreed to hold the net sale proceeds of about $79,000 in trust until the CRA had responded to the Certificate of Compliance application. Should any tax be payable, I further agreed to use the holdback monies to pay the tax.

This solution worked because the buyer was able to see all the background and all the numbers, providing strong evidence for the seller’s position that there was no tax to pay.
Will this solution work in other similar situations? It depends.

Key Success Factors in Dealing with Non-Resident Tax Problems in Canadian Real Estate

In the case study above, my client’s deal was difficult to close because of the required CRA holdback. The success factors for my resolution of the problem could be applied to many other non-resident tax situations.

1. Be aware of the non-resident tax rules,
2. Get to work early on the problem,
3. Get the seller’s accountants involved,
4. Seller must fully disclose all relevant financial information, and
5. Hope for a reasonable and/or flexible buyer

Lastly, folks, it goes without saying, but I’m going to say it anyway: tax issues are always complicated, so don’t try to do this on your own. Get advice and get it early from your trusted realtor, accountant, and lawyer.

If you’ve got a non-resident tax issue and need an Alberta real estate lawyer, get in touch with Barry today!

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

Special one-hour dive into the trenches of Creative Real Estate in Canada… and Africa! Barry has gathered a panel of experts, veritable rock stars of Creative Strategies, to share their experiences and answer questions from the audience. 

The essence of Creative Real Estate Investing is knowing strategies and recognizing opportunities. Sometimes deals come along that don’t work for your usual approach. Knowing alternative strategies like Agreements for Sale or Rent-to-Own (a.k.a. Lease Options) allows you still to turn a profit.

For many investors, Creative Strategies are a supplement to regular Buy & Hold—but they can also become a full-time real estate business. Listen now to get insight into how a bit of creativity opens up all kinds of opportunities!

Download the audio file HERE.
(control click or right click + save as)

Register now for Barry’s Rapid Cash Program!
Next event: Toronto, ON, Canada on June 1–2, 2019
http://rapidcashprogram.ca/

“Be creative” image by Ramdlon used under CC0 Public Domain. 

Damaging floods are on the rise, whether as sewer backups, swollen rivers and lakes, rising ocean levels, or overland flooding. As a result, water related insurance claims have been rising, triggering changes to policies and premiums. If you own property—and especially property with a basement—it’s time to re-evaluate your preparedness. This blog post considers climate change and what it means for Canadian homeowners and real estate investors in terms of maintenance, prevention, and insurance against water damage from flooding.

Download the audio file HERE.
Read a written version below or download the handout HERE.
(control click or right click + save as)
 

Flooding Is a Big Concern and Rapid Climate Change May Be to Blame

Extreme weather events are more common now than they used to be. Is this all about climate change? All I know is what I read. I’m a lawyer not a climatologist or meteorologist. But I read a lot. And, I’ve been concerned, actually worried for a considerable period of time about climate change. Sure, history tells us that the Earth’s climate is forever changing, but for almost all of the billions of years of geological time, mankind was not involved.

Recently, and by “recently” I mean in the last several hundred years, mankind has really started to accelerate climate change. There is real concern that accelerated climate change is having potentially catastrophic consequences for many parts of the world. The UN Intergovernmental Panel on Climate Change (IPCC) released a report in October 2018 saying we really only have about 12 years to stop global warming—or climate change may be irreversible.

Here’s the macro picture. Scientists say we must reduce global emissions to prevent average annual temperatures rising more than 1.5–2 degrees centigrade (depending on what climatologist is predicting the temperature) or we are definitely hooped. The discussions about what that will take worldwide are hugely complicated with an unbelievable number of moving parts that require amazing cooperation between huge numbers of countries, businesses, interest groups, and the general populace. I find it hard to get my head around the size and scope of what needs to be done to meet the challenge set out by the IPCC.

Homeowners and Real Estate Investors Can Protect their Properties Against Floods

I’m not going to solve climate change in this blog post, so let’s deal with the micro picture. What might climate change mean to you and your property?

Climate change means extremes of weather. Dryer periods, wetter periods, more snow, less snow, hotter, colder. Winter snow packs are melting across Canada, and many regions are experiencing flooding, so let’s talk about wetter. As Globe & Mail personal finance columnist Rob Carrick writes (with a nod to Game of Thrones), “water is coming.”

Inundations can be hard to forecast, so is there anything to be done? All levels of government are becoming aware of the increasing need to stockpile resources (e.g., sandbags) and to build infrastructure (e.g., dykes) in flood-prone areas.

Keeping this micro and on a personal level, yes, there is plenty that you can do. Here are a few suggestions culled from the “Flood Protection Resources” webpage offered by the University of Waterloo’s Intact Centre on Climate Adaptation:

Maintenance Routine to Protect Your Property from Flood Damage

1. Clean out your eavestroughs
2. Remove debris from any storm drains nearest to your house
3. Test your sump pump
4. Check your backwater valve and keep it clean

Preventative Measures Against Flood Damage to Your Home

1. Make sure your property has a positive grade (i.e., water flows away from your house)
2. Extend your downspouts so water discharges at least a couple of metres from your house
3. Do not store documents or anything expensive in your basement
4. Make sure someone checks on your property when you are on vacation
5. Where flooding is common, elevate your furnace, hot water tank, and electrical panel, or put them on a different floor

Of course, some flooding is more extreme, requiring water retention walls or even emergency evacuation plans. I hate to say it, but a lot of folks are going to need to look for new housing if the current climate change trends continue.

Impact of Climate Change on Canadian Home Insurance Policies

Unexpected flooding is a serious risk to property for Canadians across the country. Some might say, “I’m not worried, I have insurance.” But does your insurance actually cover full-on flooding or does it just cover excess water from a leaky roof or pipe? If your insurance does cover flooding, do you have enough coverage to insure against significant damage? As a real estate lawyer, I know how important it is to read the fine print, and some people might be surprised that they don’t have the amount of coverage they thought.

According to Craig Stewart, Vice-President of Federal Affairs at the Insurance Bureau of Canada (IBC), “[T]he fact is that most Canadians are not financially protected against flooding, and they may not realize it. Climate change is not a future threat – it’s happening now. Over the past three decades we have seen an increase in insured damages, and it is up to all of us – the insurance industry, governments and citizens – to do our part in responding to the effects of climate change.” The IBC also says that for every $3–$4 of damage there is often only $1 of insurable coverage. Ouch!

Insurance claims have been rising and that means insurance companies are paying out more claims. More claims equal more dollars and less profit. Insurance companies, like all companies, are in business to make money. If insurance claims and payouts rise, premiums increase. 

As an example, let’s take the floods of 2013 in Alberta. Calgary was particularly hard hit, but the full impact across the province has been assessed at approximately $5 billion. Coupled with the recent and disastrous fires in Fort McMurray and Slave Lake, insurance companies aren’t very happy with their profitability in Alberta. Anecdotally, clients have said that on receipt of their renewal notices from their insurance companies, some premiums have doubled. Yes, doubled! And, along with substantially increased premiums, coverage has been declining. So, Albertans may be paying more money to have diminished coverage. 

Home Insurance Coverage Against Flooding and Water Damage

Lastly, and very importantly, you have to know what insurance coverage you actually have. The last couple of years, the annual renewal information on insurance for my home in Edmonton has referred to, “changes to serve you better.” On a detailed reading of the policy itself, however, water damage coverage has more limitations, deductibles have increased, and premiums have gone up.

Despite being a lawyer, I still found it difficult to read the correspondence from my insurance company and reconcile it with the changes to my policy. Insurance policies are just very complicated and tough to read. Still, it was worth my time because the changes do not serve me better—despite what the letter from my insurance company suggested.

To get some reassurance, you might want to make an appointment with your insurance agent and have a face-to-face meeting. Have a general discussion about insurance trends and a particular discussion about you, your policy, any changes to your policy over the last 3–5 years, and what those changes mean to you. Get some real, common sense discussion and coaching from a trusted insurance agent.

Make sure you understand what coverage you have now and whether or not, between you and your insurance agent, you think that coverage is adequate. If it isn’t adequate, can you purchase extra coverage by paying an increased premium? Remember, typical insurance policies often come in three categories with increasing amounts of coverage: basic, broad, and comprehensive. Sometimes comprehensive coverage doesn’t cost that much more. 

Implementing the suggestions above and getting a firm grip on your insurance coverage will go a long way toward diminishing insurance surprises and unexpected losses.

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

“2017 Quebec Floods – Montreal” image by Coastal Elite used under CC Attribution Share-Alike 2.0.

Across Canada, there is an ongoing discussion about the lack of affordable housing. In some areas, developers won’t build rentals because building condos is more lucrative, because there are rent controls, or perhaps a combination of both situations. Some Canadians are completely priced out of the housing market—especially in the Great Toronto Area and the Lower Mainland of British Columbia. Even in Alberta, where I live and work as a real estate lawyer, affordable housing is an issue. One solution is increased urban density. This podcast/blog post is about the legal challenges of subdividing a single lot into two or more skinnier properties. If there is a mortgage on title, watch out!
 

Download the audio file HERE. Download the handout HERE. (control click or right click + save as)
 

The Opportunity

A big part of the ongoing housing discussion is often around the never-ending growth of suburbs. Continual growth of mostly single-family housing chews up vast amounts of land, often prime, irreplaceable farmland. Huge pressure is placed on municipal resources. Servicing the new subdivisions costs more and more as suburbs expand. Developers pass on costs to homebuyers, which increases the cost of housing. This is an ongoing problem in many municipalities across Canada where there is room to expand.

Many municipalities, supported by provincial governments, believe that part of the answer is to allow increased inner-city density. If there are more and better housing choices available downtown and in the near suburbs, the theory is that suburban sprawl will be contained or at least slowed down. As part of the plan to increase density, some municipalities are allowing large lots to be subdivided. For example, a 50-foot lot could be split into two 25-foot lots. Upon subdivision, the existing house would be demolished and two new homes built. The existing property would then hold two homes rather than one, thus doubling the density. Whether or not this increases the stock of affordable housing is an arguable point, but that’s a discussion for another day. Very quickly, the homes built on the 25-foot lots came to be known as ‘skinnies.’
 

The Plan

Recently, I had a client who purchased a home on a 50-foot lot, financing the purchase with Bank A. The plan was to subdivide the lot and build two skinnies. He found a builder, worked out his costs, and decided that he could make some money if he subdivided and built two new houses. The next step was to get financing for the two new builds, and off he went to Bank B. They loved the idea and fairly quickly approved him for two new first-mortgages. Happy guy that he was, our client told his surveyor to go ahead with the subdivision. Next, he obtained a demolition permit from the City of Edmonton and knocked down the existing house.

At this point the law firm, RMLO Law LLP, enters the picture. We get two sets of first mortgage instructions from Bank B, call our client, figure out what’s going on, and get two new files open. The subdivision had been completed, so there were two new lots and therefore two new titles. As we always do, we get copies of those titles and immediately noted that the same mortgage to Bank A was on each of the them. Why?
 

The Problem

When you subdivide a property, unless you deal with the existing lender, the existing mortgage that was on one lot now appears on both new lots. Let’s say the existing property had been a really big 75-foot lot that ended up divided into three 25-foot lots. That same original mortgage on the one un-subdivided lot would now appear on the three new titles.

Let’s go back to an earlier part of this Tale. You will recall that Bank B sent us two new sets of mortgage instructions with a key requirement. Bank B wants to be first on title. They want their mortgage, their financial charge to be first in priority. But, they can’t be first in priority because Bank A is already on both titles.

As soon as we discovered the titles, I immediately call our client to ask, “Did you talk to Bank A about getting rid of their first mortgage?” “No,” he says, “I thought that once the two houses were built, I would use the profit to pay off the old mortgage.” He was already negotiating with two new buyers and, indeed, the draft contracts showed that the purchase price the new buyers were paying would generate sufficient funds to pay off that old mortgage.

Bank B had offered what are known as ‘draw’ mortgages, meaning they would advance funds to our client at various stages of construction with a final draw on completion. The difficulty is that Bank B wouldn’t advance any funds unless they were first on title. They wanted first mortgages on both lots.

Off our client goes to talk to Bank A. You can imagine how this went: “What do you mean you demolished our security?” “Why didn’t you come to us for your new financing?” “No, we won’t discharge or postpone our first mortgage.” Bank A was royally upset. They were not in any mood to make life easy for our client.
 

A Stressful Solution

Our client was left with a huge financing problem because he could not get a draw on his new mortgages without the old mortgage disappearing. Luckily, we were able to help him find a workaround.

The solution, after much lost sleep, was to convert one of the two new mortgages from a draw mortgage into a completion mortgage. His builder agreed to build first and be paid when construction was completed. Only one new sale contract was firm, so we started with that one. Once that first new home was built and sold, our client was short $200,000 to pay out the old mortgage after paying the builder. He begged and borrowed to come up with the money, incurring heavy financing costs and using up much goodwill with friends and family. Now he is fine to build the second home because the old first mortgage has disappeared from both new lots.
   

Lessons Learned:

1. If you subdivide a property with an existing mortgage, the full amount of the existing mortgage will appear on the title of all new subdivided lots.
2. If you need new financing to build on the new lots, check with your existing lender first.
3. Carefully work through what it will take to get rid of old financing. It’s tricky, with lots of steps.

  “Seely Skinny House Mamaroneck” by NOTABENE for Wikimedia used under CC Attribution Share-Alike 4.0.

I got an email recently from an unhappy investor about problems with his property manager in Edmonton. Real estate investing is all about relationships, and you need to be able to rely on the people in your team. Property managers are supposed to find tenants, collect rent, and deal with maintenance, among other things. The following Tale is an example of what can happen when you hire the wrong property manager—and how to do it the right way. The email is so descriptive I’m passing it along verbatim. See below:

Download the audio file HERE.
Download the handout HERE.
(control click or right click + save as)

Hello Barry,

We own a rental house in Edmonton. We found a guy to look after this rental property as our property manager.

He is a registered realtor and has no property management license. At the beginning, he mentioned his girlfriend had a property management license and would look after the property. But for the whole 7-month rental time, we never got a chance to see and talk to his girlfriend. We talked about signing a property management contract with him but he never got back to us. The only evidence we can provide are text messages about rental issues and receipts (we paid him 8% of monthly rent). These could prove he did management work for our rental and received the management fee.

The tenants did horrible damage to the house. Lots of scratches on the hardwood floor, holes/stains on the wall, heavy dark oily stains on the carpets, missing lighting covers for all lights, cigarette butts everywhere in the front/back yards, missing hardwood on stairs, broken hood fan and curtain. The whole handrail from the second floor to the first floor was loose because tenants grabbed the railing when they made the turn running down fast from second floor to first floor. Often, tenants texted our property manager about house issues, he just passed the message to me and I had to find somebody to fix issues.

He rented the house out without any walk-through with tenants. Because of his poor & unprofessional management conduct, we suffered substantial losses. Currently we have paid over $18,000 (damage renovation fee $12,000 plus 3-month vacancy). Please advise how we can, or even if we can recover the money losses.

Thanks,

Victor
(name changed for privacy)

Can You Get Money Back from a Bad Property Manager?

Victor wants to know how he can recover his losses. First, with the greatest respect, Victor needs to learn about property management if he is going to continue to be an investor. Second, Victor can sue the dastardly property management due in Small Claims Court. If Victor has kept records and has photos/video, he should be able to prove to the court that they did not do their job. If the realtor and his “property manager” girlfriend are even still around, Victor has a decent chance at collecting his Small Claims Judgement.

Lessons Learned:

This is certainly a nightmare for the investor who sent me the email! Here’s my take-away for all of you folks out there who own investment properties and rely on property management.

1.    Hire a licensed property manager.
The Real Estate Council of Alberta requires property managers to be licensed. The requirements for licensing vary by jurisdiction, so find out what the rules are in your own area. In Alberta, you don’t need a license to manage your own investment real estate.

2.    Use a property management agreement.
This document should set out the duties and expectations. Make sure that both parties read, date, and sign it.

3.    Meet with, check on, and give instructions to the property manager.
Although having a property manager can be a big help, it doesn’t mean that the landlord isn’t involved. You need to manage your manager. In this example, landlord Victor never even met the realtor’s girlfriend who was supposed to be the property manager.

4.    Don’t ignore warning signs.
A professional property manager would not just text the landlord that there are issues; they would generally fix the issues within the authorized monetary limit set out in the property management agreement. The email I received from Victor is a little vague on what those fixes were, but the fact that there were probably quite a number of them should have been a warning sign.

5.    Landlords should always do their own inspections.
Even with a property manager running the rental, it’s important for the landlord to see how tenants are treating their property. Don’t just leave this duty to your property manager. In this case, all the warning signs should have had Victor inspecting early and often. He could have stopped the damage before it got too bad.

The kinds of problems, issues, and trouble that Victor experienced were caused by failing to hire a licensed property manager, not doing that hire by the book, never inspecting the property, and not managing the manager. Of course, if you have a good property manager, you don’t need to micro-manage them. But stay on top of them until you are confident that they know what they are doing.

These are hard lessons. Hopefully my readers can learn from Victor’s mistakes. Don’t let this happen to you!

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

This edition of the Tales from the Trenches podcast features special guest Arden Dalik, a senior advisor in the Calgary office of Global Governance Advisors. Her Tale concerns a real estate investment project in Alberta presented to the REIN Group by a REIN member. Quite a number of REIN members invested in the project, including Arden. Unfortunately, the deal went bad, but I was able to come to Arden’s rescue as her real estate lawyer (aka Legal Eagle).

Download the audio file HERE.
Download the handout HERE.
(control click or right click + save as)

As always our purpose in Tales from the Trenches is to educate and be educated, getting better at real estate investing by learning from experience. This Tale is not a “poor me” story all. It is all about education, sharing, and, as Don Campbell so often tells us, “being in that tiny percentage of people who face adversity and push through it rather than run from it!”

At the time that this Tale started, Arden had been a REIN member for about 1 year. She owned 4 revenue properties, having purchased using realtors, from FSBO’s (For Sale by Owners), and through other REIN members. Arden also had a couple of joint venture partners. She was definitely a little beyond the rookie stage at that point—but still not an expert.

What Was the Real Estate Deal?
Purchase condominiums in an emerging area of Calgary.

What Was Required to Invest?
$10,000 down per unit.

Sellers Marketing Ideas:
Presented as a potential group project to renovate, market, and flip.

How Was the Deal Structured?
A large number of units were purchased wholesale by the vendor. A wholesale purchase is when someone buys a number of units at the same time in order to get quantity discount (i.e. they pay less than full market value). It’s kind of like the Costco concept for real estate!

Anyway… as part of the wholesale purchase agreement, the purchaser cleverly negotiated a financing plan that would make the properties more attractive to the investors. They all had assumable mortgages on them. He then negotiated a second mortgage as a vendor take-back in order to minimize the front-end cash closing costs required for investors to participate. This vendor take-back was for 6 months, which was designed to allow the investors time to renovate, market, and sell the property before they had to pay out the second mortgage.

How Did Arden Approach It?
With a joint venture partner financing it 100% as an investment.

What Went Wrong and How Could It Have Been Prevented?
Below, our Keen Investor (Arden) explains how the deal went, and the Legal Eagle (Barry) comments on what they did—or could have been done—to avoid all the trouble.

Lessons Learned:

Real Estate is what happens while you’re making other plans! If you do your due diligence properly, then you can avoid a lot of problems before they become serious. But you should still be ready for Plans B and C; they may just turn out to be even more profitable than your original plan. Don’t panic, use your creativity, and call a real estate lawyer! If you need legal counsel for Alberta real estate, Barry is just a message away.

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“Real Estate Deal” image by Mohamed Hassan used under CC0 1.0 Public Domain dedication.

September 2016 (with mild tweaks in July of 2017) brought numerous and meaningful changes to the existing 2014 residential purchase documentation approved by the Alberta Real Estate Association (AREA). These changes affected both the Residential Purchase Contract used for all homes and houses and the Residential Resale Condominium Property Purchase Contract, used for condominiums. Existing wording has been modified and new wording added. As we go through our commentary, we will refer to the contracts as the 2014 contract and the 2017 contract. This podcast and the accompanying text explain the changes and what they mean for buyers, sellers, realtors, and lawyers dealing with real estate in Alberta.

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20 years ago, the standard real estate purchases contract was one page and completely inadequate. AREA, with the help of the Multiple Listing Service, started a consultation process and spent a ton of money completely revamping the standard contract. Since that time regular revisions have been made, always with a view to making the contract better. Overall, we believe the changes are improvements in a continual improvement process that AREA has driven for near 20 years.

The results are improved contracts, schedules, addenda and notices. Buyers, sellers and realtors are all served well by this ongoing consultation process, which aims at better disclosure and plainer English for contracts that produce a clearer, more precise buying and selling experience. While I don’t expect you to be a lawyer, I do encourage you to read every scrap of legal paper that is put in front of you. Yes, it’s the standard contract, but the versions of the contract before this version were also the standard contract and things have changed. Read your documentation two or three times. Ask questions.

Our most successful clients never sign anything blindly; they know what’s in their contracts. Your best bet is to read this Tale along with copies of the 2014 and 2017 contracts. Ask your realtor for a copy. If you can’t get the 2014 contract, then at least read this handout along with the 2017 contract.

Alright, let’s get on to commenting on changes to the contract documentation. We’ll start with the Residential Purchase Contract for homes/houses. Separate comments will be made for condominiums. Some changes are of more interest to buyers and some more to sellers. Some should interest buyers and sellers equally. As we go through the changes, we will make supplementary comments on what is more important for whom.

1. Purchase Price Details: 2.1

   The new 2017 AREA purchase contract replaces the old 2014 financial details clause that talked about deposits, assumption of mortgage, new financing, seller financing, and other value. The new clause 2.1 shows purchase price only. Clauses 4.3 and 4.4 deal with the initial deposit and additional deposits. Everything regarding new financing, assuming mortgages, seller financing, and other value has disappeared. According to AREA, the rationale for this change is that the portions regarding assuming mortgages, seller financing, and other value were rarely used. A buyer getting new financing is common but that required the buyer to insert principal amounts, interest rates, and other mortgage details that they weren’t sure about or that changed. This was a confusing clause.

   Now, if buyers are getting new financing, it’s up to them to get their own new financing. The contract deals with their deposit(s) and the purchase price and the rest of the money is up to the buyer. This change is not a big deal but it changes the look of 20 years of previous contracts.

   Should one of those rare situations show up where there is consideration of assuming a mortgage or seller financing or other value, then use the new financing schedule to provide details.

   Vacant Possession: 2.3
   The 2014 contract said that the seller would give the buyer vacant possession, “subject to the rights of existing tenants, if any.” The seller’s obligation in 2017 is to provide vacant possession to the buyer. If there are tenants and the buyer is accepting the tenants, then the contract should be amended to show that the buyer will be taking over the existing tenancy or tenancies.

   If the buyer is accepting a tenant or tenants, there is a brand-new tenancy schedule where the seller discloses the details of the to-be-assumed tenancies. If the seller promises vacant possession but there is a tenant at the time of possession, then the seller attracts liability for his failure to provide the buyer what he promised.

   Seller and buyer should work together to ensure that the appropriate notice has been given to the tenant with sufficient time pursuant to the Residential Tenancies Act and or the lease(s) that are in effect. Buyers might want to require the seller as a term of the contract to provide a copy of the Notice to Tenant.

   Buyers might further want to speak with the tenants to make sure they have the notice and that they intend to leave. Yes, if a tenant doesn’t leave when they are supposed to, the seller has liability but that might require court action which is always time-consuming, stressful, and potentially expensive for both parties. Better to work on the practicalities of making sure the appropriate notice documentation has been given which the tenant acknowledges. Watch for any signs that they might be thinking of staying on when they should be leaving.

   State of Property: 2.4
   “The seller represents and warrants that on Completion Day, the Property will be in substantially the same condition as when this contract was accepted and the attached and unattached goods will be in normal working order.”

   Comments: the additional words make it clear that the seller is representing and warranting the state of the property and the attached and unattached goods. This is a big change; previously the attached and unattached goods were not mentioned at all and the seller’s statements were not an enforceable representation and warranty that survives the closing. See s.6 for other seller representations and warranties.

2. General Terms: 1(a-m)

   Usually the kinds of things dealt with in this clause are what people referred to as “boilerplate” clauses and found at the end of contracts. 2017 emphasizes the importance of these things by moving them to the first page of the contract. This is an extensive clause.

   Specifically:

   1(d) clarifies the definition of ‘Business Day’ and specifically notes that Business Day includes all hours of the day.

   1(f) strengthens the seller’s obligation to disclose ‘Material Latent Defects’. 2014 read, “except as otherwise disclosed, the Seller is not aware of any defects that are not visible and that may render the Property dangerous or potentially dangerous to occupants or unfit for habitation.”

   Contrast this with 2017 3.1 (f) which reads, “the seller will disclose known Material Latent Defects. Material Latent Defect means a defect in the Property that is not discoverable through a reasonable inspection and that will affect the use or value of the Property.” There are at least three major changes in this changed clause.

   Firstly, the word “defects” in 2014 is replaced by “Material Latent Defect” which is more precise and reflective of how courts look at this issue.

   Secondly, “… Defects that are not visible…” in 2014 is replaced by “… A defect in the Property that is not discoverable through a reasonable inspection…”

   Thirdly, the words “… may render the Property dangerous or potentially dangerous to occupants or unfit for habitation.” are replaced by “… that will affect the use or value of the Property.” Using the words “dangerous or potentially dangerous” in 2014 and adding that extra portion regarding “unfit for habitation” was too restrictive and subjective. It allowed sellers to make their own judgment about the meaning of “dangerous.” A defect that affects the use or value of the property is more encompassing and less subjective. Sellers should think carefully about agreeing to this general term.

   1 (g) for 2017 states, “the seller and buyer are each responsible for completing their own diligence and will assume all risks if they do not.” While the clause refers to seller and buyer, this clause is really aimed at buyers. The seller might provide information but even if he does, it is up to the buyer to confirm to his own satisfaction. For example, the classic situation would be a seller saying a property is 1200 ft². The property turns out to be only 1060 ft², too bad for the buyer, he should have checked. Similarly, if the seller says the property is zoned for secondary suites and it turns out there is no zoning, then that is on the buyer. They should have done a further check with the municipality to confirm zoning.

   1(h) is interesting. This clause requires the seller to put some effort into knowing and understanding the actual facts behind his representations and warranties contained in clause 6. Sellers often sign contracts without really considering their representations and warranties and then try to explain away later why those representations and warranties were not true.

   This clause says that the seller will actually review his real property report, title to the property and registrations against that title along with determining his non-resident status for income tax purposes, determine dower rights, and actually do other research to be able to give informed representations and warranties. It’s tougher on the seller, but better for the buyer, if the deal goes sideways.

3. Deposits: 4.5
   

   Failure to Pay Deposits: this is a brand-new section found in clause 4.5 of the 2016 Alberta Real Estate Purchase Contract. Here is what the clause says: “If the buyer fails to pay a deposit, by the agreed date, the seller may void this contract at the seller’s option by giving the buyer written notice.”

   The new 2017 contract added these words: “The seller’s option expires when the seller accepts a deposit, even if late.”

   Comments: The first change aims at certainty of deposits. The second change allows the buyer to still provide a deposit as long as the seller has not voided the contract. On balance, 2017 is probably a good change, as it would allow a buyer to keep the contract alive, especially if they were only a little late and the seller really didn’t object.

   And, there is a brand-new one-page notice that assists the seller in voiding the contract. This change was put in place to get rid of uncertainty. When a buyer failed to pay a deposit, sellers were uncomfortable and uncertain if a contract would close. Deposits are often referred to as ‘good faith money.’

   The theory is that, the bigger the deposit, the more serious the buyer. Now, especially in multiple offer situations, buyers who try and win the bidding process by putting up bigger deposits have more pressure to actually pay those deposits.

   Release of Deposits: 4.8
   The old 2014 Alberta real estate purchase contract allowed buyers and sellers to argue whether deposits should be released. If there was no agreement the money went into a lawyer’s trust account and the fight was on. The new AREA purchase contract does away with this uncertainty. Now, in any of the numerous situations where deposits might be returned, deposits will be returned to the buyer or seller, as the case may be, without notice to the other party. Buyers and sellers still retain all the remedies they might have at law to pursue the other party.

4. Trustee Liability: 4.9

   “A trustee acting under this section will not be liable to the seller or the buyer for any loss arising from the disbursement of the deposits.”

   Comments: This clause was in the September 2016 version but is gone from July 2017. I thought this was an excellent clause from my perspective of a lawyer who sometimes holds deposits as trustee or is on one side or another fighting to keep or have deposits returned. No trustee likes to be the arbiter of who is right or who is wrong in deposit return arguments. I’m not aware of the backgrounder on this but I would’ve preferred to keep the clause from 2016 in the July 2017 version.

   Encroachments: 6(1)(e)(i):
   I’m not going to repeat the whole lengthy clause here. The difference between September 2016 and July 2017 is to clarify that, if they are to be allowed, private encroachments must be registered on the title. Public encroachments must have a written agreement but need not be registered. Encroachments are always trouble for sellers. Review carefully with your lawyer before you sign your contract. Amend the contract if required.

4. Disclosure: Permits and Notices: 6(1)(g)
   This is a brand-new section in the new 2016 Alberta real estate purchase contract. According to clause 1(g) the seller must disclose whether he has received notices regarding the property from any government authority and whether he knows about any lack of permits for any development on the property. This representation and warranty survives the closing.For 2017: Known government notices and known lack of permits are now described as “… Government… Notices… and lack of permits… known to the seller…”Comments: The previous phrasing was awkward. The change makes it clear that the issue is government notices and lack of permits that the seller knows about.

5. Dower: 1

   Dower or Dower Rights refer to the requirement of Alberta legislation, (the Dower Act), that a non-title spouse consent to the sale of a property. So, if a titleholder is married, (not common-law), but on title by him/herself and if either of the spouses have ever lived in the property at any time since their marriage, the nontitle spouse has what they call ‘Dower Rights.’ The nontitle spouse has the ‘right’ to not give their consent and thus stop the sale. Clause 7 in the 2016 Alberta real estate contract makes Dower Consent a condition.

   Previous contract versions only suggested that Dower Rights be considered and dealt with. Now, if the seller does not provide the Dower Consent from the nontitle spouse, the buyer can void the contract. This is a similar procedure to the seller’s right to void the contract if a buyer doesn’t pay deposits in a timely manner, (see paragraph 4 above). And, there is a specific one-page notice form for the seller to use in voiding the contract should the Dower Consent not be provided. Under clause 18 there is also a separate place for a non-title spouse to sign accepting the offer. This doesn’t do away with the requirement of Dower Consent but makes it clear that Dower must be dealt with.

   The July 2017 version adds these words: “The buyer’s option expires when the seller delivers the Dower Consent and Acknowledgment form, even if delivered late.”

   Comments: it looks like the reasoning for the addition of this clause is similar to that surrounding the deposit clause where the buyer can deliver deposit money late as long as the seller has not exercised his void option. Here the seller can deliver the Dower consent late as long as the buyer has not exercised his void option. Both the deposit and Dower changes are corrective and allow contracts to proceed with certainty as long as timelines are observed.

6. Conditions: 1(b)

   Now makes it clear that buyer and seller will each pay for the costs related to their own conditions. Occasionally some condition satisfaction situations resulted in one party claiming against the other, so this change should eliminate that potential dispute.

7. Home Inspection: 2(b)

   Not too long ago, anyone could hang out their shingle and call himself or herself a home inspector. Now, home inspectors must be licensed in Alberta. The new Alberta real estate purchase contract in clause 8.2 (b) requires inspections to be done by a licensed home inspector. No more having your brother-in-law the carpenter, or your grandpa who used to build houses, be your inspector. You are still allowed to do other diligence such as a furnace inspections or a sewer camera inspection.

8. Payment of Purchase Price: 10.3

   September 2016 read, “the buyer will pay the Purchase Price by lawyers trust cheque, bank draft or electronic transfer.” July 2017 deletes “or electronic transfer.”

   Comments: No background on this change, although I suspect that some lawyers objected to being obligated to accept an electronic transfer as those transfers are sometimes difficult to verify and can be subject to fraud. Perhaps some unrepresented sellers did not want to be obligated to accept an electronic transfer.

9. Notice of rejection:

   This is an un-numbered clause appearing right after 18. Previously, if an offer or counteroffer had been made, there was no mechanism in the contract itself for one party to advise the other that they were not accepting the offer/counteroffer. Parties would wait until a conditional time had passed without removing or waiving conditions, which automatically voided the contract. Or they would have to use an addendum and create their own words to say they were not accepting the offer/counteroffer.

   This sometimes lead to unreasonable time delays where parties wanted to simply say they were moving forward but found it difficult to do that in the old contractual process. The new 2017 AREA purchase contract makes this easy by adding words at the very end of the contract on page 6.

“The following is for information purposes and has no effect on the contract’s terms:

      REJECTION

      I do not accept this offer/counteroffer. No counter offer is being made.

      Signature and date”

Nice and neat, timely and tidy. If one party doesn’t like deal, they reject and the contract is over.

10. Removal of property inspection schedule:

    The 2014 AREA purchase contract had a property inspection clause. The very subjective clause read as follows: “This contract is subject to the Buyer’s approval of a property inspection.”

    Using this clause gave the buyer the option of using the Property Inspection Schedule. The schedule, if used, added some terms to this condition around how the buyer could refuse to waive the condition. Those terms were:

    If the inspection revealed details not acceptable to the buyer. This was a unilateral clause allowing the buyer to reject the inspection for any reason. Careful or suspicious sellers saw this as an, “out” clause for a buyer. If the buyer doesn’t like the colour of the paint or the lino in the kitchen that’s all he needs to get out of the deal.

    The defects revealed exceeded a percentage of the purchase price, or;

    The defects revealed exceeded a dollar figure

    This clause caused a ton of problems: before property inspectors were licensed, they often gave the buyer a quotation to fix the problem. Now inspectors can’t do that as part of their licensing regulations. If an inspector identifies difficulties buyers now have to get independent quotations. This results in a long condition period, which no one likes.

    Buyers and sellers would fight about quotes. Sellers thought buyers often got quotes that were outside the percentage or dollar figure allowed just to get out of the contract.

    The old Property Inspection Schedule required the buyer to give the seller a copy of the inspection report if the buyer did not remove conditions. However, the property inspectors’ regulations and insurance coverage often prohibited the buyer from providing their report to anyone else.

    Some sellers didn’t like getting a bad inspection report that obligated them to then reveal material latent defects to their next buyer

    Although the Property Inspection Schedule is not part of the current set of forms, buyers can still add their own financial or other restrictions on any property inspection condition. Buyers and sellers must take care that they don’t re-create the problems raised by the old Property Inspection Schedule.

11. Miscellaneous Changes:

    Final Signing:
    the 2014 AREA real estate purchase contract had a ‘Final Signing’ section that had its own clause and indicated which party was the last person to sign. Experience with the 2014 contract led to confusion about when legal obligations under the contract actually began or if the final signing clause was even actually part of the contract.

    Basic contract law says that legal obligations begin when acceptance of a contract is communicated to the other party. To clean this up the 2016 and 2017 AREA purchase contracts deleted the Final Signing clause. The relevant words are as follows: “The legal obligations in this contract begin when the accepted contract is delivered in person or sent by fax or email…”

    Email acceptance:
    The words, “or email” are added to improve the 2014 AREA contract which only allowed personal or faxed delivery of documents. As much as documents could and were being delivered by email, the 2017 AREA purchase contract now specifically references email.

    Clean ups:
    The 2017 AREA real estate purchase contract revisions made it longer than the 2014 AREA contract version. To keep the contract within the previous six-page limit, some information with respect to the buyer, the seller, and their representatives has been eliminated. This information is not contractual and is easily obtainable from other sources.

12. Condominiums:

    overall the 2017 AREA contract entitled, ‘Residential Purchase Contract For Resale Condominium Property’ follows exactly the format of the 2017 AREA Residential Purchase Contract. The only adjustments are for issues specific to condominiums. Some of those issues are:

    Property description:
    Clause 1.1 of the new 2017 AREA condominium contract is much clearer when describing what units are coming with the purchase. Condominiums always include a titled unit to the living space but then can also include parking spaces and storage spaces. Those spaces can be either titled or if they are not titled they can be assigned or leased. The new set up makes the parties look more clearly at what is actually coming with the purchase and avoids situations where buyers and sellers ‘forget’ to deal with parking or storage spaces.

    Condominium documents:
    Sellers still have to provide the buyer with condominium documentation as set out in paragraph 8.2 of the new AREA condominium contract. The addition to the 2017 AREA contract is that if the seller does not provide documentation, the buyer can in section 8.2 (iii) exercise an option to obtain the condominium documentation him or herself. If the buyer chooses that option then in the very next sub-clause the buyer has the right to extend the condition date to a date past when the seller was to supply the documentation. Much better for the buyer.

    Cost of condominium documents:
    Previously in the 2014 AREA condominium contract, if a buyer obtained and paid for the condominium documentation because the seller wouldn’t or didn’t, the buyer could set off those costs against the purchase price. There was no other buyer remedy to recover costs. This left the buyer who did not waive conditions with no way to recover the sometimes very substantial costs and complexity of obtaining condominium documentation. With the 2017 AREA condominium contract, the buyer can now invoice the seller with a 30-day payment requirement. Note: a buyer might still have to chase the seller to pay.

    Condominium fees/contributions:
    Clause 9.2 varies the 2014 AREA contract, which required the seller to state the condominium fees in the contract. Sometimes after signing the contract and stating the fee, Condominium Corporations would levy a new fee thus making the seller statement incorrect. Clause 9.2 now adds the words, “To the best of the seller’s knowledge and to be verified by the buyer” and then there is a space for the seller to insert the monthly contribution/fee for any titled or non-title units. This leaves on the buyers the ultimate responsibility for determining the actual required contributions and fees for all title the non-title units.

    Special Assessments:
    Responsibility for special assessments is dealt with in both the 2014 AREA real estate purchase contract in clause 4.7 and in clause 10.4 of the new 2016 AREA residential purchase contract for resale condominium property. Both clauses state that the seller is responsible where the Condominium Corporation has passed a resolution prior to 12 noon on the completion date implementing a special assessment. However, there are three differences between the two almost similar clauses:

    The 2017 contract deletes these words, “Unless the Buyer and the Seller otherwise agree in writing…” Now the clause begins with “Regardless of when a resolution is passed…” Buyer and seller could still agree in writing that the clause might not apply but the 2016 clause attempts to eliminate any discussion by simply saying who has what responsibility when.

    The 2014 contract refers to a “special resolution” where the 2017 AREA condominium contract refers only to a “resolution.” This change ensures that the special assessment will be by resolution but eliminates the issue of buyers and sellers trying to guess whether the bylaws of a particular Condominium Corporation require a ‘resolution’ or ‘special resolution.’ As long as the special assessment is resolved, the responsibilities are as indicated in the clause.

    Lastly, the 2017 AREA residential purchase contract for resale condominium property includes the word, “levied” in reference to a special assessment.

    In other words, a Condominium Corporation might have resolved to implement a special assessment but for the seller to be responsible for a special assessment resolved prior to noon on the completion day, the Condominium Corporation has to actually have levied which means they have given official notice to owners of the special assessment and its terms of payment. This is a subtle but important change in responsibility for special assessments. And, it’s a great illustration of why new contracts need to be read in detail. It’s a one-word change that could mean a huge difference to both buyers and sellers when the special assessment is $60,000.

Conclusion:

Overall the new 2017 AREA Residential purchase contract and its sister form for condominiums are an improvement over the 2014 area contracts.

• The 2017 contract is much more a plain-English contract. The contract is in tune with, and flows much more with, how contracts are read, negotiated, signed, and implemented. Confusing wording and unnecessary wording have been eliminated.
• There is generally more space for additional signatures and terms.
• Due diligence for both buyer and seller is emphasized both with respect to responsibility and timing, and cost is clarified.

The 2017 AREA contracts are strongly recommended for use by buyers and sellers with a further strong recommendation that all parties read the contracts a number of times and get a thorough explanation from both the realtors and their lawyers where required.

Buying or Selling Real Estate in Alberta?
Get the Investor Lawyer on Your Side!

Barry McGuire is senior counsel at Field Law in Edmonton, Alberta. With over 40 years of experience as an attorney, Barry’s practice emphasizes buying and selling houses, homes, condos, townhouses, apartments, acreages, and more; send him a message today!

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“House renting, buying, selling contract” image by Mark Moz used under CC Attribution 2.0 Generic.

Real estate can cause all kinds of problems when a family member passes away. First, it can take a long time before the will is executed and the inheritor is actually in control of the property. Second, the person who inherits the property also inherits the financial responsibility (mortgage, taxes, etc.), which they end up responsible for even before they own the real estate! This Tale is about what happened when someone inherited a piece of property and almost went into foreclosure with it.

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Here’s a great story from Mike Parker (known simply as ‘Parker’) of Edmonton’s Mogul Realty Group about inheriting a piece of Alberta real estate. In his own words:

Hey Barry,

Parker here…

So a little background for my sister’s situation. We have the same dad but different mom—so my half-sister.

So her mom passed away and my sister inherited the property. 3 bed, 1½ bath condo townhouse right by West Edmonton Mall. It sat vacant for almost a year waiting for probate to go through, all the while her trying to keep up with the payments.

She fell behind and there was 126k owing on the mortgage, she owed about $1,200 in property taxes and $3,000 in condo fee arrears and $2,500 for the condo lawyer’s caveat. Plus the place was in terrible shape. Needed 30-40k just to bring it up to shape. The bank started knocking on the door and served her in January and said she had 21 days until she’d be foreclosed upon.

This was before I was officially licensed as an agent and I figured I could flip it. So I called Calvert Home Mortgage and I was gonna flip it. I was all lined up to flip it with a joint venture (JV) contractor but… he backed out last minute. 2 weeks until the bank forecloses on her. Clock is ticking.

I figured next step was to assign the contract. So I blasted it out to my list and, wouldn’t ya know, a REIN member calls me up and meets me at the property the next day. I was advertising it at 144k with me taking a $5,000 assignment fee, my sister gets 139k and gets out with a clean slate. He and his JV partner talk about it and are pretty happy.

However a little more digging and they can’t take it at 144k…the numbers just didn’t quite work. We figured out their bottom line was 138k.

Wouldn’t ya know it with all the bank’s lawyer fees (that my sister had to pay for), the mortgage, plus all the arrears, were about $138,400.

So I wanted to help my sister obviously and I wanted this REIN member to get the property. So I let go of the assignment fee and we got the property sold with 3 days to spare at $138,000. My sister was relieved to get out basically scot-free (and not get foreclosed upon!). And the REIN member should have a conservative after-repair value (ARV) of about $225,000 and be able to be in and out in 3–4 months!

And they now know I’m a licensed agent too, so it may be beneficial down the road in that way too!

So Barry… overall it was truly a win-win-win. It was pretty cool how it all came together. I hope this makes a great Tales from the Trenches story!

Lessons Learned:

1. There are lots of folks (opportunities) like Parker’s sister.
2. Probate is time consuming a short-term rental can help cover costs.
3. Pay those condo fees—or pay big legal bills.
4. It all comes down to the numbers, so you need a Plan B and an exit strategy.
5. Play for win-win.

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

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“Last Will and Testament” image by Ken Mayer. Used under Creative Commons Attribution Generic 2.0

“Failure To Close? More Than Your Deposit Is At Risk!”

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

Lessons Learned:

1. Buyers can lose their deposits if they don’t close.
   As a buyer, if you don’t close your purchase, more than your deposit is at risk. Yes, sellers almost always just take the deposit and move on, but in a down market, maybe not.
2. Buyers can be held responsible for the price difference when the seller resells.
   Sellers must mitigate their damages by trying to resell the property, but the buyer is responsible for the difference between the original sale price and the resale price.
3. Buyers can be sued for the seller’s expenses.
   The buyer is also responsible for associated costs such as mortgages on two properties, utilities, other holding costs, legal fees, and any other costs reasonably associated with the buyer failing to close.

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.

“Flipping / Assigning Properties? Don’t Go To Jail!”

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!

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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.

“Real Estate Between Friends and Family.”

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.

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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.

Lessons Learned:

1. Diligence is Always Important when Investing
   When dealing with friends and family, diligence is even more important. It protects not only your investment, but also your relationship.
2. Overcome Objections
   When your friends/family resist, try saying: “Love you, you’re my brother, but I’m taking this to my lawyer because I want you to continue to be my brother.”
3. Spend the Money
   Diligence sometimes costs a substantial chunk of money for third-party experts, whether they be a home inspector/engineer or perhaps a consultation with your lawyer or accountant. It’s always money well spent to help you make an appropriate investing decision.

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.

“So, You Want To Be A ‘Flipper.’”

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

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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.

Lessons Learned:

1. ‘Flipping’ is a Senior Strategy
   Do not attempt this without substantial real estate experience. At the very least, make any deal ‘subject to buyer’s lawyer’s approval.’
2. GST is Complicated
   In Canada, the Goods and Services Tax (GST) is treated differently in different situations and contracts. Again, you need experience and expert advice to make sure the GST component doesn’t bite you.
3. Have Exit Strategies
   And, as we’ve said so many times before, before committing to a deal or deals that expose you to risk, you need to cover your exit with at least Plan B and, better yet, a Plan C.

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.

“Insurance Realities.”

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…

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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?

Lessons Learned:

1. Not all insurance is equal.
   Insurance policies come in different formats, covering different things. You can get the least expensive, plain-vanilla policy or the gold plated version. Surprisingly, the gold plated version often costs only a little bit more—but will cover you for things the basic version won’t.
2. You can get help choosing the right insurance.
   Work with an insurance agent who provides excellent personal service. Personal service is tough to get from those giant insurance companies that you can only contact via an ‘800’ number. Local is usually better.
3. It’s possible to customize many policies with added coverage.
   This is key: find out what isn’t covered by the standard policy. Consider paying a little bit more for insurance ‘riders’ to provide extra coverage.

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.

“Keep Your Joint Venture Up-to-Date.”

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.

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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.

Lessons Learned:

1. Do what the Joint Venture Agreement says, or
2. If you are not going to follow the Joint Venture Agreement, at least have a paper/email trail that proves you consulted with and got the agreement of your fellow investors.
3. Overall, your best protection is to do formal amendments to the Joint Venture Agreement that clearly document any changes to the original agreement.

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.

“Get the Details.”

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.

Download the audio file HERE.
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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?

Add a clause to the contract requiring the seller to confirm rental details in writing.

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.

Lessons Learned:

1. Great deal or not, always ask for copies of leases and in/out reports.
2. If you can’t get leases and in/out reports you could add a term or condition (‘subject to ‘) clause. A condition is probably better because it protects you more. That clause should say: “On or before (insert a date that matches up with your other conditions), Seller will have each tenant complete and sign buyer’s form of Rental Confirmation containing rental and security deposit information satisfactory to the buyer.”
3. With signed Rental Confirmations, you will be able to get the appropriate adjustments for security deposits and for rent if your deal is closing on a day other than on the first of the month.

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

“Foreclosures, Creative Deals, and Court.”

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…

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Dealing with Bankruptcy in Foreclosure Purchases

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.

Lessons Learned:

1. If a bankruptcy trustee is involved, make sure to deal directly with them.
   You must run a proposed solution by the bankruptcy trustee and get their agreement. Bankruptcy trustee often don’t care or want to get involved unless there is some equity that they will claim on behalf of creditors.
2. If you are making an offer in a foreclosure, you are allowed to go to court and speak.
   If you are confident and informed, you don’t need a lawyer for this appearance. See the next two points below. But if you do need a real estate lawyer in Alberta, my law firm can help. Contact RMLO Law LLP in Edmonton as soon as possible.
3. Make sure the foreclosure lawyer knows you are coming to court to support your offer to purchase.
   Tell him/her you would like to be introduced and you are prepared to speak to the court. Sit as close to the front of the court as you can. If s/he forgets or isn’t helpful, when your matter is called, stand up. The judge or master should recognize you. You can say who you are and why you are there and you will have your chance to speak.
4. Take really good notes of the court proceedings to protect yourself.
   If you don’t, you might be put to a further court application to stop the foreclosure from going ahead on the basis of the wrong order. This would involve ordering expensive court transcripts in order to prove what really happened and most likely retaining an expensive lawyer to help you with the application because it’s tough to do on your own.

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

“RRSP Mortgages and the CRA.”

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:

1. arm’s length,
2. usually administered, and
3. commercially reasonable

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.
The best way to figure out what a property is worth is to obtain an appraisal from a certified appraiser. Less esteemed valuation methods are to get a Certified Market Analysis (CMA) from a realtor or a current tax assessment.

Calculate the Loan-to-Value (LTV) ratio.
Banks and other mainline lenders are not allowed to offer more than 80% (this used to be 75%) of the value of the property without using National Housing Act (NHA) insurance, which is usually provided by Canada Mortgage and Housing Corporation (CMHC) or sometimes a private insurer. If you are proposing to lend more than 80% of the LTV without the mortgage being insured, is that commercially reasonable?

Interest rates are important.
Private lenders usually charge a higher rate of interest than banks. If your RRSP loan has a five-year term and your interest rate is less than mainline lenders, the CRA might not like that.

Interest rates should have a relationship to the LTV ratio.
Once the LTV ratio is over 80%, in the private marketplace, rates rise astronomically. Why? Because the most experienced lenders in Canada, the mainline lenders, understand that their risk of default and loss rises dramatically over the 80% mark. Therefore, private commercial lending rates range between 8%-20% for loans where the LTV ratio exceeds 80%. The higher the LTV ratio, the higher the rate of interest. Private lenders need to be paid for their risk.

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.

Lessons Learned:

1. Be a commercially reasonable lender.
2. Do as much diligence on a borrower and property as a bank would do.
3. High LTV ratios make for risky loans. Your interest rate should reflect your risk.

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

“Conditions, Lost Deposits,
and Collapsed Deals.”

In other Tales from the Trenches I’ve talked about the importance of accomplishing sufficient diligence on any property purchase to say that you have done ‘Due Diligence.’ It’s worth repeating here because it’s so important. The notion of doing or accomplishing your own Due Diligence is what allows you to make a buying decision. Will you buy or not buy? In this Tale, a deal falls through because of a lack of diligence regarding financing conditions.

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Our would-be investor was purchasing the property from a fellow member of the Canadian Real Estate Investment Network (REIN). The transaction was using the standard Alberta Real Association MLS contract, which includes some buyer terms. A couple of those terms required the seller to provide certain information to the satisfaction of the buyer. When our buyer went to apply for financing, the lender made those buyer terms part of the seller’s financing conditions.

Now, one issue that affected our buyer’s view of the diligence he had to perform was that the seller was also a very reputable REIN member. Now, the standard contract specifically says that buyers and sellers are totally responsible for accomplishing their own diligence. But when I was talking to our buyer after the transaction went sour, he said: “you know, I was kind of relying on the fact that everyone knows the seller and everyone thinks he’s a good guy and…”

What happened was that the lender issued a commitment letter that incorporated requiring the seller to provide the information as set out in the contract. Our relatively inexperienced buyer heard from his broker that getting mortgage approval was, “looking good.” He translated that into, “ I’ve got a mortgage approval,” and he removed his financing condition.

Then, as the process moved forward, the seller provided information that the lender deemed inadequate and the loan was refused. Our buyer was unable to get replacement financing and he lost the deal. He also lost his $5,000 deposit. The buyer was lucky that the seller was able to resell the property at a slightly higher price, which meant the seller wasn’t going to sue the buyer for losses over and above the $5,000 deposit. The buyer was also lucky that it was such a small deposit, but a loss is still a loss.

Lessons Learned:

1. Doing sufficient Due Diligence is completely on the shoulders of buyers and sellers individually and at their own cost.
2. Don’t remove your financing condition until you have a written, unconditional mortgage commitment from the lender.
3. Even with that written, unconditional mortgage commitment, ask your lender/broker: “Is my commitment unconditional?” “Is there anything else I have to do?” “Please confirm I can remove my financing condition.” And, do that in writing with your lender/broker so there is a record of your correspondence.

If you’re buying and/or selling real estate anywhere in Alberta, Barry is the lawyer you need to get the job done right. Use the form below to get in touch now!

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“House/Home Inspection” image by Mark Moz used under CC Attribution 2.0 Generic.

“A Real Property Report
with Municipal Compliance Doesn’t Prove a Suite is Legal.”

Are you looking to buy a property with a secondary suite? Ideally, you want to buy properties with legal secondary suites. But guess what? A Real Property Report doesn’t prove a suite’s legality in Alberta.

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Download the handout HERE.
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Here’s some background. A Real Property Report (RPR) is a two dimensional drawing prepared by a professional land surveyor according to their manual of surveying practice. The current, standard Alberta Real Estate Association contract used by all MLS realtors requires the seller to provide the buyer with a current RPR and written evidence of municipal compliance (city bylaws and permits). So, if you are a buyer and you and your realtor use the standard form contract, you are expecting to see an RPR as described above.

Let’s say you are a very careful investor and instead of just getting the RPR as part of closing documentation, you make it a condition of contract that the seller supply the RPR and compliance for your review, say, 10 days prior to closing.

The seller provides a nice, relatively new, legible RPR and it has either a nice compliance stamp or a letter from the municipality confirming compliance or non-conformance. That meets the seller’s obligations under the contract and you are a happy camper thinking you now have proof of a legal secondary suite.

But wait! On a closer examination of the RPR and compliance you notice there is no reference to, or evidence of, that secondary suite. That’s because the surveyor only makes his/her RPR drawing of the outside of any buildings or improvements. S/he doesn’t go into the house and look in the basement to see if there is a secondary suite.

So, when the RPR is sent off to the municipality for a compliance application, all the clerks see is what the surveyor drew. Like the surveyor, they also have no idea that there is a secondary suite and so the compliance notation doesn’t take into account—and certainly does not legalize—the existence of that secondary suite.

For more information on legal vs. illegal suites in Edmonton, check out my previous blog post.

Lessons Learned:

1. Don’t get caught thinking that an RPR and compliance that meets the seller’s contractual obligations is also proof of the legality of a secondary suite.
2. The only proof of a legal secondary suite is a combination of properly issued permits and final inspections found in the City file.
3. To check the City file you need an authorization signed by the seller allowing the City to give you information/search the file. Your realtor can help you get this authorizing form.
4. Be aware that the City of Edmonton has been actively cracking down on illegal suites lately. Your best bet is to either buy properties with legal suites or to make sure that it would be possible and reasonable to make the suite legal.

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This Tale is about the legal process in Alberta (and some other Canadian jurisdictions) of selling property as part of an estate after someone dies. A long-time client got in touch to say that her Dad had passed away. I knew her Dad and had done seven or eight real estate transactions for the family over the last 15 years. Dad was a great guy and I was very sorry to hear of his passing.

My client said it was a simple estate; basically a bank account, some personal possessions, a few stocks, bonds, and mutual funds, and an acreage where Dad still lived at the time of his passing. There was a Will appointing my client as sole executor and an estate lawyer was already on working on probate.

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Download the handout HERE.
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What Are the Steps
to Selling the Property of an Estate?

For a quick review, probate is the process whereby an executor, usually through a lawyer, makes application to the Probate Court here in Alberta for what is known as a Grant of Probate. The application process involves the executor gathering in all the assets of the deceased, figuring out whether the deceased owed any money, checking for bank accounts, insurance policies, RRSPs, LIRAs, RESPs, TFSAs, etc., and also involves a determination of whether there are beneficiaries or dependents of the estate. It’s a long paper process that can be a pain in the ‘you know what,’ extremely time-consuming.

Fortunately, my client is a very organized person and had provided the estate lawyer all the estate information and the application for probate have been submitted to the Probate Court.

The most difficult asset to deal with was Dad’s acreage. My client had retained a realtor to list the property and during the listing process they had a meeting with the estate lawyer. The estate lawyer informed my client that the probate process is lengthy. The probate clerks are currently working on applications for probate submitted four months ago. Their process has changed so that if an application for probate is rejected, once the corrected application is returned to the Probate Court, the application goes to the bottom of the pile taking another four months to rise to the top.

The Probate Court is very careful with probate applications, knowing from experience that wills and estates are fertile ground for misrepresentation, little white lies, and outright fraud. They are especially careful if there are beneficiaries.

The saying amongst estate lawyers is that you can count on your probate application being rejected at least once. In today’s probate world, that would mean an application would take eight months to work its way through the process and for the executor to have his or her Grant of Probate. This kind of timing is more typical than not across Canada. I just ran into it through my involvement in a British Columbia probate application.

With that background and understanding of the timing, the estate lawyer said to my client and the realtor, “don’t list the property until we have the actual, approved Grant of Probate”. Everyone agreed and then the property was promptly listed with a couple of offers coming in almost immediately. Those offers were written, acknowledging that probate had to be obtained, but the buyer maintained the right to withdraw from the contract at any time on two weeks notice to the Estate.

My client went to the estate lawyer and asked what they could do. Without much hope, the estate lawyer talked to the judge in charge of the Probate Court. The judge said, as you might expect, “Why the heck did the property get listed? Almost every probate application on my desk has a piece of real estate to deal with. Why should I make an exception for you?”

The estate lawyer said he understood what the judge was saying, but that it was a good offer in a tough marketplace; the estate and the executor did not want to miss being able to close. The market could easily get worse and the buyer already had the right to withdraw. Reluctantly the judge agreed to give an Order of the Court directing the Land Titles Office to allow the executor to sign paperwork that would allow the sale to go ahead. The rest of the estate would have to wait. The offer to purchase was amended to now show a fixed closing date.

The judge drafted the order using the accepted offer to purchase for details and sent it to the estate lawyer for registering at the Land Titles Office, which he did reporting to me that he had done so and he was going to send me a copy of the registered order. When the order arrived on my desk, I noted that Dad’s name in the order was not the same as Dad’s name on title to the acreage. Dad had used two last names during his lifetime with slightly different spellings. The estate lawyer advised the judge who agreed to make changes. The judge was a little testy because he had to come in on the weekend having been in Northern Alberta on the circuit court.

Meanwhile, we heard from the buyer’ s lawyer who wondered whether or not we were going to be able to get him paperwork to meet the new fixed closing date. At the same time he gave me the names of his clients showing first, middle and last names for both the husband and wife. Uh oh, the judge used the buyer’s names from the offer to purchase, which were different than the names provided by the buyer’s lawyer! A mad scramble ensued and the problem was solved with an Affidavit of Identity where the buyers swore that the names on the transfer of land and the names in the judge’s order were the names of the same people. The Land Titles Office accepted this and the deal closed.

Not waiting for the Grant of Probate and causing the estate lawyer to deal with the probate judge costs the estate an extra $2,500 in legal fees. Our legal account was about $800 higher than normal because of all the time expended. On the other hand, the sale went through at a good price. More importantly, the possibility of a falling market was avoided.

Lessons Learned:

1. When someone passes away, an official Grant of Probate is required for the Executor to carry out the deceased person’s Will. The Executor needs that Grant of Probate to have official authority to deal with estate matters.
2. Obtaining a Grant of Probate is a lengthy process. It takes months to gather in estate details, and then the application process takes more time. Any mistake in the application will cause rejection and resubmission to the Probate Court with further lengthy delays.
3. If you are Executor of an estate, be very careful what you commit to, since you have no authority until you have that actual Grant of Probate in your hands.

If you’re dealing with real estate as part of a will or estate, get in touch with Barry now. Use the contact form below or visit Contact Page.

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“Last Will and Testament” image by Ken Mayer. Used under Creative Commons Attribution Generic 2.

Wow, a recent bombshell of a legal case from the Ontario Court of Appeal is causing huge ripples in the Canadian real estate world. In the Courts and in the world of precedent there is a pecking order. The Supreme Court of Canada is the highest court in the land. The Ontario Court of Appeal is the court of last resort in Ontario. Ontario is Canada’s largest common law jurisdiction. Therefore, any decision from the Ontario Court of Appeal is extremely influential. It recently ruled that marketability of title and marketability of property may be linked.

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Marketability of Title
And
Marketability of Property Now Linked?

The case in question was MacDonald versus Chicago Title Insurance Company of Canada, which you can read in full at the following link: http://canlii.ca/t/gmc53. For a clear and cogent summary—including why this matters to real estate buyers and sellers across Canada—check out an article called “The New Marketability of Title Paradigm after MacDonald” written by Jeffrey W. Lem and Megan J. Lem for building.ca: https://www.building.ca/features/new-marketability-title-paradigm-macdonald/.

The key piece of information, according to Lem and Lem, is that, “The Supreme Court affirms that good and marketable title now includes freedom from latent defects.”

Lessons Learned:

1. Sellers: There are many forms of contract. Ask your lawyer if your sale contract guarantees marketability of title.
2. Sellers: Beef up or amend your sale contract particularly in the Warranties section to make it crystal clear you are not providing a guarantee that there are no latent defects.
3. Buyers: Title insurance is tricky at the best of times. Always get a thorough home inspection.
4. Buyers: Always ask the Seller if there are any issues/defects at all that might affect your buying decision.

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“Law3” image by Rafqi Jamil, used under CC Attribution ShareAlike 3.0

An investor recently showed up in my Edmonton law office with this absolutely marvellous Tale about a unique property seller in Alberta and the magic of having the right real estate investing strategy for the job.

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Creative Strategies Can Reveal
Unique Real Estate Investing Opportunities

An acquaintance had introduced our investor as a real estate expert to a gentleman who had a real estate problem. The problem was that the gentleman owned a 4-suite apartment building, but wanted to leave town. He had worked hard his whole life in Alberta, was recently retired, and planned to move to Eastern Canada. His well located apartment building was mortgaged for about $700,000 with about 3.5 years left on the mortgage term and all suites rented, albeit at about $200 per suite per month less than what those same suites would have rented out a couple of years ago. Overall the apartment was break-even cash flow with mortgage pay down of $12,000 per year.

The gentleman, who was a knowledgeable investor himself and had worked in various aspects of the real estate industry over his whole career, had purchased the property with his daughter. The daughter was very busy with her own life and wanted nothing to do with the property. The investor was familiar with the building location and thought that a conservative valuation would be $850,000-$900,000.

A bit of head scratching goes on and our investor finally says to the gentleman, “why don’t you just sell the property? You seem to have a fair amount of equity and even with payout penalties, a sale would put a good chunk of change in your pocket.” “I don’t want to do that,” said the gentleman. “I have to move pretty quickly and I just do not want to go through the trouble of listing the property, dealing with realtors and potential buyers, providing all of that material you always have to provide, only to have offers fall by the wayside. Even though I’ve been in real estate my whole life, I’ve always hated this part of the process. I just want to get rid of the property and protect my daughter. For myself, I don’t care; it’s protecting my daughter and getting rid of the stress. Plus, I don’t think there is that much equity, it’s not enough for me to chase.”

Our investor then suggests keeping the property and turning it over to a solid property manager. Although the market is down now, in a couple of years rents and values will be back up and the mortgage will be paid down. That would preserve equity and be a nice part of retirement. Or, what about a joint venture with a knowledgeable real estate investor who could take over the property and manage it in a trouble-free way, again, giving the gentleman a chance to share in the property upside.

The answers were, “no” and “no.” Property management costs too much and the gentleman had never liked joint ventures. Plus, wasn’t our investor listening? The gentleman wanted to get rid of the property, period.

Our investor was out of ideas. The gentleman said… wait for it… “ I can tell by our conversation that I can trust you and you have a lot of real estate experience. You could buy this property by way of Agreement for Sale (AFS).” Flabbergasted and dumbfounded are the words to describe our investor’s reaction. But, inclined to keep going, he asked, “how much do you want?”

The gentleman responded that he wanted protection for his daughter but no cash, but also no adjustments. If our investor would take over responsibility for the security deposits and not ask for a rent adjustment in a proposed mid-month closing, the gentleman would take a zero down deal and throw in the insurance and tax adjustments. Our member continues to be flabbergasted and dumbfounded, but he agrees and further says that he will have his wife purchase the property and he will personally guarantee the AFS. The guarantee will assist on the daughter protection side of things. Payments under the AFS will be exactly the same as the payment under the underlying mortgage.

This is the classic low/no equity AFS deal. The most amazing thing is that the gentleman made the offer. No one even knew he wanted to get rid of the property. Essentially, the gentleman took our classic AFS question and turned it around on our investor. Basically he said, “are you interested in buying my apartment building for no money down but you have to take over my mortgage payments, taxes, insurance, and all repairs and maintenance?”

Now, as a sideline we always talk about not taking advantage in a deal. Our investor told the gentleman that he was incredibly grateful for this amazing chance to pick up an apartment building for no money down. But he still felt the gentleman should consider taking any of the three steps described above or any other step that would actually get him some money in his pocket. In that regard, our member told the gentleman that if he changed his mind or came up with a better deal from somebody else any time up until closing, our member would simply walk away. “No way”, said the gentleman. “I like you, I trust you, I like the deal—especially you adding your personal guarantee—and I’m going to close with you. When would you like to go and meet the tenants?”

Lessons Learned:

1. AFS continues to be an amazing strategy in any part of the real estate cycle.
2. AFS is especially applicable in today’s Alberta real estate market.
3. Deals are where you find them. Don’t assume what a seller’s motivation might be; find out what it is!

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

My law firm in Edmonton, Alberta is the corporate registered office for many corporations. We get lots of letters addressed to those corporations because that’s part of being registered office. Anyone who wants to send something official to a corporation can send it to the registered office. Those official notices are often notices of trouble…

A recent letter was no different. It was a scary letter!

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Corporate Matters Matter:
Struck Corporations, Land Titles, and Tax in Alberta

A big, downtown law firm sent a notice that named two numbered corporations and demanded payment in full of a mortgage balance of about $150,000. Further, they attached a Notice of Intention to Enforce Security. In that document they referred to one of the numbered corporations as an “insolvent person.”

The first thing we did was search our records. That search showed that in 2008 one of the numbered corporations was struck from the Corporate Registry for failing to file the required annual corporate returns.

The next thing we did was get a copy of title for the property named in the Notice of Intention to Enforce Security. Then, we dug out the minute book for the numbered corporation for which we are still registered office. The minute book told me who the principals of the corporation are, and then my memory bank kicks in.

I remember acting for the client in purchasing a 28-suite apartment building about 20 years ago. A review of the title confirms my recollection that the seller carried all of the financing. No other financing had been put on the property in the last 20 years. Our client got a great deal when he bought, and the building is probably conservatively valued today at about $2.8 million.

So, about $150,000 left on a vendor take-back mortgage on a property worth $2.8 million, with the mortgage apparently in default and the titleholder insolvent! Not a pretty picture.

With that background, it was time to contact the client who was on vacation and took a few days to reply to email. Firstly, our client advised that the vendor take-back mortgage is not $150,000, but somewhere around $50,000. And, he was very sure that he had records including letters back and forth and cancelled cheques along with amortization schedules. This means he can prove what he paid over the years and what the actual balance should be.

On the issue of the struck corporation, our client says that he has been meaning to re-register the struck corporation, but just hasn’t gotten around to it. He asks that our corporate department here  start the ball rolling to reinstate the struck corporation. We say we will, but in the back of my mind I have a nagging fear about the reinstatement. Struck in 2008 and now it’s 2017, that’s a long time! Can the corporation be reinstated? 

On checking with our corporate department, they tell me that under Alberta’s Business Corporations Act (BCA), a corporation dissolved for more than 5 years cannot be revived for any reason (see s.208 (1.1) BCA). Under previous legislation, a corporation could apply to the courts for reinstatement but that right has been taken away.

Further, and even worse, s.229 (1) of the BCA says that all property of the struck corporation is now vested in the Crown. Our previous title search, however, showed that the property was still in the name of the struck corporation. That means, so far, the Crown (Provincial Government of Alberta), had not taken any steps to perfect their interest. That was at least minor good news. Still more research to do on this particular point and what it exactly means.

But wait, it gets worse! My first thought when I confirmed that the title-holding corporation had been struck from the corporate register is, what about tax? Our client bought 20 years ago and the property had at least quadrupled in value. The Canada Revenue Agency (CRA) always says taxes are payable when there is a disposition of the property.

What was the tax effect of the corporation being struck with ownership now potentially vested in the provincial Crown?

Back over to our corporate department, who took the problem to our tax consultants. Their first look at this mess is that the corporation being struck along with the provisions of the BCA leads to the CRA treating the situation as though the property was sold at fair market value. In this case that could result in a $500,000 tax bill.

So here is the ugly picture. We have a corporation that, according to the legislation, no longer owns a property. The CRA treats the statutory non-ownership as a sale at fair market value. The corporation didn’t get a dime out of the “sale.” And, even worse, the corporation still has a big tax bill, along with interest for late payment and penalties. Not fair, but that’s the way the legislation reads.

It’s hard to believe that what seems to be a relatively innocuous and simple administrative mistake or error in judgment would have these disastrous consequences. At the moment our client remains in big trouble.

Our expert tax consultants say there may be a way around the problem.

But, like all big tax problems, there is going to be a ton of research required on the accounting and legal side of all the issues. Then a legal opinion about a tax repair plan will be drafted.

At this moment, the plan is not drafted and the jury is still out on whether a plan can be drafted that has a decent chance of being accepted by the CRA. The tax repair plan will have to essentially reverse the effects of the corporation being struck and the relevant legislation referred to above. Folks, such a result is not guaranteed. And, as you probably figured out, this will not be cheap or easy for our client.

So those are the nuts and bolts of our client’s dilemma all starting with a decision not to keep a corporation that owned valuable real estate in good standing at the corporate registry. Stay tuned.

Lessons Learned:

1. You can’t revive a corporation struck for five years or more.
2. Property owned by a struck corporation may pass to the Crown.
3. Even if the Crown takes a property, you might have a big tax bill.
4. Should I incorporate? It’s a frequently asked question for serious real estate investors; in some cases, you can save a bundle on taxes. Should I un-incorporate is an even bigger, more complicated question. Always make sure to consult legal and accounting experts before moving ahead.
5. Corporate matters matter. Keep your corporations and corporate minute books up-to-date.

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“Post Letters Envelope Leave” image by 3dman_eu used under CC Universal 1.0 Public Domain Dedication.

“Deep Diligence Saves
Half A Million Dollars!”

I heard from a Calgary investor recently about dodging an expensive bullet.

Houses with legal suites or houses zoned for legal suites are all the rage in Alberta. What’s not to like about adding a secondary suite to a single-family home effectively turning it into a duplex with amazing positive cash flow? Everyone likes that. Tougher to do in Calgary, though. I hate to say it, our Calgary cousins are not nearly as advanced as we Edmontonians on the secondary suite issue. The City of Edmonton has amended bylaws to allow secondary suites all over the city and in most zoning situations.

City of Calgary, not so much. In Calgary, secondary suites are only allowed in certain areas. Calgary City Council is divided on whether to expand the areas where they allow secondary suites.

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Legal Secondary Suites in Calgary

So, in Calgary if you find a property with a secondary suite that is perhaps grandfathered or is in one of the areas where the zoning allow secondary suites, it can be a jackpot. But, as with all potential purchases, you have to accomplish adequate diligence. Here’s an amazing story in the investor’s own words.

Hi Barry,

I thought you might find this interesting. A possible “Tales from the Trenches” for Calgary.

I have been pursuing a house in Mayland Heights. Great lot, raised bungalow. Existing suite from 1960. However, the city only knew about it as a single-family home. No problem, I thought… I’ll just update it to legal status once I purchase it. It is RC2 so permitted use. However, after pulling title…

REGISTRATION NUMBER *** *** ***

20/10/1977

SUBJECT TO CALGARY INTERNATIONAL AIRPORT
ZONING REGULATIONS

First call to the city, they said it probably only applied to noise and that yes we could build a suite. 

But something just did not feel right to me, so I did more research. I looked up the property according to the Airport Vicinity Protection Area (AVPA) regulations. And after looking up AVPA Regulations and asking the City to look into it we find out that this property can never be more than a single-family home. So, no secondary suite. No infill development exit strategy.

We never put in the offer. Our JV’s (Joint Venture partners) once again mentioned how pleased they are working with us, as our meticulous due diligence saved us making a half-a-million dollar mistake.

Interestingly, CBC news recently reported on the issue of airports, zoning, and secondary suites in Calgary. City officials have debated making a request to the Province of Alberta regarding housing rules near airports. A provincial regulation from the 1970s restricts development in communities that are in an air transit flight path. The rules are in place to prevent buildings that would interfere with air traffic. Low height infill like basement suites wouldn’t affect airplanes, although airport officials speculate that noise complaints might rise if there were more people living in the flight path.

One classic diligence lesson that our investor so obviously understands is that when you ask a question and the answer is, “probably,” that is not an answer to a diligence question. You will recall our investor called the City of Calgary to ask about the AVPA regulations and the city said, “it probably only applied to noise and that yes we could build a suite.” Makes sense does it not? Why would airport related regulations that are really mostly about not building tall buildings in aircraft flight space care about a suite in a basement?

Logic would tell you they don’t care but logic would be wrong. You have to nail down the answers to your diligence questions.

LESSONS LEARNED:

1. Airport Vicinity Protection Area regulations prevent secondary suites in Calgary.
2. Reviewing title is basic diligence.
3. Do title review before you make an offer
4. Never accept, “probably” as the answer to a diligence question
5. There are airports all over Alberta. Don’t buy near an airport without checking on AVPA regulations.

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“View of Calgary downtown from International Airport” image by Qyd used under CC Attribution-ShareAlike 3.0

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A Tale of Real Estate Investing Success

This is the story of new Canadians, who in 2003 thought they would like to supplement their incomes with a revenue property. They bought a duplex on the central south side of Edmonton, close to the University of Alberta, but not too close, and started down the investment real estate road.

Today, 14 years later, they are retiring and moving on to the next phase of their lives. It was time to sell the duplex. When they came to see me to sign their sale paperwork, we were in my boardroom going through the details. I’m always interested in what my clients have been doing and how their investments have worked for them.

So I asked them, “how has it gone, what has your investment experience been like?”  I love their response! Here’s what they said:

“The property has not given us one bit of trouble over 14 years; this was a trouble-free investment for us. We bought the duplex for $360,000 and are selling for $795,000. Plus, it has been great positive cash flow over 14 years.”

“That’s fantastic,” I said “what a great story. What is the secret of your success?”

7 Keys to Success with Buy & Hold Real Estate Investing in Alberta

1. 1. We were very careful about tenant selection. 
      Once we get an application from a potential new tenant, the very first thing we do is go on Facebook and Linked-in.  If there are any posts done after a wild evening of partying, chances are were not going to rent to those people.
   2. We always checked with the previous landlord(s).
      Especially the second-last landlord if we could reach them. If any landlord referral was an over-the-top glowing recommendation, we were suspicious and did extra diligence.
   3. We always did a serious tenant interview.
      Even if all of our other diligence didn’t show any problems, if we did not have a good intuition, a good gut feeling then we wouldn’t rent.
   4. We never hesitated to leave the property vacant for a month if we couldn’t get the right tenant.
      It’s way better to suffer for a month (or more) than to be stuck with a bad tenant for a year (or more)! Having a reserve fund puts you in the position to be able to do this.
   5. We took an interest in our tenants.
      We were available landlords and we always encouraged the tenants to keep us informed about anything to do with the duplex.
   6. We always kept the property in good condition.
      We fixed anything as it came along, no deferred maintenance. But over 14 years, there wasn’t much trouble because we had an engineer inspect the property at the beginning. It was well built to begin with and in fantastic shape when we bought it. Maintaining the property was really a minimum cost.
   7. We took care of our tenants.
      We encouraged them to tell us if they were going on holiday so that we could keep an eye on the place for them and sometimes even retrieved their mail. Tenants stayed with us for years even at the premium rent that we charged. Currently one half of the duplex is rented at $1650 per month with the tenant having been there three years. A new tenant on the other side is paying $1800 per month.

Why is this such a great story? It’s a classic illustration of what I’ve always believed brings real estate investing success. Buy a decent property in a decent area and manage the heck out of it.  That’s it! Of course there are ups and downs and problems to solve. But if you buy that decent property in a decent area and manage the way my clients managed, you just can’t help but be successful. And that’s tonight’s Tale from the Trenches.

Barry McGuire is your friendly neighbourhood Edmonton real estate lawyer. Before buying or selling  property in Alberta, get in touch with Barry first!

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“Edmonton Canada Day Fireworks 2012” by Kurt Bauschardt (with modifications) used under CC Attribution-ShareAlike Generic 2.0.

This episode of Tales from the Trenches contains two stories about transfers: one is about transferring mortgages and the other is about transferring property.

In theory, many mortgages are assumable, but in practice lenders in Alberta (and elsewhere) have been tightening up on their regulations. Some lenders just won’t allow it at all, while others require full re-qualification. This Tale explains how a real estate investor got the bank to agree to a mortgage assumption after he held a property for just seven days!

Rollovers are when a property is transferred from your personal name to your corporation or vice-versa. My Edmonton legal firm, RMLO Law LLP (formerly Ritchie Mill Law Office), helps people with rollovers all the time. But we always caution our clients to get additional accounting advice because capital gains might be an issue. In this Tale, the example is an investor who rolled over a property and had to pay the Canada Revenue Agency (CRA) $30,000 dollars in tax…

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For all your Alberta real estate law needs, contact Barry and he’ll sort you out.

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“3D Home Inspection Big Check” by http://www.ccpixs.com/ used under CC Attribution 2.0 Generic.

The first part of this Tale is about an Alberta landlord with tenant problems. The renter usually paid on-time, but then the rent started coming late. The tenant’s girlfriend left him, and when our landlord went to check on the property it appeared to have been taken over by a biker gang! Eventually the property appeared to be abandoned, but the landlord was afraid to go back. Moral of the story, nip problems in the bud before they grow to become out of control.

In the second part of this Tale, we have a problem with a buyer who disappeared, but whose caveat comes back to haunt the seller. If you would like to sell a property by way of agreement for sale, the buyer will register a caveat on the title. That is the buyer’s protection in the transaction. But what happens if the buyer then changes their mind and walks away from the deal? Their caveat might still be on title, which you as the owner/seller need to address before you can sell the property to someone else.

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If you’re buying or selling real estate in Alberta, you need a lawyer.
Use the form below to contact Barry now!

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“Neon Real Estate Sign” by Chris Griffith used under CC Attribution 2.0 Generic.

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If you’re buying or selling real estate in Alberta, you need a lawyer.
Use the form below to contact Barry now!

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“Mortgage Fraud” image courtesy of  http://www.cafecredit.com used under CC Attribution 2.0 Generic.

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Need an Alberta real estate lawyer in Edmonton? Contact Barry now!

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

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For an experienced and reliable Alberta real estate lawyer in Edmonton, contact Barry now!

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“House/Home Inspection” image by Mark Moz used under CC Attribution 2.0 Generic.

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If you’re buying or selling a home in Alberta, you need an experienced lawyer that you can trust. Get in touch with Barry now!

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

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Use the form below to contact Barry McGuire, veteran Edmonton real estate lawyer.

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“3D Home Inspection Big Check” by http://www.ccpixs.com/ used under CC Attribution 2.0 Generic.

Here’s some great stories about people buying and selling real estate in Alberta. These five quick Tales from the Trenches are short, but they show a wide range of different issues, problems, and successes.

In a joint venture, it’s always nice when a more experienced investor can help out someone who’s just getting started, which is the subject of the first Tale. The second deals with rules surrounding RRSP mortgages. Did you know that the money needs to be at arm’s length from the person whose RRSP it is? The third Tale is about Alberta Health’s Minimum Housing & Health  Standards. I’d recommend anyone looking to buy real estate in Alberta take a look at these (available HERE), especially if they want to rent out the property. The second last Tale is about seller’s warranties. They can be hard to enforce, and so due diligence with things like fire safety searches is important before committing to buy. Finally, a real estate deal that is too good to be true can have hidden problems. It might still be a good deal, but it’s best to look a gift horse in the mouth by still doing your due diligence.

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If you’re buying or selling real estate in Alberta, get yourself an experienced Edmonton lawyer. Use the contact form below!

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“House/Home Inspection” image by Mark Moz used under CC Attribution 2.0 Generic.

Here are two quick Tales from the Trenches: 1) tips on keeping a property buyer motivated and 2) contract language to fix the cash portion of a real estate deal.

Our first Tale shows one reason why a real estate deal can close late. Even when investors have good relationships with their buyers, I say hold onto the keys to the property until everything is finalized. That’s a “key” to motivating your buyer to hurry up!

In the second Tale, our investor had a great deal, with the seller agreeing to carry a second mortgage on the property. But when the assumption statement came back less than the first mortgage was supposed to be, our investor got caught paying the difference. You can fix the cash in a second mortgage or vendor take-back financing scenario, but this needs to be written into the contract.

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Barry McGuire is a real estate lawyer in Edmonton, Alberta. Use the form below to get in touch.

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“House and Keys” image by geralt on Pixabay used under CC0 1.0.

I’ve said it before and I’ll say it again: when you’re buying a property, never remove conditions on the purchase contract until you’ve done due diligence. A real estate lawyer like me can protect your interests and help you negotiate a better deal, but I can only work with the documents and evidence available. In this Tale, our investor was working on buying a multifamily rental property. Unfortunately, there were many discrepancies with the contents of units as well as with the estoppel certificates (aka rental confirmations forms). Good thing they didn’t remove conditions before they finished their diligence!

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Use the form below to contact Barry McGuire, real estate lawyer, Edmonton, Alberta.

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“Exercise That Diligence” image by Alan Levine used under CC Attribution 2.0 Generic.

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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Looking for a lawyer to help with buying or selling property in Alberta? Contact Barry now!

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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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“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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“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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“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.

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Advantages of Investing in Property:
Why The Ultra-Rich Like Real Estate

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.

LESSONS LEARNED

1. Ultra-rich people love real estate

2. Real estate is an inflation hedge through yield, leverage, capital gains.

3. Real estate is great in up-markets; it pays you to wait in flat or down markets. Not as volatile as stocks.

4. Don’t chase ‘hot.’ Buy when markets are depressed.

[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.

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Lead Pipes in Older Homes:
Lead Isn’t Dead

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:

1. I advised both tenants that they would not be bound by the Term provisions of their Lease Agreement and that upon 30 days advance written notice to me, they could vacate the property if they felt this issue was of significant concern.

2. I arranged for Epcor to test the water. I contacted Epcor’s recommended contractors and met with 4 of them on site to obtain quotations to replace the water line (est. lowest cost was $6000). I installed water filtration systems on the kitchen taps in each of the suites (cost $700).
   

3. I tried to track down the previous owner (I purchased the home in 1997) and reached their son in Kelowna. He said that he was confident there would be no lead pipes running to the home.
   

4. I advised Epcor that, in future, as the utilities are in my company name and I owned the property, they should be sending these notifications to my company and the tenant at the property. I sent them instruction to this effect in writing. Epcor advised me that they had been sending similar notices to my tenants for a number of years.
   

5. I contacted Park Insurance and asked them whether or not this matter would be covered by my insurance. Generally I was hoping to learn that they would, as a minimum, defend me in the event the tenants were to bring an action against me or my company. Park has confirmed that Insurers would defend and that they didn’t think I would be liable … given the steps I had taken. It is important to note that I believe this would be considered a ‘pollution’ incident and possibly uninsured by the policy.

6. I sent pictures of the above surface piping to Epcor to show them that what was above surface – was copper – NOT lead, and waited for the test results.
   

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. 

Lessons Learned

1. If you own older rental properties in Edmonton (or elsewhere for that matter), insert language in your lease that advises your tenant that there is the potential that fewer than 3% of Edmonton homes have services lines that are suspected to be lead… and that in the case this is one of those properties you are unaware of this and that your tenant is voluntarily accepting such a risk and that you accept no liability for any injury, death, or damages your tenants suffer as a result.

2. Check with your insurer to see if they will defend you or pay damages on your behalf in the event you become embroiled in similar circumstances.

3. Keep meticulous notes as you move through the circumstances.

4. Ensure that the water utility provider updates its records once they know your property does not have lead service pipes.

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!

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When to Walk Away from a Real Estate Deal:
Diligence Time Bombs And Letters Of Intent

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:

1.  firm up those contractor prices,
2.  get a written statement from the foreclosure lawyer, and;
3.  do extensive marketing research.

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.

• Risk 1: the acreage location and it being an acreage – they aren’t as easy to “flip” as a house is in Edmonton. I spoke with a realtor in the area who said it had been a decent year but not what it was in previous years.
• Risk 2: if it did not sell that I would have a substantially harder time finding tenants than in Edmonton and there’s not much for comparison to find what market rents would be.
• Financing/Profit numbers: the money was just too tight. With the extra $10,000 for the foreclosure, written estimates for construction costs to finish the home at $45,000 not the guestimate of $30,000 and another $10,000 to payout that surprise of a Rural Electrification Lien, our sweet $100,000 was now down to $65,000. Split 20/40/40, our profit was disappearing. And, the more we looked at this deal, the more the costs were going up and would go up. We all know that in renovations you can count on actual costs being higher than even careful written estimates, the project taking longer to finish, it will take longer to sell than you think and always for less then you plan. All of a sudden the money side is looking terrible. $100,000 could easily be turning into $50,000.
• Red flag from you: that technically, with the term of the existing mortgage already expired, we could bring the mortgage into good standing and the bank could have refused to renew the mortgage and then we couldn’t do an Agreement for Sale. We would have had to get a new mortgage. That would have eaten up again more money in profits, which would have made the spread even smaller than it already was
• 3 sets of people splitting profits: This was my first time working with the finder. Apart from finding the deal, they were supposed to find the contractor and manage finishing construction and landscaping. Their contractor wasn’t reliable and I had to bring out my own. Big red flag for me that I would end up running the entire project. Time is money. If I had to supervise, first I didn’t have the time and second, my portion of our diminishing profit becomes smaller because I wouldn’t get paid for my time.
• Realtors: the money partners were insistent on marketing thru a personal acquaintance realtor with no experience in either acreages or this type of property, rather than finding the right realtor for the job. I’m a mortgage broker so I’ve got loads of realtors I deal with. You need to find the right realtor for the right area with the right tools to get the job done.
  

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,
Roger.

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.

Lessons Learned:

1. Get started, plunge in, make a conditional offer.
2. Early in the process, clarify the deal with a Letter of Intent.
3. Stopping foreclosures always cost more than you estimate.
4. Any renovation always takes longer, costs more, takes longer to market, and sells for less.
5. Your protection is the gap between after repaired value and estimated costs, BIG is better!
6. Diligence protects you from making bad decisions.
7. Get a second opinion from a trusted mentor or knowledgeable 3^rd
8. Too many partners means smaller profit, and it’s tough to get a consensus.
9. Don’t force it. Walk away if it’s bad. Use your experience to write another deal.

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 .

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!

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Agreements for Sale:
Definition and Opportunities

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.

The Agreement For Sale Contract

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.

Protecting The Buyer

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:

• The seller has little or no equity. They bought at the height of the boom. Prices have fallen. Their high ratio mortgage now has a principal balance larger than the fair market value of the home. They can’t sell it with a realtor because real estate fees will take up $10,000 plus dollars that they don’t have. Remember this is negative equity. Even if they do sell, chances are their mortgage is closed and paying it out would trigger a large payout penalty. Think of the negotiating possibilities for you as an investor buyer under this scenario.
• The seller just can’t make payments or needs to sell an existing home before buying a new home.
• The seller has positive equity but doesn’t need this money. Let’s be realistic. Most sellers need the money from their sale, but some don’t. You can show the seller how to potentially save thousands of dollars in real estate commission and payout penalties, earn a better return on her/his equity than s/he could in the bank, and, if the seller is also an investor, to defer profit on her/his taxable gain.

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

• assign your interest in the AFS, in other words sell your contract, or;
• lease-option the property to a tenant buyer, or;
• sell an option without a lease, or;
• make a straightforward sale at a profit to another buyer, or;
• keep the property in your Buy & Hold portfolio.

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,
it’s a great time to find an AFS opportunity.

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!

Agreements For Sale
Lovely Concept… But, Are There Any Real Deals?

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

Property Type: single family home
Purchase Price: $340,000 /   Money Down: $1,600

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
Purchase Price: $228,000 /   Money Down: $3,210.00

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
Purchase Price: $185,000 /   Money Down: $5,000 (to pay mortgage & tax arrears)

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
Purchase Price: $275,000 / Money Down: $7,500

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
Purchase Price: $780,000                 Money Down: $0

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
Purchase Price: $445,000 /            Money Down: $1,000

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)
Purchase Price: $270,000 /   Money Down: $50,000

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)
Purchase Price: $260,000 / Money Down: $10,000

** 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
Purchase Price: $109,000 /   Money Down: $0

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

Lessons Learned:

1. AFS is a legitimate, time tested strategy
2. AFS is not well known, we basically have it to ourselves
3. My students and clients are finding deals and making a ton of money.

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.
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Lease-Options aka Rent-to-Own:
Just a Taste

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.

Why Choose A Rent-to-Own Strategy?

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!

Rent-to-Own, Who Would Do That?

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
in these large, non-qualifying groups of people
don’t want to rent!
They want their own home and they want it now!!!

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.

Lessons Learned:

1. There are many groups of anxious, potential homebuyers and we are finding more every day. N.B., many of these RTO candidates have jobs and money but don’t fit within conventional lenders sandbox rules.
2. Credit Stupid: There are lots of people who fit in this category. What’s the cure for stupid? Education. Over time, you can teach people to quit being Credit Stupid and help them qualify for a new mortgage that will allow them to close out your RTO investment.

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.
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Creative Real Estate Strategies

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 slogan: “just one damn deal”!

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.

Buy & Hold or Get Creative?

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
in a series of legitimate real estate strategies
that are short-term rather than long-term.

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.
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Contract Assignments:
Clever Investment Strategy
or Malicious Shadow Flipping?

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

Real estate ‘contract assignments’ not illegal, but are they ethical?

Barbara Yaffe: Vancouver Sun Feb.8, 2016

Christy Clark promises an end to shadow flipping in BC real estate

“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

Real Estate Council of B.C. fast tracks new measures in light of criticisms

CBC.ca April 1^st, 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.

1. Licensed realtors have professional responsibilities. Unlicensed entrepreneurs do not. These folks, often referred to as ‘wholesalers,’ put up flyers in neighbourhoods and knock on doors offering to buy for cash with no conditions and no inspections. Typically they have buyers lined up or realtors who can find buyers.Note: if you are thinking of diving into this market, remember that lenders don’t really like assignments. They seem to think that the first price is the real price and any later assignment that increases the price is really only price inflation. Further, lenders who take this attitude will only finance on the first price. Therefore, for these big-ticket assignments you need buyers who can pay cash or it doesn’t work nearly as well.
2. If a realtor is buying for his/her own account, then s/he has to reveal that to the seller. But, if the buyer is a corporation where the realtor owns less than 5% of the shares, then s/he doesn’t have to reveal anything.
3. And, what about that Land Transfer Tax? I wasn’t being levied on these flips in BC, which made them even more attractive.

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 2^nd 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:

(xi) Assignments

[05/16/2016 the following section updated]

1. a) Real Estate Contract Assignments
   A contract assignment occurs when a buyer transfers the contract to buy property to someone else before the completion date. The buyer can transfer the contract for any price, even for a higher price than they paid for the property. The buyer does not have to pay the seller any additional money if they make money from selling the contract.

Real estate contracts are assignable under the law unless the contract expressly forbids it. Section 36 of the Law and Equity Act provides that the seller’s consent to the assignment is not required, provided that notice in writing of the assignment is given to the seller.

1. b) New Provincial Requirements for Licensees Relating to Real Estate Contract Assignments
   On May 16, 2016, new requirements relating to the assignment of real estate contracts came into force in BC. The amendments to the Real Estate Services Regulation (the “Regulation”) apply in all transactions where a licensee is acting for the seller and/or the prospective buyer of real estate (except where the contract is for the sale of a development unit by a developer, as those terms are defined in section 1 of the Real Estate Development Marketing Act).All licensees providing trading services should carefully review the amendments to the Regulation.The amendments provide that a licensee preparing a proposed contract for the purchase and sale of real estate (an “offer”) must include the following terms (the “Standard Assignment Terms”) unless otherwise instructed in writing by the person to whom they are providing trading services:

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

2. 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
Assignments of Contracts of Sale
Assignment of contract

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:

1. Contracts where you might want to assign used to be written showing the buyer as “John Jones or Assignee.” or perhaps “John Jones or Nominee.” With the rise in mortgage fraud, lenders and title insurance companies don’t particularly like assigned contracts. For another reason, as the BCREA says to their members, “licensees should not use clauses such as ‘and/or nominee’ or ‘and/or assignee’ in the description of the buyers. Arguments could be made that contracts containing such phrases in the description of the buyer are unenforceable due to uncertainty in the identity of the buyer.” You are better off showing just your name as the buyer. Then, in the terms section of your contract, (currently section 7.6 in the AREA contract), you add some extra words. Those words are, “buyer reserves the right to unilaterally amend buyer’s name.”I also like additional ‘disclosure words’ that are very helpful. You can add these disclosure words (amend to fit your deal) to 7.6 or put them in a separate schedule/addendum, “Buyer discloses to seller buyer may move into the property, rent out to tenants or sell at a profit to a third party before or after closing. Seller will, in all respects, cooperate with buyer to facilitate sale to a third party buyer.”Why do these words make a difference? Firstly, with this term(s) in the contract, if you want to assign the contract or JV you have the stated right to do it on your own. You don’t have to go asking the seller pretty please or bring up s.154 of the Alberta Land Titles Act. Secondly, it appears that while lenders don’t like assignments, they are very familiar with amendments to contracts and, if the buyer’s name changes by way of amendment, they are okay with that. Thirdly, disclosure protects you and requires the seller to cooperate in your sale to a third party.

2. When you write a purchase contract in this manner you have flexibility. You may choose to close for yourself and add the property to your rental portfolio. Or, any contract with the assignment clause also indicates and gives you the right to change the buyer’s name to facilitate a cash assignment or the sale to a third party.

3. Lenders finance on the lower of the price in the purchase contract or the appraised value. In a Scenario II situation (Rising Market), if you have a purchase contract with a seller for $300,000 and you assign the contract to the ultimate purchaser for $10,000 then the ultimate purchaser is paying $310,000. Based on the rule above, the lender will only finance on the basis of $300,000. Lenders also don’t like it if the seller to the ultimate buyer is not the name of the owner on title. How can you organize it so your ultimate buyer will get financing based on all the dollars he has paid and have a contract the lender will live with? Remember full disclosure at all times to your lender/broker.

4. You may have to go back to your seller and explain the situation to them. What you need is a new purchase contract written between the current owner and the ultimate buyer for the ultimate buyer’s price. This is where the words in clause 7.6 come in. They say to the seller that you might buy the property and move in yourself, you might rent it out, or you might sell the property to somebody else. The schedule says that whatever you do, the seller will cooperate with you to facilitate a sale to your ultimate buyer. Replacing one contract with another can be a little tricky so get help from your lawyer on the type of wording for the 7.6 clause or perhaps a schedule to use to replace one contract with another.

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:

1. a) Assignors who did due diligence before assigning
2. b) Assignors who did some diligence before assigning
3. c) Assignors who did no diligence before assigning

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?

1. a) Finalize your Assignment before the deal goes unconditional. If you are using a realtor, make sure they know. If it’s a private sale, make sure the seller knows.

1. b) Amend the contract, in writing, to show that there is a new buyer. You can use various forms; an Amendment, an Addendum, or a Schedule, they all will accomplish the same thing. What words do you use? In three recent assignment situations, I have seen the following words used in the amendment:

1. i)  “this contract is amended to delete John Jones as buyer and replace with William Smith”
2. ii) “the buyer John Jones has been replaced by the buyer William Smith”
   iii)  “John Jones as buyer hereby gives notice that he has assigned his interest in the contract to William Smith”

1. c) Call your lawyer early on and discuss your plans in detail.

Lessons Learned:

1. Assignments can take a good chunk of the time available for closing. They often turn ‘normal’ deals into ‘rush’ deals.
2. In Alberta, you can assign your contract without the seller’s consent. You must give the seller notice that you have assigned the contract. The seller’s lawyer will now typically deal with your ultimate buyer’s lawyer to close the deal. As an Assignor, you continue to remain liable even after you have assigned.
3. Make sure your Assignee acknowledges ‘in writing’ what you have told them about the diligence you have done.
4. Give your lawyer, lender, and realtor lots of detail as early as you can.
5. The Assignment concept is deceptively simple. There are lots of other issues. Always get legal advice before you start using Assignments, including the form of Assignment you will use.

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.
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Title Insurance:
Is It Worth It?

$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:
Why homeowners need their own title insurance policy – a case in point

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:
Shortly after closing, a claim was made to FCT regarding a gap registration issue in the amount of $21,000 (a judgement by Royal Bank of Canada), which had priority to the transfer and mortgage. What is important to note is that FCT’s lender’s coverage can only be invoked when a loan goes into default and the lender suffers a loss as a result. Only then does the lender have a viable claim.

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.

3. Bottom line, title insurance is cheap. I always recommend my clients purchase title insurance and I bet these buyers wish they did too.

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.
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Asset Planning & Protection:
The Power of Trust

Let’s start with some basic considerations.

1. Asset Planning & Protection is a legitimate, basic building block of financial life.
   It is part of any complete business plan. Do not be thrown off track by those who refuse to plan, or see every plan as a scam.

“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)

2. Life is uncertain. Uncertainty accentuates the need to plan and protect.
   For example there are numerous legal uncertainties arising from ongoing interpretation of law, the Charter of Rights and Freedoms, an increasingly litigious society, contracts, guarantees and indemnities, participation in businesses, joint ventures, matrimonial and family relationships, and limited insurance coverage. Tort legislation and class actions are more prominent, examples being various church abuse disgraces, the residential schools debacle, and the Red Cross tainted blood scandal. You just don’t know what’s coming.

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.

3. Life is complicated, and growing ever more complicated. As much as you would all like life to be simple, it is unlikely we are ever returning to simpler times. But, you might think your circumstances are simple. I can’t say this enough, oversimplify at your peril. Your circumstances might be simple, but find out for sure. Each of your situations and facts are different. Every one of you needs to take professional advice before creating a plan to maximize and shelter your assets. Overly simplistic plans or plans that step in the ‘grey area’ do not serve you or the public and could easily expose you to the very risk that you are trying to avoid. And, as much as every one of you needs a plan, remember this.

“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.

Lessons Learned:     

1. Everyone needs to consider Asset Planning & Protection (APP).
2. APP is not a cookie cutter.
3. An asset plan must include asset protection.

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

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To mark the 75^th 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.
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What to Do About Foreclosure:
“Help, I Can’t Make My Mortgage Payments!”

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,

• ‘Mortgage Default’ http://investorlawyer.ca/2015/05/25/mortgage-default/, and
• ‘Quitclaims and Foreclosures’ http://investorlawyer.ca/2015/06/23/quitclaim-foreclosure/#more-158486
• ‘Mortgages & Related Security: How Are You Liable?’ http://investorlawyer.ca/2014/02/06/mortgages-and-related-security-how-are-you-liable-handout
  (Note: this is part 1 of a 9 part series)

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.

Pre-Foreclosure: What To Do?

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.

As one foreclosure lawyer told me,
“We want the dough, not the dirt.”

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.

Talk To Your Lender – Ignoring Them Doesn’t Work

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.)

Can You Catch Up?

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.

Amend Your Mortgage

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.

National Housing Act Mortgages

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
– Genworth Financial Canada
– Canada Mortgage and Housing Corporation

Get Creative

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:

Deal Sharing

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.

What About Selling Your Property?

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:

• today’s property value in relation to your existing mortgage
• rentability
• cash flow generation potential
• suitability as personal residence

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.

The ‘Negative Cash Flow’ Option

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?

Title-in-Lieu of Foreclosure (often called Deed-in-lieu in other jurisdictions)

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.

Foreclosure Already Started?

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.

Once You Miss a Payment, Here’s How a Typical Foreclosure Works

1. At this point, if you decide not to make your first payments, the lender will almost assuredly start their usual ‘missed a payment’ routine. The routine varies from lender to lender, but usually includes a phone call or two from the branch or mortgage administration, a letter or two demanding payment and sometimes offering discussion, followed finally by a referral from the lender’s mortgage administration to a foreclosure lawyer. This part of the procedure can take between two weeks (at its very shortest) and three months.

2. The foreclosure lawyer also probably writes a demand letter to you, the owner, indicating that they will commence action within a certain period of time if the mortgage is not brought into good standing. If you don’t respond, the foreclosure action will be started by way of a document known as a Statement of Claim.The lender will serve the document on you either personally or by substitutional service if they cannot locate you. There is then a waiting period before the lender can take the next step. This time is given to you to:

• File a Statement of Defence if you think you have a defence to the foreclosure (very unlikely),
• File a Demand of Notice if you just want to keep getting advised of the lender’s next steps in the court action or,
• Perhaps you do nothing.

3. If you do nothing, the lender will get an appraisal of the property if they have not already done so and then make an official court application for a preliminary judge’s order. At this court application, they will advise the judge of the status of the mortgage, how much it is in arrears, the value of the property according to the appraisal. They will ask the judge to set a time within which you have to pay, known as the ‘redemption period.’ For owners living in the property as their personal residence with some equity, there is a minimum six-month redemption period (the time within which the owner gets to bring the mortgage back into good standing). For investors who have little or no equity in the property, it could be as little as a one-day redemption period.

4. At the end of the redemption period, the lender can ask for various types of order/relief. Typically, the judge orders the property listed for sale with a realtor on terms that the judge thinks are reasonable. If there are no offers, or if the lender is unhappy with the offers, then the property might get transferred into the lender’s name.

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:

1. Hire a lawyer and fight the foreclosure by issuing your own ‘Statement of Defence.’ There is usually no point to this because usually you have no defence to the lender’s claim that your mortgage is in default.

2. Hire a lawyer or act for yourself in filing a ‘Demand of Notice.’ This requires the lender to provide you with notice of every step in the proceedings. There may be various points where you want to show up in court and have your say. Some of our clients just prefer that the lender’s lawyer’s numerous legal filings are served us here at Field Law, rather than having process servers constantly banging on their door. Plus, we can review what the lender is doing or asking for, which gives you a chance to go to court and have your say if you think you ought to or need to.

3. Do nothing. Many homeowners feel there isn’t any point in hiring a lawyer or defending or even in getting a Demand of Notice. They either abandon the property with no further interaction or, some homeowners mail the keys back to the lender in a process called ‘jingle mail’ named after the jingling sound in the lender’s mail room from keys in envelopes.

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.

Lessons Learned:

1. The issues surrounding foreclosure are numerous and varied. Start educating yourself. At least read the blog posts referred to above.
2. Don’t put your head in the sand. If trouble is on the horizon, deal with it. Way better to start figuring out your options long before the lender starts the foreclosure.
3. Be very careful about your supposed non-recourse mortgage. There are lots of mortgage products and you might be in the recourse category with full responsibility.

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

Sometimes a “sure thing” can come apart at the last minute. In this Tale, we have a buyer who found her dream home and was all ready to purchase. Or so she thought! Unfortunately, an inspection revealed major problems with the foundation. She was able to negotiate a reduction in purchase price, and so she went unconditional on the deal. But then the bank pulled her fully approved financing and left our buyer scrambling to save her dream home—as well as her $60,000 deposit. In the end, she found a solution, but this could have gone better if she had kept her financing condition on the deal until she was surer of the situation.

Download the audio file HERE and the text/handout HERE.
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Financing Conditions:
Unconditional Mortgage Commitment

This Tale starts in 2014 when my client was moving from Airdrie to Edmonton. Married with a couple of kids, the Airdrie property was in her husband’s name. This was a good job transfer for her and her husband. They came up to Edmonton on a couple of weekends and looked around. It didn’t take long to find their dream home at a price of $690,000.

They put an offer in at $680,000, which was accepted. They were pre-approved for an 80% mortgage. Once they had an actual real estate purchase contract to look at, the bank reviewed that contract and quickly gave them an unconditional mortgage on their new home. With that unconditional approval in hand, they removed their financing condition. They had not yet removed their inspection condition.

Their dream home took a big kick when the inspector said that the home had foundation issues. They hired a contractor who told them the repair would be about $80,000. A second opinion confirmed that number. Back to the seller they went with the inspection in hand. After much negotiating, the price was reduced from $680,000 to $600,000. Whew, problem solved! Enough of a price reduction to allow for fixing the foundation and they breathed a sigh of relief as they removed their inspection condition… not so fast!

As part of full disclosure, their mortgage broker provided the big bank lender with a copy of the revised offer showing the price reduction. The bank wanted to know, “ why the reduction?” After being provided with the inspection reports. Guess what? The bank did not like the situation and yanked the financing.

Closing was only five days away and they had an unconditional deal and no financing. Their $60,000 deposit was at risk. The seller gave them a one-week extension, but they couldn’t get new financing approved in that short time frame. The seller refused further extensions.

With only a few days to close, they were frantic. The only lender who could work with such a short time frame was a private lender. Private lenders charge big interest rates; in this case it was 10% for a one-year term. However, the alternative was losing their dream home and their $60,000 deposit, as well as potentially being sued by the seller. So, they signed up with the private lender and closed the deal.

Lessons Learned:

1. It’s very rare but, lenders can cancel fully approved, unconditional financing
2. Foundation issues are always trouble; they can cause bigger, more influential problems than the repair itself
3. Revisit approvals when serious issues arise
4. Private lenders can be a valuable resource

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

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“Financing on Chalkboard” image by GotCredit used under CC Attribution 2.0 Generic.

Did you know that a land survey certificate of building locations on a property is no longer valid if there have been improvements like a deck or a garage? In the Canadian province of Alberta, an up-to-date Real Property Report (RPR) is a requirement built into the standard sales contracts used by realtors. As a seller, you either need to get a current RPR or find a way to amend that clause. In this Tale, we have two sellers who had to deal with their RPRs being out-of-date.

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Do You Need a Land Survey to Sell a Property?:
Real Property Reports and Sellers

Most jurisdictions have a form of property description document that is prepared by a professional land surveyor. In Alberta, it is a ‘Real Property Report’ (RPR), which is is what we used to call a ‘survey’ or a ‘building location certificate.’

Land surveyors have extensive post-secondary education that trains them to prepare that document. The surveyor uses his/her training and sophisticated instrumentation to draw the boundaries of a particular property. Then, within those boundaries, s/he locates and draws in representations of all the improvements to the property. Very quickly you can see the house, the garage, the hot tub, decks, fences, planters, and all other improvements. Each of those improvements is measured for its own dimensions and its relationship to the boundaries of the property. How far is the house from the side boundary? How big are the side yards? How close is the garage to the alley?

Why is this important to you as a seller? Well, let’s go back to when you were a buyer. Alberta is different from most other provinces in Canada. In Alberta, the standard Alberta Real Estate Association (AREA) contract is used by most realtors. That contract says that the seller will provide the buyer with a current RPR and evidence of municipal compliance. Most other provinces say that if the seller has an RPR, he has to give it to you, but if he doesn’t have it then it’s up to you as a buyer to decide whether you want to get an RPR as part of your diligence.

When a seller says, for example, that s/he does not have a current real property report because the new garage is not on that old RPR and would you as buyer accept Title Insurance in lieu of an RPR? The answer is NO! When you are buying, stick to your guns. Get that current RPR and compliance if you possibly can.

Remember, we were talking about why this is important to you as seller. When you are selling, the obligation is on you to provide a current RPR and compliance. So, if you got these documents when you bought and if you have made no changes to the outside footprint of the property, then, no worries. Almost always, you can simply pass along what you got when you bought to your new buyer when you sell.

But, what if you didn’t get an RPR when you bought, or if you accepted an RPR that showed some difficulties with the property or if, after you bought, you added to the outside footprint of the property? Now, as seller, you have a problem. You are faced with the standard seller’s obligation to provide a current RPR and written evidence of municipal compliance. If you didn’t get this when you bought, you have to be very careful when you sell.

What to do? Here are two examples of how this affected sellers.

In example number one, our investor accepted an RPR when he bought that did not show a small deck at the rear of the property. He kept the property for three years and then sold it. He did not modify the standard AREA contract and simply promised to provide a current RPR and written evidence of municipal compliance.

The buyer’s lawyer quite rightly said, “this RPR doesn’t show the deck. Please have the RPR updated and then submit it to the city for compliance.” The city, of course, noted that there were no permits for the deck and that some of the construction was offside city bylaws. By the time permits were applied for, the deck corrections made, and the RPR re-submitted to the city for compliance, this was a $2,500 bill!

In our second example, our seller got a nice new RPR and compliance when they bought. Six months after taking possession, they added fencing to the property. Instead of simply signing the contract with the standard RPR clause, they called me to discuss the situation. My advice was to delete the standard RPR clause (currently 4.11 in the AREA contract) and to delete some of the warranty clauses (namely 6.1.d, e, and f). Then, add these words to the terms section (currently 7.6) of the contract: “Seller will only supply and buyer accepts that RPR dated March 25, 2009.”

Here’s the thing. I totally get it that RPRs and compliances are not something anyone deals with every day, not even me. So, expecting anyone to remember what RPR information they received when they bought and balance that off against the intricacies of contractual RPR obligations three years after they bought is simply asking too much. So, what can you do?

Fortunately, this is an easily solvable problem. The trick is, you just have to remember that it’s an issue.

When you buy, mark on your file in big, bold, multi-colored, felt pen, “RPR! When selling, do not sign offer to purchase or listing contract without reviewing RPR and compliance issues with lawyer.”

Lessons Learned:

1. A good review of an RPR with your lawyer will make sure you don’t get into trouble.
2. If you got an RPR and compliance when you bought, but you don’t want to review with your lawyer, then at least:
   4. Amend the offer to purchase to delete any RPR requirement clause (currently clause 4.11).
   5. Delete the warranty sections that relate to the RPR, (currently, 6.1.d, e, and f).
   6. Then, add these words to the terms section (currently 7.6) of the contract. “Seller will only supply and buyer accepts RPR dated….. and compliance dated…”
3. Do not offer Title Insurance as a solution to problems. Keep that in your back pocket to use as a supplementary negotiating tool if the buyer does not want to accept your old RPR.

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

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In my 40-plus years of experience as a lawyer, I have observed many common situations that real estate investors have the same questions about. My answer is: it’s all about The Basics. One of those questions is how to be a landlord. As an attorney, I suggest that one of the most important parts of being a landlord is carefully following the legal rules for renting properties. In order to do this, you need to know the law in your area. Luckily, governments usually have all kinds of resources to help people who aren’t lawyers to learn the rules. You also need to have a system in place that makes sure you can consistently do things by the book. In this Tale from the Trenches, we have a property manager who unlawfully evicted a tenant, and a landlord who paid the price.

Download the audio file HERE and the text/handout HERE.
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The Basics:
The Legal Side of Landlording

As real estate investors, our perfect world would be something like this:

• find a completely renovated property that exactly fits our system and make an offer,
• satisfy due diligence and remove conditions,
• close on time,
• place our perfect tenant,
• and enjoy solid, positive cash flow.

That would be a perfect world, but real estate investing—and life—aren’t perfect… anything but…

Over the last 40-plus years of being a lawyer, and after having handled approximately 25,000 transactions, I have discovered that every mortgage application, every tenancy, and every deal has its own wrinkles, crinkles, ups, and downs. However, there are many situations that keep coming up, time and time again, which raise basic questions that real estate investors need the answers to.

Having answers to those repetitive, recurring situations will help you move forward with your business of real estate. These answers will be valuable tools in your real estate toolbox, enabling you to quickly deal with those ever-present puzzles and questions that come up constantly in the world of real estate investing.

So, where are your answers coming from? The answer is, from a great understanding of The Basics.

The Basics recognizes three realities.

Reality # 1:
New real estate investors need to know the answers to classic, re-occurring questions.

Reality # 2:
Most investors, new and veteran, employ basic buying and renting strategies for 80% of all purchases.

Reality # 3:
Regular, ongoing discussion of basic examples is the best way to learn.

We are going to look at those situations that keep coming up and get into the details. This Tale from the Trenches is all about the legal side of landlording.

There is a lot more to successful landlording than just the legalities, but understanding your legal obligations is very important. Why? Because, as a landlord, you are governed by the laws of the legislative district where you own property. I will focus here on the Canadian province of Alberta.

There are a number of laws that affect being a landlord.

The most important pieces of legislation that you should be very familiar with are the Residential Tenancies Act (RTA) and the Residential Tenancies Ministerial Regulation (Regulation). See other important regulations below. You can find these and other applicable laws on the Internet. You can view online, print, or order your own specific copies, but read and be ultra-familiar with these important laws.

Next, Service Alberta, an arm of the Alberta Government provides a wealth of information online. One very helpful resource is the RTA Handbook. Here’s what they say on the Service Alberta website (accessed April 12, 2016):

This Handbook is designed to explain the rights and responsibilities of all tenants, landlords, and agents involved in renting residential premises in Alberta under the Residential Tenancies Act (RTA) and regulations:

• Residential Tenancies Exemption Regulation
• Residential Tenancies Ministerial Regulation
• Residential Tenancy Dispute Resolution Service Regulation
• Security Deposit Interest Rate Regulation
• Subsidized Public Housing Regulation

RTA Handbook – in black and white (pdf)

1. INTRODUCTION (pdf)
2. DEFINITIONS  (pdf)
3. RESPONSIBILITIES OF LANDLORDS AND TENANTS (pdf)
4. RESIDENTIAL TENANCY AGREEMENTS  (pdf)
5. INSPECTION REPORTS (pdf)
6. SECURITY DEPOSIT  (pdf)
7. RESIDENTIAL TENANCY AGREEMENTS ~ FEES & CHARGES (pdf)
8. LANDLORD’S DISTRAINT (Distress) (pdf)
9. RENT INCREASES (pdf)
10. LANDLORD’S RIGHT OF ENTRY (pdf)
11. SECURITY – KEYS & LOCKS (pdf)
12. TERMINATION OF A TENANCY  (pdf)
13. NORMAL WEAR & TEAR   (pdf)
14. ABANDONED GOODS  (pdf)
15. EMERGING ISSUES  (pdf)
16. RESOURCES AND REFERRAL INFORMATION  (pdf)

A Checklist for Tenants (pdf)

A Sample Cleaning List (pdf)

Inspection Reports (pdf)

RTA Offences (pdf)

 

What a great way to get up to speed quickly!! My strong, strong suggestion is that you read the RTA Handbook from beginning to end. Then read the frequently asked questions (FAQ) on the Service Alberta website. Between the RTA, Regulation, RTA Handbook, and the FAQ, you will soon have a very good understanding of how landlording works from the legal side.

Complying with the law
will make your life easier if you ever have problems as a landlord.

You just have to understand that if there is ever a problem and you are in Provincial Court or in front of the Residential Tenancies Dispute Resolution Service (RTDRS), the Judge or Hearing Officer will listen to the facts, look at your paperwork, and apply the law. It’s all there in the RTA and the Regulation, which is all explained in plain English in the RTA Handbook and the FAQ. The more exactly you comply with the law, the better your chance of having problems resolved in your favour will be.

RTA Offences

Don’t obey the rules?? You could be warned, fined, or taken to Court. There are lots of offenses. My perception and anecdotal understanding is that charges are rarely laid except in very serious cases and even fines are relatively rare.

Even though fines are rare, it doesn’t mean they don’t happen.

Here are just three examples. Beside each offence is the maximum fine on conviction of the offence as well as the specified penalty for a violation ticket.

• Failing to provide a “notice of landlord”: $5,000 & $150
• Failing to retain inspection records for at least three years after the termination of the tenancy or make them available to the Director for purposes of an inspection or investigation: $5,000 & $150
• Failing to provide a tenant or landlord with a key when the locks have been changed: $5,000 & $400

As I said, charges and fines are rare, but don’t be the exception that proves the rule! Now, let’s have some more information with thanks and a tip of the hat to the RTA Quick Reference Guide.

The RTA does not apply to:

• Mobile home sites covered in the Mobile Home Sites Tenancies Act.
• Business premises with living premises attached and rented under a single agreement
• Rooms in the living quarters of a landlord, if the landlord actually resides there
• And seven other situations

Fixed-term Tenancy Agreement Definition and Comments:

• is for a specific period of time, typically one year. It begins and ends on specific dates
• does not require either party to give notice to end the tenancy.
• At the end of the fixed term the landlord and tenant may negotiate a new residential tenancy agreement. The new agreement could include a change in the rent amount and the conditions of the tenancy. The new agreement can be a new fixed term or can be changed to a periodic tenancy.

Periodic Tenancy Definition and Comments:

• has a start date but not an end date
• A periodic tenancy renews or continues weekly, monthly or yearly without notice.
• either the landlord or tenant will end the agreement by giving notice
• is usually month-to-month

Implied Periodic Tenancy:

• a combination of a fixed term tenancy and a periodic tenancy

Inspection Reports

The Residential Tenancies Act (RTA), section 19, and the Residential Tenancies Ministerial Regulation section 4, speak to the topic of inspection reports. It is mandatory for landlords and tenants to complete both a move-in and move-out inspection report.

The following requirements apply to Inspection Reports:

• Landlords and tenants must inspect the residential premises within one week before or after a tenant moves in and within one week before or after a tenant moves out.
• The premises should be vacant when the move-in and move-out inspections take place, unless the landlord and tenant agree otherwise.
• The landlord and tenant must inspect the residential premises together. They must identify all damage such as scratches or burns and write it down on the inspection report.
• And six other comments

Security Deposits (a.k.a. Damage deposits)

The Residential Tenancies Act (RTA), allows a landlord to ask a tenant to pay a security deposit (sometimes called a damage deposit). The deposit is held in a trust as a security for damage and cleaning costs, unpaid rent, and any other obligation of the tenant to the landlord.

Purpose of a Security Deposit:

• To cover the landlord’s costs of repairing or replacing physical damage to premises.
• To cover the costs of cleaning because of extraordinary or abnormal use. This does not include cleaning associated with normal wear and tear.
• To cover any arrears of rental payments.

Amount of Security Deposit:

• The maximum amount a landlord can ask for as a security deposit is the equivalent of one month’s rent at the time the tenancy starts.
• The security deposit cannot be increased as rent increases.
• Refundable fees/charges are considered to be part of the security deposit. Therefore the total amount of the security deposit plus refundable fees cannot exceed one month’s rent.
• And eight other comments

Non-refundable Fees

The Residential Tenancies Act (RTA) does not prohibit a landlord and a tenant from agreeing to non- refundable fees and charges that are in addition to the security deposit and rent. The following points apply to additional fees and charges:

• Once a tenant agrees to an additional fee or charge, the tenant is obligated to pay the fees or charges when the circumstances giving rise to them occur.
• A refundable fee or charge is considered to be part of the security deposit.
• A non-refundable fee or charge is not subject to the security deposit restrictions.
• And five other comments

As you are getting started, it might seem like there is way too much information to figure out and really understand. But, it’s all pretty straightforward and, just like any other job or skill, the more effort you put into understanding how landlording works, the better you will get at it.

Now, let’s get out of the theoretical and into the practical. Following is the case of Krause v. Bonin decided in the Provincial Court of Alberta. I have edited the case for easier reading, but if you want to read the full version, you can view it in the CanLII database. For research on other landlord and tenant issues in the CanLII database, just enter “Residential Tenancies Act.” There is lots of interesting reading,

This real case illustrates what happens when landlords or their property managers don’t know the rules.

In the Provincial Court of Alberta

Between:

Plaintiff           Shelby Krause

– and –

Defendants      Robert Bonin and Kazacka Ltd.

Summary of the facts:  March 1, 2010 the tenant, Ms. Krause (‘the tenant”) and her friend, Ms. Arnold, entered into a “month to month” residential tenancy agreement with the landlord, through Mr. Bonin, ( the property manager) for a unit in an apartment in Red Deer, Alberta. The rent was paid in a timely manner until July 1, 2010 when it was paid late. The rent due August 1, has not been paid.

Beginning on August 1 at noon, Mr. Bonin’s office repeatedly left messages on the tenant’s cell phone and contacted her known friends and family instructing them to have her call. There was no response.

On August 6, Mr. Bonin attached a “two week” notice to the apartment door purporting to terminate the tenancy as of August 20 for non‑payment of rent. While not relevant for the purposes of this analysis, the notice was ineffective as it purported to require payment of administrative fees or penalties in addition to rent in order to nullify the notice (contrary to s. 29(2) of the Act), and did not properly calculate the required notice period, which is exclusive of the date of service and the date of expiry.

On August 9, another tenant complained of an odour coming from the suite. When Mr. Bonin attended, it appeared to him that no one had been in the apartment since August 6, as the previously posted notice remained in the doorjamb. He decided to enter to “take a look.” He says he that what he observed led him to conclude that the tenant had abandoned the suite. This included various scattered items of furniture, insects, and some spoiled food on the counter and in the fridge. Mr. Bonin belatedly posted a 24-hour notice of his intention to enter the premises on the apartment door, and returned on August 10. On that day he had the locks changed and sent a letter to the tenant decreeing that as she had abandoned the suite, her personal property was being stored or disposed of, she was responsible for the associated cost, and threatening that criminal charges may result if she returned to the building or her apartment. The letter was sent to her mailbox at the apartment.

As it happens, Ms. Krause was pregnant with her first child. Around the first of August, she began having difficulties with the pregnancy and was staying at her mother’s house. In June her roommate had moved out, leaving the responsibility for the rent in her hands. In early August her assistance cheque was not available on time to pay the rent. She went into early labour on August 6 and had her baby on August 9.

About this time she learned of the notice by the landlord purporting to terminate the lease on August 20. She could not afford the rent and the various administrative penalties that were being demanded. She returned to her suite on August 10, to pick up some of her property including her baby things. She found the locks had been changed and she had no access to the apartment or her personal property.

On August 12th, Mr. Bonin had the tenant’s property removed and the apartment cleaned. He disposed of any items he deemed a health hazard, and put the remainder into storage.

On August 25th, he met with the tenant and advised that in order to recover any of the remaining property she would have to pay the moving and storage costs, which he estimated at over $1,000. She did not agree with this demand, confirming in her letter of August 27 that she had not abandoned the suite.

On September 28, as the impasse had not been resolved, Mr. Bonin determined that the value of the items stored was under $2,000.00 and he disposed of them believing he had the authority to do so under s. 31 of the Act. Some items were taken to the landfill and some sold at what he decided was fair value to persons who assisted him with the cleaning of the apartment and removal of the property.

It should be noted that considerable effort was devoted by Mr. Bonin and his witnesses at trial to describe the dirty and unsanitary condition of the apartment. However the photographs taken by him did not show anything close to the conditions described. This seemed odd, as a landlord normally makes an effort to take photos that clearly depict the unsatisfactory condition or disorder of the premises. While I am satisfied that the apartment was not in a very sanitary or clean condition, when considered in light of the other findings in this case, one is left with the conclusion that this evidence was exaggerated.

Issue #1. Upon electing to treat the tenancy at an end, did the landlord have the right to change the locks and retake possession of the apartment on August 10, 2010?

Mr. Bonin took the legal position on behalf of himself and the landlord that the tenant had abandoned the apartment, or at the very least that he had reasonable grounds to believe that to be the case, and that this allowed him to break into the apartment and dispose of her property.

The Residential Tenancies Act SA 2004 (“the Act”) is a comprehensive statute outlining the rights as between landlords and tenants. A tenancy can only be terminated in accordance with the act. Any waiver or release by the tenant of the rights, benefits or protections of the Act is void (s. 3(1)).

Section 27 of the Act codifies the landlords rights when the landlord believes that the tenant has abandoned the premises or otherwise repudiated the lease.

27(1) If a tenant by abandonment of the residential premises or otherwise gives the landlord reasonable grounds to believe that the tenant has repudiated the residential tenancy agreement, the landlord may either

(a) accept the repudiation as a termination of the tenancy, or

(b) refuse to accept the repudiation and continue the tenancy.

(2) In the case of a periodic tenancy, for the purposes of subsections (3) and (7), the tenant’s acts of repudiation constitute a proper notice effective to terminate the tenancy on the earliest date that the tenant could have terminated the tenancy under this Act.

(i) in the case of fixed term tenancy, until it would have expired had the landlord not accepted the repudiation, or

(ii) in the case of a periodic tenancy, until the termination date.

Mr. Bonin changed the locks and removed Ms. Krause’s property ‑ acts which were consistent only with electing to terminate the lease. Upon an election to terminate the lease, s. 27(2) applies. Any acts of repudiation “…constitute notice effective to terminate the tenancy on the earliest date the tenant could have terminated the tenancy under this Act”. The earliest the tenant could have terminated would have been with a 30 day notice under s. 8(1)(a). Section 8(1) (a) provides that a periodic monthly tenancy has to be terminated by the tenant on or before the first day of a tenancy month to be effective on the last day of the tenancy month. As Mr. Bonin claims to have become aware of acts of abandonment or repudiation after August 1, 2010, notice to terminate the tenancy would have been effective on October 1. In other words, when there are facts sufficient to constitute acts of repudiation (including abandonment), the Landlord is in the same position as if he were provided with a 30 day notice by the tenant under s. 8(1).

Other than proceeding with the consent of the tenant, the Act provides for no right outside of a court order to terminate the lease or retake possession until the notice period in s. 27(2) expires. Mr. Bonin’s actions were not consistent with the statute. His retaking of possession on behalf of the landlord was unlawful, in breach of the covenant for quiet enjoyment under s.16 and the prohibition concerning the changing of the locks in s.24.

In the vast majority of situations where the rent will be in arrears concurrent with the tenant vacating or abandoning the premises and the landlord can terminate and if necessary get an order for possession on an expedited basis using the 14 day notice provisions. The situation is very different if the landlord wishes to terminate solely on the belief the tenant has abandoned or repudiated the lease.

Mr. Bonin’s entry for the limited purpose of dealing with the odour, any insect infestation, and to determine if there had been abandonment was justified under s. 23(2).

Issue #2: Did the landlord have the right to remove the tenant’s personal property, detain it and then dispose of it in accordance with s.31 of the Residential Tenancies Act?

No. Section 31 of the Act applies to abandoned goods. The tenancy here had not expired or been properly terminated. Further, Ms. Krause testified she had not abandoned the premises. Accordingly s. 31 does not provide any authorization for seizing her property.

Damages: The main purpose of damages in cases of trespass to chattels is to put the person who suffered the loss into the same position, as much as possible, as she was in before the loss occurred. The onus is on the person suffering the loss to prove the value of the loss on a balance of probability.

All of the circumstances should be taken into account. The loss is usually determined by assessing “actual value”. This is not the same as replacement value or market value, but the pecuniary loss suffered by the claimant. In coming to a conclusion about actual value, evidence respecting replacement value less depreciation and market value is admissible, but is not conclusive. It is simply considered along with any other evidence.

A second list of items prepared by Ms. Krause contained more items than the first list, more detailed descriptions and dollar values totalling $10,570.00. The evidence of Ms. Krause and Ms. Arnold was that when the court required a better accounting of the loss for trial purposes, they sat together and on a room by room basis, tried to recall what items were in the apartment. They looked up the cost of similar goods on a Wal-Mart website.

I am satisfied that an honest effort was made to list the property lost. I am not satisfied that the second list contains an accurate representation of the quality of the items. This was not due to any intent to deceive, in my view, but is attributable to the witnesses not being familiar with the technical difficulties encountered when calculating actual value for the purpose of damages.

It was, however, apparent from the exhibit photos that the furniture in the apartment was of low end quality, some in need of repair, and was generally consistent with furniture and belongings which were second hand and of a type collected by a young person just starting out on their own.

Further with respect to the issue raised as to whether some items, such as clothing, were present on the property, I would accept the evidence of Ms. Krause and Ms. Arnold over that of Mr. Bonin and his witnesses. The removal of the tenant’s property was conducted over a period of time when a number of people had access to the apartment. There was no impression gained from the evidence that the inventory by Mr. Bonin was carefully supervised.

Looking at all of the evidence, I determine the loss in favour of Ms. Krause to be $4,000.00.

In addition I find that an award for non‑pecuniary general damages is appropriate considering the emotional effects and inconvenience suffered by Ms. Krause. There were serious and ongoing breaches of the Act, and disposal of virtually all of her worldly goods, including those she was relying on to take care of her newborn. Replacement of the various individual items has or will involve considerable time, effort and inconvenience. The award in this regard is $2,000.00.

Counterclaim by the Landlord: Mr. Bonin submitted an invoice whereby the costs of the seizure and cleaning of the premises were calculated. It was apparent on cross examination that the invoice was not based on independent billing by third parties or records of actual time spent, but on Mr. Bonin’s ruling of what was appropriate. One invoice appeared to be from an independent company, but was calculated and issued by Mr. Bonin. Many of the persons involved in the seizure or cleaning were paid in cash or in kind, with no accounting record. Administrative fees and fines were assessed, apparently with no reasoning behind their quantum other than Mr. Bonin’s judgment of what he felt was fair. All in all, the amounts claimed were generally unverified, related to illegal or unauthorized activities, or constituted penalties for which relief from forfeiture would and does apply.

With respect to cleaning costs, while the apartment wasn’t in pristine condition after the Landlord’s agent retook possession, Ms. Krause was deprived the opportunity of cleaning the property by the Landlord’s breach of the lease. Therefore the cleanup costs, other than the sum of $50.00 for the work required to deal with the rotting potatoes, are not established.

The total owing for damage deposit offset against the rent, and the allowed cleaning costs is $495.68 ($775‑50‑229.32), in favour of Ms. Krause against the landlord.

The final total of the judgment in this matter is in favour of Ms. Krause as follows:

–   as against Kazacka and Bonin, jointly and severally, the sum of $6,000.00;

–   as against Kazacka only, $495.68.

In the event that any party wishes to speak to the issue of costs, they can bring the matter forward within 30 days for that purpose. Otherwise, Ms. Krause is entitled to a cost as against the Landlord and Mr. Bonin, jointly and severally, in the sum of $800.00, inclusive of all disbursements. While this exceeds the usual tariff, the trial was lengthy and involved.

 

Lessons Learned:

1. Know the rules
2. Follow the rules
3. Document everything

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

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“Woodfall’s Law of Landlord and Tenant” image by umjanddoan and used under CC Attribution Generic 2.0.

It’s sad to say, but there are dishonest people out there. Some real estate buyers, sellers, lawyers, and realtors will try to pull the wool over your eyes. A classic trick unscrupulous people use is to slip a clause into a document or take one out without you noticing. Luckily you can protect yourself from this and keep them in check by making sure to read contracts thoroughly, as well as to reread them after every round of negotiation and/or amendments. Vigilance is a necessary aspect of due diligence.

Download the audio file HERE and the text/handout HERE.
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Some People Aren’t Honest

Wha??? Barry, tell me it isn’t true!!!

Sorry, folks, it is true. I remember helping Don Campbell an apartment deal where was having a long, difficult set of negotiations with a seller. They went back and forth with numerous changes being made to the documents. When the final set of documents came to Don’s desk, he and I then gave that final version a very thorough going over. We discovered that the seller had reinserted a clause that we had removed from the lengthy contract three versions ago. The seller slipped it back in giving himself a huge advantage. However, we caught it, and we learned the hard lesson that some people are not honest. You have to read, reread, and check documentation especially when there are custom contracts.

One of our clients recently learned this lesson again in a Rent-to-Own deal. He had done a number of Rent-to-Own deals, and found that his legal accounts were quite a bit larger than they would be for a normal Buy-and-Hold deal. He completely understood that creative real estate takes more legal time, and therefore generates larger legal accounts, but he wanted to try to defray those legal expenses. His approach with a tenant buyer was to insert a term in clause 7.6 of the standard MLS real estate purchase contract to the effect that the buyer would pay the investor’s legal account to a maximum of $1,500.

When we sat down to review his most recent Rent-to-Own deal where the tenant was ready to buy the property, he gave me a copy of the signed contract. Then he took great pains to point out to me clause 7.6 where the buyer had agreed to pay our client’s legal account up to, but not exceeding, $1,500. “Duly noted” I said. “We’ll make sure that the buyer’s lawyer is aware, and we will advise them that $1,500 would be added to the price in the statement of adjustments.”

So, that’s what we did. In communicating with the buyer’s lawyer, we referred to clause 7.6 and indicated that $1,500 plus GST (of course) would be added to the purchase price and set out in the statement of adjustments. They didn’t say anything, and, in due course, we sent over our trust letter. On receipt of our trust letter, the buyer’s lawyer sent me a letter indicating that the buyer would not be paying the $1,500 because he wasn’t required to.

I was completely flummoxed; what was he talking about?

After some back and forth, the buyer’s lawyer sent me a copy of the page of the MLS contract that contains clause 7.6. His version had no reference to the buyer paying the seller’s legal fees not to exceed $1,500 plus GST. I phoned our client who was very surprised and didn’t have an answer. The next day he called me back and said, “You know, we went back and forth on a couple of things in the contract and in the scanning and faxing back and forth, when they finally signed off on the contract, they only sent me the signing page and not the other pages.”

So the arguments back and forth started. In the end, the buyer agreed to pay $800 of our client’s legal account, but not $1,500. To me, that just confirmed that they substituted their own page of the contract because they saw that they could. Why would they agree to pay $800 if they hadn’t agreed to pay anything? That just doesn’t make sense.

Our client decided this was just another tuition cost at REU (Real Estate University). He was making good money on the deal and he wanted to move on, so he accepted the $800 and we closed the deal.

Lessons Learned:

1. Through each offer and counteroffer, get a full copy of the contract, each page initialed.
2. Read each offer and counteroffer thoroughly. Those seemingly pre-printed paragraphs can change.
3. Initial important clauses to confirm parties’ awareness of same.

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

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“Sherlock” image by HebiPics, used under a Public Domain Dedication, has been combined with the “money i’ll never spend” image by brian.ch under Creative Commons Attribution Generic 2.0.

Smaller municipalities can be an ideal place to invest in real estate. This is particularly true if you focus on an area where there might be many opportunities and little competition. Prices are often lower in small towns, and even medium-sized cities can provide an advantage over big metropolises if you specialize in one neighbourhood or region. The key is that you need to become a local expert. Leverage your small town advantage to become a big asset for you as a real estate investor!

Download the audio file HERE and the text/handout HERE.
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Real Estate Investment:
Small Town Advantage

When I first met one of my clients in 1995, he and his wife had just moved to a small town about 125 km out of Edmonton, a commute of about an hour and a half. Both of them had lived in the city but originally came from small towns. They were happy to find jobs in their areas of expertise and soon settled into small-town life.

Over the years they bought numerous properties, working their way up to a portfolio of approximately 20 doors. When I told them they were going to be featured in Tales from the Trenches because of the interesting Tale created when they acted as their own lawyer, they wanted to make sure I also recounted in Tales their success as investors. “Absolutely” I replied, because I always want to talk about successes as well as those piles of do-do that any active real estate investor risks stepping in.

When we talked about their very successful portfolio, they remarked that their best success had come by acquiring properties in the small town that they lived in. The first thing they noticed when they moved there was that real estate prices were way, way lower than in Edmonton. There wasn’t that much rental housing available. But, there seemed to be lots of renters. The town was small, but it served an active, agricultural community. It also had an agricultural college, the local county government offices, and some energy industry service companies along with a fair bit of tourism drawn to the nearby Provincial Park.

The next thing they noticed was that rents were not that much lower than in Edmonton, maybe $200 a month less for a three-bedroom bungalow. But, that same three-bedroom bungalow was only half the price it was in Edmonton. So, they dipped a toe in the water and bought two properties, both in reasonably good shape. A little bit of paint and carpet, and very quickly both of these properties were rented to great tenants and the positive cash flow was about $500 per door.

They sold their Edmonton properties and used the cash to buy more properties in their small town, all of them easy to rent with great positive cash flow. Then they came across what looked like a disaster, two fourplexes that were run down with only six of eight suites rented. The absentee owner was a terrible manager, alienated tenants, didn’t fix anything, and had decided landlording wasn’t his game. He was a classic motivated vendor: ready to sell and say goodbye.

Our clients didn’t rush it. They made sure to get proper inspections which revealed some sewer line blockages, roofs that desperately needed re-shingling along with furnaces and water tanks that were on their last legs with a couple of furnaces already kaput. Armed with their inspector’s report, they negotiated hard with the seller for price reductions, and ended up buying those fourplexes for $140,000 each.

Financing was with the local Alberta Treasury Branch (ATB) who already had the existing mortgage. This local ATB branch knew our clients well as they had already provided them with a number of other mortgages on their local portfolio.

When they went in to make their mortgage application, they presented their plans for renovations, a list of tenants who had already made applications at very good rental rates, and asked for a mortgage based on the after repaired value, which, at the time, would have been $200,000 per fourplex. The mortgage application was granted, the deal closed, and the renovations were completed using our clients’ own cash. Then ATB did another appraisal and funded the second portion of the mortgage based on the now established after repair value.

Since our clients bought these fourplexes about eight years ago, they have never had a vacancy and values have just gone straight up. When they sold they enjoyed a very nice rise in equity, and, of course, had great positive cash flow during their time of ownership for those properties. When we were discussing this particular deal, our clients told me that they couldn’t ever have done this well in Edmonton, not only on the fourplexes, but on the other parts of their portfolio as well.

“Once we knew the town and the surrounding area, we were the only actual real estate investors around. Sure, a couple of other people owned a couple of doors and there were actually some apartments, but, overall, we were the only ones with any expertise who were running our real estate portfolio like a business.”

Many clients have repeated this same story to me and it is almost the same story no matter what small town or even small city that they live in. Andrea Warkentin lives in Red Deer, and I consider her an expert in the surrounding area. Many other clients have done the same thing in their small town. I think small towns or cities, not always but often, give you an edge in the deal; lower priced real estate, competitive rents, and a non-competitive investing environment.

If you are not in a small town you can get many of the benefits if you specialize in an area. The classic example is Russell Westcott who specializes in condominium townhouses located in NE Edmonton. There isn’t much that goes on around townhouses in NE Edmonton that Russell and his long-time realtor don’t know about.

So, if you don’t live in a big city, utilize your small-town advantage; it’s way bigger than you think! If you live in a big town or small to medium city, make sure you are a specialist in a strategy tailored to your area.

Lessons Learned:

1. Lower prices and competitive rents mean small towns and cities can be gold mines.
2. Wherever you are, be a local expert.

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

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“Peace River Neighbourhoods” image by Mhalifu used under CC Attribution-ShareAlike 3.0 Unported.

Experienced investors sometimes do real estate deals without the help of a lawyer. But even knowledgeable people can miss things that a professional wouldn’t! In this Tale, we have a seasoned investor who acted for himself when he bought a property, but got help from me when he was selling. I found a couple of things registered on the title that he wasn’t aware of. Lucky for him, it was quick and easy to have these removed, but it could have been much worse. If you are going to be your own lawyer, make sure to be even more diligent because you’ll be dealing without backup…

Download the audio file HERE and the text/handout HERE.
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To Lawyer or Not to Lawyer?

A long-time client sold a property in small-town Alberta. Once the paperwork was ready, I gave him a call and he came in to sign. We had a great conversation about life, family, his portfolio, and plans for new real estate projects. I hadn’t seen one of my favorite clients for a couple of years so it was a great catch up.

Then it was time to sign documentation and go over the numbers. One thing your lawyer should always discuss with you is how to pay out your sale proceeds. Typically there might be realtor’s commission to pay, pay out on an existing mortgage, and perhaps some outstanding taxes along with a legal account. We got to this point in the paperwork and I said, “I see you sold this on your own so there is no commission. So it looks like the only two things to pay out are the mortgage and my legal account.”

His face went white. “Mortgage, what mortgage? I don’t have a mortgage.” I showed him the copy of the title, which indicated a mortgage to Alberta Treasury Branches (ATB). “I see that a mortgage is registered, but I paid cash. I don’t know what’s going on,” said our investor.

Then I pointed out another registration against title being an unpaid vendor’s caveat. He looked at the caveat and said, “Those are the names of the people I bought the property from.” Remember I said that this was a long time investor and client. At this point I asked him, “Did I act for you on this deal?” He looked a little sheepish and said, “No, it wasn’t a very expensive property and I knew the people selling… so I thought I would just do it on my own.” Without beating up this very nice man, I gently pointed out to him that this is why you hire a lawyer.

Why do I need a lawyer?

One of the many jobs your buyer’s lawyer does for you is to make sure that title to the property you are buying is completely clear of anything related to the previous sellers. The lawyer for the seller is put under trust conditions that once the purchase price is paid, the seller’s lawyer will clear the title of, in this case, the old ATB mortgage and the unpaid vendor’s caveat.

The happy ending is the ATB mortgage was paid out and our investor was pretty easily able to get a discharge of the mortgage from ATB. Similarly, the sellers were still in the small-town and signed a discharge of the unpaid sellers caveat.

Our member was fortunate that these two potentially very serious problems were easily solved!

Lessons Learned:

1. Obtain a copy of your title before you sell.
2. Make sure only expected registrations appear on the title.
3. Best advice, don’t be your own lawyer!

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

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“Exercise That Diligence” image by Alan Levine used under CC Attribution 2.0 Generic.

In a previous Tale, we reviewed the calamitous and stomach turning events at the Penhorwood Condominium complex in Fort McMurray, Alberta. Our review looked at events occurring in 2011, but in 2014 things really came to a head. I thought this was serious enough to reprint some our previous Tale, and then follow-up with a discussion of how the circumstances evolved. Read on and be very aware that some condominiums have ultra-serious issues.

Download the audio file HERE and the text/handout HERE.
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Update on the Disaster at Penhorwood

2011 Summary:

The disaster at the Penhorwood Condominium Complex in Fort McMurray is another graphic illustration of huge potential problems in a condominium purchase. In March of 2011, on a cold winter evening just before midnight, all residents were ordered to evacuate on 30 minutes notice. The Condominium Board had requested the evacuation order after receiving an engineer’s report fearful of a disastrous foundation collapse.

Fingers were being pointed everywhere. The Condominium Corporation blamed the builders and the developers, the Regional Municipality of Wood Buffalo, project engineers, safety codes officers, and the architect. There had already been a lawsuit in 2007 that the Condo Corp had launched against the developer, which was based on a previous engineer’s report noting numerous deficiencies. There had also been a $25,000 per unit special assessment related to earlier problems. Statements of Defense denied all allegations and nothing had been proved in court.

2014 Update:

The Edmonton Journal published an article describing how the Penhorwood owners had been ordered by the regional municipality of Wood Buffalo to demolish all the condominium units. Those 300 residents evacuated in the middle of the night in 2011 had not been allowed back into the condominium complex. There had been talk of repairing the damaged units, but nothing came of it. The Edmonton Journal article says that the regional municipality threatened fines of up to $100,000 and a further $1000 per day and/or imprisonment not exceeding six months. In follow-up articles, the regional municipality has said that they never meant to threaten residents and would never impose those fines or try to put anyone in jail.

However, since the condominium owners have been fighting the demolition order for a couple of years and have said they cannot afford the costs of demolishing, the regional municipality says they will now do it. Christine Burton is president of the Penhorwood Condo Association and she says that the regional municipality will file a caveat against each unit title. They intend to recoup the cost of demolition when the land is sold. Demolition cost is approximately $100,000 per unit.

Remember that every owner will now lose all the cash that they put into each unit purchase, be responsible for their mortgage, and owe a further $100,000 demolition cost for each unit they own. I don’t know the original purchase price of all the units, but I expect minimum losses for each unit owner will be in the $250,000 range.

On their part, condominium owners continue with their $60 million lawsuit launched against 28 defendants including the municipality, developers, and construction companies. This is the worst condominium disaster I have ever come across!!!

Where does this leave you as an investor looking to buy a condominium unit?

Due diligence, due diligence, and more due diligence!

I made many suggestions in the first Tale about Penhorwood, there is also my Tale “Condo Reserve Fund Studies,” and you can take a look at the CMHC’s Condominium Buyer’s Guide.

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

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“High Risk Area” image by Howard Lake used under CC Attribution Share-Alike 2.0 Generic.

When a qualified tenant wants to be a homeowner, but can’t get a mortgage, investors can offer him or her a lease-option. This creative investment strategy is also known as rent-to-own. The trick is doing enough diligence on the tenant to make sure that they will be able to qualify for a mortgage at some point in the (relatively) near future. It also helps to get insurance in case something goes wrong. The tenant pays a non-refundable sum of money for their lease-option, and the whole deal can provide an excellent return-on-investment (ROI) for real estate investors.

Download the audio file HERE and the text/handout HERE.
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How to Use Lease-Options

The lease-option, often referred to as ‘rent-to-own’ or RTO, is a popular creative real estate investment strategy. The essence of this approach is finding and qualifying a tenant who would like to be a homeowner, but for various reasons cannot immediately qualify for a mortgage. This is where the creative part of our strategy comes in. As long as the tenant has the ability to pay a solid chunk of option money (typically not less than 5% of purchase price and better to get more), you can start on the other parts of what we like to refer to as ‘qualifying a tenant.’ Your focus is doing enough diligence to be confident that the tenant will be able to qualify for a mortgage in the future so he or she can buy the property.

Below are the RTO experiences of a graduate from our Deal-Ready Documents Focus Workshop. In his own words:

Here’s a really great story that a colleague shared with me. It brought home a few points I think we can all learn from.

This colleague, I’ll call him Joe, signed a new tenant buyer to a nice clean property in an older neighbourhood. It was a character home in great condition, and the tenant—a single man with a few credit history issues—seemed like a great guy.

Joe exercised his due diligence by checking out the tenant’s credit history, getting him to sign off on a letter stating he understood the parameters of the RTO deal, and making sure there was a good chance he would be able to successfully complete the lease agreement and act on his purchase option.

Over a year went by and all seemed in great order, but then the problems started. It became difficult for the tenant to make his payments on the agreed upon schedule. He just needed a bit of time, he said. Understanding that everyone runs into problems from time to time, Joe agreed to wait for the payment. The waiting stretched out, and the rent fell into arrears. The tenant was warned about the consequences of his actions. Nothing changed.

Joe went over to the house to speak to the tenant and collect a cheque. He says he nearly fell over when he entered the house. It was trashed. A once lovely character home was now like something out of a horror movie: holes in the walls, piles of trash, and filth caked on every conceivable surface. The house was unlivable and the only recourse was to evict the tenant.

The drama didn’t stop there. Although Joe had the non-refunded lease-option monies, they were insufficient to cover the thousands of dollars in repairs. His insurance policy would not cover the repairs.

The house is now repaired, looks fantastic, and has a really great family living there. Even better, a few hard but important lessons were learned.

Lessons Learned:

1. Even though a prospective tenant may put down a substantial amount of money toward an option consideration, he or she may not necessarily be a good tenant.

2. Make sure you screen your tenant buyer thoroughly in all respects. This includes getting personal and landlord references as well as checking credit history and employment. Don’t deviate from your standard tenant qualification practice (unless you make it more rigorous). 40% of tenant/buyers don’t close and are always a tenant!

3. Even though you may follow up on all credit and personal references, and things look OK, trust your gut instinct.

4. Make sure you’ve got the right type of insurance. This can save thousands of dollars.

5. Check in at least every quarter. Look at how the property is being treated.

6. Get to know your tenants; a personal connection will help bring the RTO deal to a successful conclusion.

Barry’s Takeaway

Does this story turn you off lease-options/RTO? It shouldn’t. The stats say that 60% of RTO deals close (meaning the tenant actually buys the property) with our members achieving 40%-50% ROI over a typical two-year term. This leaves plenty of room to add a joint venture partner and offer an amazing 20% – 25% ROI to them. For deals that don’t close, positive cash flow during the lease term and a solid, non-refundable option payment are still good results.

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.

The foundation of real estate investing is to buy and hold property. Sometimes, however, opportunities come along that require a different strategy. A highly motivated seller with a low/no equity property could be approached with an Agreement for Sale. This is both a creative real estate investment strategy as well as a type of legal document. In this Tale from the Trenches, our investor was able to put down very little money, but still got control of the property through seller financing. Despite the difficulties of Agreements for Sale, they can be very lucrative if handled correctly

Download the audio file HERE and the text/handout HERE.
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Agreements For Sale:
Creative Cash Takes Time And Effort

Two years ago our member ran across an opportunity in his community group. Mom and Dad owned a nice, well-managed condo with a great reserve fund, but their marriage was falling apart. Their CIBC mortgage was in arrears to the tune of $10,000 and condo fees were $4000 in arrears. Dad suffered from a physical disability with no ability to generate income. Mom had taken a job in South America and Dad remained here in Alberta. At the time, condo prices were depressed. The sale price was $200,000. There was only about $10,000 equity in their condo, all of which would be taken up by arrears.

That situation makes it impossible for the sellers to list with a realtor unless the sellers were prepared to pay real estate commissions out of their own pocket. These sellers needed to sell without a realtor. How does an investor creatively purchase this property from a motivated seller? Creative doesn’t mean applying for a conventional mortgage with the usual down payment. The best you could do is 15% down with a Canada Mortgage and Housing Corporation (CMHC) insured mortgage and on a purchase price of $200,000 that’s a $30,000 down payment. And, even in Alberta, mortgages are not assumable without qualification.

The question is, how could our member, for as little money as possible, get control of this property using seller financing? The answer is, our member employed a real estate strategy known as an ‘Agreement For Sale,’ abbreviated as ‘AFS.’

An Agreement for Sale is a Concept and a Document

Formerly in wide use across Canada and still in use in Alberta, an Agreement For Sale or AFS is a strategy where the buyer takes control of the property and uses seller financing. The words ‘Agreement For Sale’ are both the name of the strategy and the name of the security document that the buyer gives the seller.

Seller’s Name Stays on Title

The essential first part of an AFS is that even though the buyer takes full possession of the property and is responsible for taxes, insurance, and maintenance of the property, the title remains in the seller’s name. Sellers love that title remains in their name when they are providing the financing.

Seller Acts as Lender

The second essential part of an AFS is that once you have paid your deposit, if any, the seller is your lender for the rest of the purchase price. The seller may have a large mortgage already registered against the property, a small mortgage, or no mortgage at all. The amount of the seller’s mortgage, if any, is usually not a concern to you. You are not assuming the seller’s mortgage. He or she is your bank for whatever money you still owe. What the buyer owes to the seller is called the ‘unpaid seller’s equity.’

There were lengthy negotiations extended by Mom being out of the country. It took a long time to get an arrears statement and any cooperation from the foreclosure lawyer. Finally, we got the arrears statement, which confirmed the existing mortgage to CIBC was $10,000 in arrears. It was time to write the offer.

Now, in many cases and including this Tale, after paying the deposit/cash portion, the amount you owe the seller and the amount the seller owes his lender might be exactly the same in dollar value. That was the situation for our member in what we describe as a ‘low/no equity AFS.’

Using a standard Alberta Real Estate Association (AREA) purchase contract and a specialized AFS schedule, he and I wrote up the contract. Lucky for us, Mom had to return from South America so during her two-week visit, we got the contract signed and she went to see a lawyer that I was able to recommend as being familiar with AFS.

Not All Lawyers Know Agreements for Sale

The AFS strategy does not work well with lawyers who don’t understand or haven’t worked with AFS. Always make sure your seller has a lawyer who understands and who will cooperate in an AFS transaction. I sent a draft AFS document to the seller’s lawyer. We finally got the AFS details worked out, although we didn’t get everything we wanted.

One ideal AFS component is a power of attorney (P of A) from the seller to the buyer leaving the buyer in full control of the property. The P of A is very useful for a buyer who might have to deal directly with a lender, municipality, or uncooperative post-closing seller (no more skin in the game). The seller did not want to give the P of A on the advice of their lawyer, which later caused our member trouble. However, we did get them to sign a transfer of land to be held on file along with a management agreement.

Having the signed transfer on file facilitated the situation two years later when the AFS matured and our member had to refinance to pay the full purchase price or sell to third party. A management agreement is not as powerful as a P of A, but still useful. And so, with much backing and forthing and time and stress the deal closed and our member now controlled the property. In the end, our member paid the seller $16,000 representing the mortgage arrears, condominium arrears, and $2,000 for the seller’s lawyer’s legal fees.

… Wait a minute, if the seller’s equity was only $10,000 should our member have paid $16,000 cash?

Over the next two years our member battled with CIBC on the question of making the underlying mortgage payment. He didn’t want to simply deposit his AFS payment to the seller’s bank account because the sellers were in financial difficulty. What if they received our member’s payment and then didn’t make their mortgage payment?

CIBC didn’t want to deal with our member because of the foreclosure history. They didn’t like and would not abide by the management agreement. Similarly, the condominium corporation was not cooperative. However, our member finally worked out the details of ensuring the sellers underlying mortgage payment was made, dealt with the condominium corporation, and installed a very satisfactory tenant.

Fast forward two years later and our member wanted to sell the property. The AFS was maturing and the condominium market had recovered. The next issue to deal with was that lenders and title insurance companies have tightened their rules to disallow skip transfers. They want the seller’s name on the contract to be the same as the name on title.

The sellers wouldn’t cooperate so our member negotiated financing with Calvert Home Mortgage. He transferred the property to himself, put on the new mortgage, and paid out CIBC. Now, the title was in his name and he listed the property, which sold quickly for $268,000.

A rocky, stressful road… leading to a sweet profit. Even allowing for substantial extra expenses and real estate commission, our members annualized return-on-investment (ROI) was 280%.

Lessons Learned:

1. Low/no equity does not equal no value.

2. Power of attorney is ideal for low/no equity AFS.

3. AFS require lots of babysitting. This is a senior strategy. You need education/coaching/solid legal representation before embarking on AFS deals.

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.

It doesn’t matter who you are working with in a real estate deal, you still need to do your diligence. This means asking questions and reading the documents—even if dealing with a friend. Don’t assume an expert is infallible either; professionals can still be wrong or make mistakes.

Download the audio file HERE and the text/handout HERE.
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Diligence with Friends and Experts:
A Tale From The Diligence Trenches

Here at Investor Lawyer we talk a lot about diligence. We harp on how important it is to undertake enough diligence to say, “I have done due diligence.” When you can confidently say, “I have done my due diligence,” you can then make a buying decision. Sounds easy. Find a property or investment, work your way through the diligence items, and make a decision. Like all theories, putting it into practice sometimes has speed bumps.

One major speed bump on the road to due diligence is the presence of an ill-informed friend or so-called expert. We all tend to believe what our friends and experts tell us. Don’t do it!!! Here, in his own words, is one investor’s account of a couple of friend/expert situations (slightly edited for flow).

Hi Barry: RRSP Loan inquiry

Long time no hear, from me that is, as I’ve just finished listening to you on “Tales From The Trenches!” Just last night, I sat down with a paper, pen, and AREA contract and listened to your detailed explanation of this contract you went through in March of 2009. There’s always something else that makes us go…..oh wow, I didn’t hear that all the other times I’ve listened to it. I’ve made myself a word document that is now on my USB and will accompany me on all offers. Of course you know that you make an educational impact on us, but please don’t forget that all those recorded meetings are still making an impact on us – A BIG thanks for that!!!

I’ve done a couple of RRSP loans already with 2 REIN members and wondering what a typical time limit would be to complete the documents from your office? I know there will be a lot of questions, but I’ll fill you in the best I can for now.

This would be a loan to a friend who wants to buy an existing Halal grocery store.
– The loan amount would be $40,000 from my Olympia Trust account, which is ready to go.
– It would be for 1 year, monthly payments (We haven’t agreed on an interest rate yet).
– 1st payment January 1st, 2014.
– Mortgage can start when lawyer’s office can have it ready.
– He can pay $20,000 in March, which I’m OK to put in a contract.
– I’m not sure if your office would be OK with it or not, but he can use you as a lawyer as well, if not, it would probably be a Law Office in Calgary.

That’s all I can think of at the moment.

 

Here’s my reply:

Hi there and thanks for those kind words.

With respect to the RRSP I note that you have done a couple already. If you have a lawyer that you have used and you were happy with the service and the fee, then you may be best served by continuing to use that lawyer.

As to the loan itself, it has to be what I believe the CRA calls a “qualified investment.” I don’t think a straight loan is a qualified investment. What security is he giving you for the loan?

I look forward to your comments

Cheers, Barry

To: Barry McGuire
Subject: RE: RRSP Loan inquiry

Hi Barry:

Well, in my due diligence stage, my friend could not give me any security, as I asked to put the loan against his home and he couldn’t do it because he plans on building a new home in the new year. I simply told him, I need something to back this loan up and it fell through. We currently own a Rent-To-Own property together and he asked to use that as security and I said no, I want the books clean when it comes time for our Tenant Buyer to purchase, which is the end of the year.

I did ask him a lot of questions and it’s obvious he has not done any homework on this grocery store. He told me that the seller wanted more time with his family, as the business was eating all his time up. I then asked my friend to go and sit with the current owner, if his motivations are what you told me, then maybe the owner can loan you that money and work it into the deal.

I’ve been trying to loan out more RRSP money and it amazes me how many REIN members don’t expect all the questions that I ask. I’ve had one member in Ontario, that when I told him I read the offering memorandums from front to back, he never even sent it. Another mortgage broker sent me a potential lending opportunity and the property owner didn’t even own the land, just the trailer on it, so I asked, where would my security come from, if this trailer got moved and he had no answer. I thought, how can a respected mortgage broker send me something like that. Either I’m reading too much into it or just not experienced enough—I’m going with the “reading too much into it” part.

So, there you are! Our investor dealt with a friend and co-investor who wanted to borrow money but did not want to provide any security. Too many people in this situation would have done this on a handshake or perhaps a promissory note. When the deal went bad because the friend hasn’t done any diligence on the grocery store and has no experience in the grocery store business, both the loan and the friendship would be gone. Demand paperwork, then read it thoroughly, twice or three times. If it doesn’t make sense, ask more questions.

When experts like the mortgage broker send you deals to consider, pay no attention to the status of expert. And, keep reviewing your Tales From The Trenches and written material. Tales are ‘Gems’ that will save you time, trouble, and a lot of money.

Lessons Learned:

1. Be careful dealing with friends or experts. Be even more rigorous with them than you would be with any other investor. Take nothing at face value.
2. Read everything and ask lots of questions.
3. If you don’t get the right answers, don’t do the deal.
4. An unsecured loan is not a qualified investment for your RRSP

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

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“Exercise That Diligence” image by Alan Levine used under CC Attribution 2.0 Generic.

Buying and holding single-family homes is a great strategy for anyone starting out in real estate investment. Many people eventually get into multifamily properties, which builds on the experience of basic buy-and-hold. Becoming a developer is a very different type of strategy and is much more difficult. The rewards can be worth it for a senior investor, but there is also a lot of risk involved, and so development should be approached cautiously—if at all.

Download the audio file HERE and the text/handout HERE.
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Real Estate Development Is a Senior Strategy

The bedrock strategy of the Real Estate Investment Network (REIN) is buy-and-hold. That’s what we teach and that’s what most investors employ as their main strategy. We think it takes purchasing at least three buy-and-hold properties to give anyone a basic understanding of this most straightforward of strategies.

Once you start moving up to multifamily there are other wrinkles and crinkles as you work your way through the duplex, fourplex, sixplex scenarios and then into the 20-suiter (or bigger!) apartment buildings. The strategies for multifamily purchases are a little more complex. But, and this is a big but, moving from any of these strategies into what we call “development” is a totally different kettle of fish. Investors who insisted that experience and success with buy-and-hold strategies prepared them to be developers have lived both to regret that notion and the accompanying huge monetary losses. Let’s look at some examples.

Our first investor found a piece of property near a major Alberta city and felt that the property would make good acreage subdivision. He had a partner with a fleet of earthmoving equipment and lots of experience. He negotiated with the relatively unsophisticated owner subject to financing, permitting, and subdivision requirements. Many condition dates came and went without conditions being removed. Still, the seller and our investor stumbled along.

The transaction eventually went unconditional, but ultimately failed when our investor could not satisfy his lender’s tough requirements for project advances on the mortgage.

Our investor failed to properly assess or understand:

1. The difficulty of working with a municipality to get a Development Agreement
2. The length of time it takes to work with the utility providers
3. The cost of installing utilities and services
4. The length of time it would take to accomplish the numerous aspects of a major subdivision development
5. His ability to convince a lender that millions of dollars should be advanced because our investor thought things would work out

This investor believed, wrongly, that:

1. His expertise as a real estate investor with slightly more than rookie experience
2. His partner’s fleet of earth moving equipment would overcome any of the difficulties

He was wrong and his company is bankrupt.

Our second investor invested in the debentures (promises to pay secured by company assets) of a development company doing a residential development in a small, southern Alberta town. The debenture was issued by way of prospectus and properly done through the securities commission.

The developer badly underestimated the attractiveness of his project and kept running out of money. Presales were not good. The developer kept returning to the debenture holders asking them to postpone their first security interest to new money from other lenders. The developer finally washed his hands of the project and the debenture holders have had numerous committee meetings to see how they can try and preserve their investment.

It was difficult if not impossible for the debenture holders to analyze whether the developers had a chance of success with his project. It appears that our investor and other debenture holders relied on Alberta’s boom in an attractive area to assure themselves that the project would move to completion. They were wrong and our investor is holding the bag along with other debenture holders.

They may never be paid or at pennies on the dollar.

Our third investors were a husband and wife team with very high paying jobs in Alberta’s oil patch. They met a developer who had moved to Alberta from another province and started on numerous Alberta real estate developments. For due diligence, our investor checked in the developer’s home province and found the developer was well thought of, with lots of experience.

Our investors put up $200,000 for a hazy, unsecured interest in one of a number of developments and a promise of large profits. The developer insisted the investment would be hands off with our investors having no say. Our investors subsequently noted that the developer was short staffed and undercapitalized for the projects. Later on, it was discovered that the developer was mixing funds from various investors in various projects.

Our investors are now embroiled in a court battle looking to retrieve their $200,000.

Our fourth investor wanted to graduate from buy-and-hold and morph into being a builder/developer. The plan was to purchase a lot and build a fourplex. He found a lot zoned for a duplex in an area full of duplexes and fourplexes. He understood that he couldn’t build a fourplex, but thought that was just a matter of getting a variance from the city planning and building department. The street already had some fourplexes didn’t it? So, the lot was bought, and the deal went unconditional.

What our investor didn’t understand was that unless the zoning allowed a fourplex as either a permitted or a discretionary use, a development officer has no authority to issue a permit; s/he has no authority to change the use. The word variance applies to the development regulations that apply to a particular zone. In other words if the zoning allows a fourplex but requires a certain side yard, then, if your side yard is deficient, the development officer can give you a variance with respect to the side yard. But, s/he still can’t change the use.

Our investor overpaid for the lot, and so he will now have to build a duplex and hope to break even, or sell the lot and take a loss.

Lessons Learned:

1. Whether you are the developer or purchasing securities related to a development, real estate development is a very tough game, with hugely different rules, and a long apprenticeship. Examples one and four illustrate the difficulties developers face.
2. If purchasing a single family home or condo townhouse is the 1^st level of real estate investing, multi-family buildings are the 2^nd level, and anything to do with real estate development is at least the 3^rd and probably the 4^th plane of difficulty.
3. In our second and third examples, our investors were promised or felt there were very high financial returns, but they had no idea of the risk. Folks, there is a reason for high returns, you have high risk!! You simply cannot put money into any facet of real estate development without a real hard risk assessment, a ton of experience, and/or expert professional advice.

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

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“High Risk Area” image by Howard Lake used under CC Attribution Share-Alike 2.0 Generic.

In this Tale, our investor was right to walk away, but they will probably lose their deposit. Avoid using the same realtor for both buyer and seller. Know the difference between a Real Property Report and Title Insurance. Make sure your team members are real estate investment professionals, not just family, friends, or people who speak your language.

Download the audio file HERE and the text/handout HERE.
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Real Rules of Real Estate:
Real Property Reports and Realtors

This is such a great learning Tale. It illustrates so many real estate investment teaching-points and the consequences of ignoring the Real Rules of Real Estate. The RRRE are understandable, fair to all and protective. Here is the Tale told in our investor’s own words (edited for clarity).

I’m going to buy a house.

Mistake 1: for some reason, we used the seller’s realtor that later we find out is the seller’s mother. From the beginning, she didn’t want to give us the Real Property Report (RPR) and insisted on giving us title insurance instead.

When we met to sign the offer, she brought an offer to purchase form where the standard RPR clause (4.11) which states the seller should provide the buyer with an RPR and evidence of municipal compliance or non-conformance were scratched out already. Fortunately, I learned from Barry that RPR is very important, and it cannot be replaced by title insurance. They are two completely different products.

With our insistence, she refused to write up a new offer but added “the seller should offer RPR and compliance before the closing day.”

Mistake 2: My lawyer asked me why I want buy title insurance if the seller can give me RPR. And he told me with title insurance no RPR is OK; and with RPR, I don’t have to buy title insurance. Title insurance only protects me during the possession process; it’s not valid after the purchase.

So I have to verify this by calling First Canadian Title. At that moment, I know I made a huge mistake to choose a lawyer just because he can speak my first language. I thought my English is not good enough and find a lawyer who can speak my first language can make me understand better.

Now, one day before the possession day, the seller’s lawyer gave my lawyer RPR showing the property to be non compliance, because the city said the RPR survey shows the building was not set back enough from the regulations (one side over 0.3m and another side over 0.05m). So the development and building permit has to be applied. Plus the seller had added a fence and deck, no permits for the deck.

Tomorrow is the closing day and we have to decide to take the risk or give up. So we decided to give up the deal. But the realtor (the seller’s mom) said that there must be a problem with the new survey because when her son purchased this house the 2006 RPR has no problem. She didn’t want offer RPR from the beginning just because they get new fence. If we cancel this deal she will not give my $5000 deposit back. My lawyer said in this case she have to give the deposit back.

Is there any chance she can keep the deposit? And how long should she give me the deposit back if she has to?

Talk about a lot of red flags on this deal! At the time of writing, this process was still ongoing…

Here are some corrections to what our investor`s lawyer said:

1. Title Insurance is not a substitute for an RPR and vice versa. They are complementary but completely different products. They protect and inform about different things.
2. Title insurance does last past closing, in fact for as long as you own the property.
3. Typically, Title Insurance does not cover fence issues or any situation where there is not enforced removal.

Your starting position as a buyer should always be that you want the RPR and compliance. It’s essential if you are planning an addition or building new. If you don`t get compliance problems fixed when you buy, they will bite you when you sell.

Consider making receipt and review of both the RPR and compliance a condition of your offer. A typical clause would look like this: “Subject to seller providing RPR and compliance satisfactory to buyer on or before (insert date).” This gives you a chance to identify and deal with issues well before the closing date.

Lessons Learned:

1. Don’t use the same realtor. In a ‘Dual Agent’ situation, my opinion is that the realtor cannot properly represent buyer or seller. Especially don’t use the same realtor when they are related to seller. It’s just impossible to be the completely unbiased agent that you need your realtor to be.
2. Use your own regular realtor for personal as well as investment properties. Don’t call the realtor on the sign; get your own realtor to call.
3. Don`t worry about whether the professional speaks your language. You can always get an interpreter. The key is to use a lawyer, realtor, accountant, mortgage broker, or other professional who understands investment real estate, likes dealing with investment real estate, and even better owns investment real estate him/herself. There are lots of investor professionals who fit this description.

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

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“House and Keys” image by geralt on Pixabay used under CC0 1.0.

A holdback clause can help insure that the seller takes care of a property’s deficiencies before closing. The language of this item in your purchase contract needs to be very specific in order to be effective. Some lenders, however, don’t like cash backs, holdbacks, or credits.

Download the audio file HERE and the text/handout HERE.
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How to Get a Seller to Do Repairs:
Holdbacks or Drawbacks?

In a recent situation, our investors wanted to purchase a property that had shoddy renovation work done to the heating and electrical system, which included three furnaces (one in the garage). The roof also needed re-shingling. Their inspector told them what work needed to be done; they consulted with plumbing, roofing, and electrical contractors, and produced a list of deficiencies that they wanted the seller to remedy within a specific time.

The seller said he would take care of the deficiencies and then he didn’t. Arguments ensued about what was really required and who would be the judge of whether the jobs were properly done. The two weeks given to the seller to fix the deficiencies was extended by three more two-week periods. Now we are at two months after signing the offer to purchase and still nothing done.

Our investor had a fully approved mortgage and, in fact, the lender had funded the mortgage based on the original closing date and we had to send the mortgage money back to them. The lender is starting to ask questions. The seller throughout had been uncooperative and, to be charitable, not forthright in providing all the information on the property or the existing three tenants and their information.

Our investor decides on a change of tactic. If the seller won’t fix the deficiencies, then let’s put a value on the deficiencies and do a repair holdback. Give the seller a little more time to do his job and then if he doesn’t, I will have the money to do it. That is our investors thinking. Nothing wrong with that, right?

There are two major issues that come up at this point:
Firstly, our investor needs a repair holdback clause.
And secondly, what about the lender?

Holdbacks are when your purchase contract requires the seller to do or fix something before closing. Maybe s/he has to do take away some junk or old car bodies or perhaps complete a renovation. No matter what the seller has to do, your contract needs:

1. a precise description of the seller’s obligation,
2. a time by which the obligation must be completed,
3. a money consequence (holdback) for failure to complete the seller’s obligation, and;
4. how and when and who controls the release of holdback.

Compare the following two clauses. The first was prepared by our client’s realtor and sent to me for review. The second is my amended clause.

Original clause:

The seller agrees to obtain at their cost and provide to the buyer no later than seven days prior to the completion date, proper permits and certification for the heating systems and electrical systems within the property.

Amended clause:

The Seller Agrees to Obtain at their Cost and provide to the buyer no later than seven days prior to the completion date, all required permits for both the electrical and heating systems and components of those two systems as currently installed in the property and proof that both systems have final inspection and approval by the City of Edmonton. In the event such permits and final inspections are not provided seven days prior to the completion date, the buyer will complete the purchase and hold back $10,000 from the closing proceeds. The seller will have a further 30 days commencing on the day after the Completion Date to provide the permits and final inspections. If, after the expiry of the extra 30 days the permits and final inspections have not provided by the seller, the $10,000 holdback will be released to the buyer and the responsibility for permits and final inspections will shift to the buyer. No money will be refunded to the seller.

The lender approved the mortgage on the basis of the original offer where the seller fixed and paid for the deficiencies. Lenders do not like cash backs, repair holdbacks, or repair credits. Experience has shown lenders that these types of monetary adjustments are often a scam and an attempt by purchasers to reduce the amount of cash they have to put into a property.

So, lenders often take a very straightforward position. Cash backs, repair holdbacks, and repair credits are just a reduction in the purchase price. If the price is reduced then the amount of mortgage money is reduced. Lenders instruct their lawyers to watch out for these items and advise the lender if they occur.

We did advise the lender through the mortgage broker on the file and surprisingly the lender was more lenient than most. Deficiencies were completed, paid invoices supplied, and the surplus of holdback monies returned to the lender for application against the mortgage principal. In my view this lender attitude is rare and our investor was fortunate.

Lessons Learned:

1. The first clause is useless because it does not contain
   a) a precise description,
   b) time to complete,
   c) a money consequence/defined dollar holdback, or
   d) how the money gets released if the seller’s obligation isn’t met.
   The second clause meets all four requirements.
2. In genuine repair situations, your best bet is to have the seller actually do the work before closing. This maximizes your mortgage amount and still gets the repairs done.
3. Heads up, lenders hate holdback clauses whether they be cash back, repair credits or repair holdbacks. Many lenders have a policy that any holdback is a reduction in the purchase price and therefore a reduction in the mortgage amount.
4. If your real estate purchase contract needs a holdback, consult with your mortgage broker/lender and with your lawyer to make sure the holdback will be allowed and the holdback clause is properly drafted.
5. Always best to have the seller’s obligation completed well before the closing day. Try for 14 days. You will be happier and your lender will certainly be happier.

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

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“Commercial Box Gutter” image by Ethoseo used under CC Attribution 3.0 Unported.

Purchasing a new property before it is built is far more complex than buying an existing one. There are even more possible issues when subdividing and condominiumization are involved. Subdivision takes a long time and has many complicating factors. I don’t generally recommend small condos (i.e., less than 8 units.)

Download the audio file HERE and the text/handout HERE.
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Say No to Condos Less than 8 Units:
New Homes And Subdivision

Our investor had an existing home with lots of equity. Her plan was to leverage that equity and purchase a side-by-side duplex. She would live in one half and rent out the other half with, hopefully, a legal suite in the basement.

Her realtor found a builder who specialised in duplexes, apparently had a good reputation and who seemed to be helpful. The builder already owned a lot on which a duplex would be built, but needed to subdivide that lot into two separate titles. That subdivision was apparently in process.

The contracts showed up in my office and were drafted to attempt to deal with the basement suite and holdbacks for finishing the suite after closing and deficiencies both seasonal and normal course. As always, the clauses that purported to give our investor comfort and security regarding the suite and deficiencies were unclear and inadequate. Those definitely had to be cleaned up.

Timing for completion and move in had to be firmed up because our investor had to sell her existing property. She wanted to move into the duplex before selling her existing home so she needed bridge financing. Why? Because all of her cash for the new duplexes was coming from her equity in her existing property.

As lawyer for our investor, I was also very concerned about the nature of the subdivision of the existing lot. Was the subdivision application to create a two-unit condominium corporation, which we completely disagree with, or two traditional lot, block and plan titles? And so the negotiations and discussions commenced.

Why don’t we like small condominiums? Following is my advice to another client in similar circumstances:

“As much as you might have been advised and are okay that this is a condo with one sewer line, there is so much more on which any buyer of a small condo should properly be advised. For instance, as discussed before, there is no such thing as an inactive condo corporation. In this situation what we really have is a condo corporation that is not paying attention to the Condominium Property Act and regulations.

There are no:

• appropriate bylaws,
• guarantees of insurability (Park Insurance won’t),
• agreements about management,
• agreements about common property including the party wall,
• discussions about reserve funds and reserve fund studies, which have to be done if the property is going to be sold,

And that’s just a small portion of what needs to be looked at and advised upon on the condominium advice side.”

As the negotiations commenced, they were impacted by constant, inaccurate information from the builder’s realtor to our investor’s realtor, worsening her own inexperience as a brand-new, apprentice investor.

We could not get any comfort, no matter how much we tried, that the builder was creating two separate lot, block and plan titles as opposed to a two-unit condominium. Timing for closing kept getting postponed.

Late in the process our investor discovered that the lender would interim finance for the half duplex she was moving into but not for the rental half. It took a long time for the builder to confirm that he had applied for and had been issued permits to install a legal basement suite.

The expected subdivision was way behind predicted timing. The seller and seller’s realtor kept insisting that the subdivision was completed and would tell our investors realtor. The seller’s lawyer and our searches at land titles revealed the subdivision was not completed. Hugely frustrating for our investor who, like most normal people, believed what she was told. She would say to me, “Barry, they say the subdivision is completed, why would they say that if it isn’t done?” I agree, why would they? But the short answer to that question is, “if the subdivision is completed then just give us a copy of the new title!” They could never do that.

Finally, our investor had to book movers, take time off work, and move the process forward. Even with plenty of notice, on moving day, subdivision was not completed and there were yet more anxious, expensive negotiations about how to get our investor a key without actually closing. Very difficult to advise our investor to move in when we did not know about subdivision, final inspections, occupancy permits, or deficiencies.

Lessons Learned:

1. Overall, a new home purchase is twice as difficult as an existing home purchase. Building permits, deficiencies, warranties, timing, and occupancy permits are all over and above the issues found when buying an already built property. Even harder when there are owner-occupier and investor issues all mixed in.
2. If a transaction needs subdivision, this is a senior strategy (at the very least Master Investor) with its whole set of other questions. One of the biggest issues is that the subdivision process is lengthy. Even when all the surveying work has been done, all the permits have been obtained, and the subdivision application has been submitted to the Land Titles Office (3-4 months to achieve), Land Titles is currently quoting 12 business days to register the subdivision. That would be approximately 17-18 days including weekends, which is a huge timing issue. Neither Title Insurance nor Western Torrens Protocol, the usual methods of closing quickly, apply in subdivision situations. Therefore, in order to actually pay the builder, registration of the new lots must occur and that takes 17-18 days.
3. Be extremely careful when someone suggests you buy a unit or units in a small condominium (less than eight units). Re-read section above.

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

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When you want a mortgage, you need to play by the lender’s rules. Be sure to disclose the facts of your application or risk losing your funding. Timing is key, so leave yourself extra room after removal of final conditions.

Download the audio file HERE and the text/handout HERE.
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Rules for Getting Mortgages:
Timing and the Lender’s Sandbox

There are two things you always have to consider in any new deal. The first is timing. The second thing is to understand that if you want a mortgage, you are playing in the lender’s sandbox and you have to play by the lender’s sandbox rules.

I had a brand new client who was really worried. He had applied for a mortgage and fudged his income figures, including a promotion he did not yet have. He also told the lender that he wanted a 5% down mortgage because he planned to move in. The lender discovered the job promotion did not take effect for a couple of months and became aware that my client-borrower intended to rent out the property. The lender quickly declined the loan.

Now the client was into see me with a brand-new offer. His friend was going to provide the down payment but did not want to go on title or mortgage or tell anyone he was involved. The deal was written with a completion date 10 days after removal of final conditions. His realtor and mortgage broker both told him he needed to have a short closing because it is a seller’s market. There is lots of competition for properties and sellers won’t give you more than 10 days. I insisted he change the completion date (or the ‘closing date’ as it is often called) to 30 days after removal of final conditions.

The contract also contained a clause giving the buyer a $12,000 repair credit for shingle replacement and electrical upgrade. My client-buyer was now ready to apply for his mortgage.

Did I have any comments? You bet I did!

Lessons Learned:

1. Timing is so important. You have to leave yourself sufficient time to accomplish your diligence. Once your diligence is completed, you need sufficient time to close the deal. You will be pressured to set a closing date earlier than 30 days after removal of final conditions. Yeah, there might be lots of competition for the property and yeah, sellers might want to close earlier. But, resist that pressure. Set your closing day at 30 days or even 45 days after removal of final conditions. Let the seller amend the contract and tell you he needs to close sooner.
2. Do not lie to your lender. Any inaccuracy or untruth is grounds for the lender to refuse your mortgage application, or if approved, withdraw that approval. Full disclosure is always the best policy.
3. Lenders do not like cash-backs, repair credits, or repair holdbacks. Lenders view all these items as price reductions and they will only give you a mortgage on the reduced price. You may, and note I said may, be able to work these into your contract but they are tricky. Don’t write these in your offer to purchase without consulting your lawyer or broker/lender.

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

Managing properties when they are far from where someone lives can be tricky. Use this fact to help you find motivated sellers. Beware that pre-possession inspections require custom clauses and you can’t just kick existing tenants out if they are a problem. When finding replacement tenants, know the difference between rent deposits and security deposits.

Download the audio file HERE and the text/handout HERE.
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Buying Long-distance Property:
Travel and Tenants

Our investors were pretty happy with their first two properties. Both were rented out to long-term, trouble-free tenants. Now they were starting to talk about their next property. Should they go with the tried and true strategy to buy up another single-family property or should they move on to multi-family?

They had mentioned to their realtor that they were considering multi-family. Next thing you know, the realtor is calling to ask, “are you still interested? I have an out-of-town owner who self-manages a 12-suite building and he is tired of the travel back and forth to manage. He wants out.” Negotiations didn’t take too long with a motivated seller and soon they had an accepted offer to purchase.

The closing process brought home a few lessons.

In the weeks before closing, they called the seller to organize a pre-possession inspection. They just wanted to make sure that the property was still in the same shape as it was when they made their offer. The seller wouldn’t allow the inspection.

The seller did allow them to interview new tenants for the single vacancy. They took 10 applications, picked the best one, and took a one-month security deposit when signing the lease, with the move-in date 15 days away. The tenant changed his mind and demanded return of his security deposit. Our investors didn’t want to give it back. A deposit is a deposit, right? It’s good faith money, why should they have to give it back?

Although there was only one vacancy, there were a couple of problem tenants who had to go. One of our investor’s fathers was helping out. His advice, “just kick them out with 30 days’ notice,” was problematic.

Lessons Learned:

1. Long distance self-management is tough without the proper training. Find a way to locate out-of-town owners. Realtors, property managers and title searches are all possibilities. There is a good chance their approach is leaving them frustrated and motivated to sell.
2. Standard Multiple Listing Service (MLS) contracts have no right to a pre-possession inspection. It is a very difficult clause to negotiate. If you think you need an inspection, call your knowledgeable investment lawyer about the exact wording that your inspection clause requires. Every situation is different; you need custom clauses to protect yourself.
3. Our investor’s father was wrong. You can’t just kick the tenant out. There must be grounds under the Residential Tenancies Act or the Regulations to the Act. Learn the Act and the Regulations to give yourself better management control.
4. When taking any deposit from the tenant, make sure it’s a rent deposit not a security deposit. If the tenant doesn’t move in you can forfeit their rent deposit but not a security deposit.

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

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“House/Home Inspection” image by Mark Moz (https://electrosawhq.com) used under CC Attribution 2.0 Generic.

When buying a property, you are buying the neighbourhood and neighbourhoods are not homogenous. Do some diligence around schools opening or closing, new public transit soon or in the works, and rezoning. Check parking lots and dumpsters where you intend to buy; these will give you an informal tenant profile. Any environmental considerations?

Download the audio file HERE and the text/handout HERE.
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Multifamily Location Is Key:
You Are Buying the Neighbourhood

I can hear the wheels grinding out there. “What do you mean we’re buying the neighbourhood? We’re buying this building, quite frankly it’s a nice building and we don’t care much about the neighbourhood.” Well, you should care because your building is part of the neighbourhood. What goes on in the neighbourhood affects you. Here are a few scenarios.

Neighbourhoods are not homogenous.

Usually, they have good areas and not so good areas. You might be in a good area of a particular neighbourhood and it might be nice for a couple blocks.

But, what’s going on in the rest of the neighbourhood? Is the neighbourhood collapsing, rejuvenating, any proposed LRT, new developments, are they shutting the local schools, re- zoning plans, area redevelopment plans, other new transportation? All good questions (and of course there are more) that need answers for you to make an informed buying decision.

Communities have other tenants.

Deduce amazing information by simply opening your eyes and observing. Look at the parking lot of your proposed building and others in the area. Are they filled with junker cars and trucks, cars on blocks, cars in various stages of disrepair? If so, you are looking at an informal tenant profile. These are all tenants with a past and no future.

Check the dumpster at your building and others in the area. Are there large collections of mattresses and furniture? If the answer is yes, you are looking at a building with high turnover or bedbugs or both.

Environmental Considerations.

What buildings or businesses are next to or close to your proposed purchase? Here’s a chilling story. My client bought a multi-family building next to a dry cleaning establishment located on the commercial periphery of the neighbourhood. The phase 1 did not reveal any problems. Later, the government changed the rules about the allowable levels of certain chemicals for residential buildings. The 50-year-old dry cleaning plant emissions were within the range for dry cleaners but exceeded the new allowable levels for residential buildings. My client could not sell or refinance; he’s caught!

Lessons Learned:

1. Neighbourhoods are living, changing, and cyclical entities. What’s your cycle?
2. Open your eyes, parking lots and dumpsters tell a story
3. Watch for off-site environmental issues

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

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“Downtown Chelsea Residential HD Chelsea MA 02” image by Jameslwoodward used under CC Attribution-ShareAlike 3.0 Unported.

When buying a multifamily building, inspect all the suites. Your vision of what is satisfactory and the vision of a seller anxious to sell are likely to be completely different. Failure to inspect meant substantial extra expense after closing for this investor.

Download the audio file HERE and the text/handout HERE.
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Inspecting a Multifamily Property

“All the suites look just like this one,” it what the seller said when our investor showed up to inspect the 24-suiter.

The first-floor vacant suite looked pretty good. There was fresh paint, the carpets were clean and the appliances looked relatively new. Generally, the suite looked fine, neat, clean, and tidy. The only exception was a cracked mirrored door on the medicine cabinet in the bathroom. Our member and his realtor made a note and carried on with the inspection.

The seller’s property manager squiring them around the building said, “we’ve got two more representative suites for you to look at, one on the second floor and one on the third floor. Nice long-term tenants in both. The suites will give you an idea of how the units set up when they are furnished.” So, up the stairs they went (no elevator in the wood frame building). The two tenants were, indeed, very nice.

The lady on the second floor seemed happy to show them around followed closely by her pet Yorkie. “Nice dog,” says our investor, who is a dog owner himself. Nice, but didn’t the sign out front say “adults only, no pets?”

He gently asked the tenant about her dog and the no pets sign. “The manager is so nice, they made an exception for me,” was the reply. On to the third floor. A retired couple seemed happy for the interruption and proudly showed pictures of their grandchildren.

Finished with the three suites, our member and realtor inquired about the other 21 suites. The seller’s property manager said, “the owner didn’t tell me about that. He said you wanted to do an inspection and to show you three representative suites. We haven’t given notice to the other tenants. We can do that. I’ll have to talk to the owner and it will take 2-3 days to set it up and give the proper notice.” A quick look at the offer to purchase revealed the words ‘subject to suite inspection.’

“Well”, said our investor,” what are the other suites like?” “Pretty much like these three,” said the property manager. Our member was from out of town with a flight leaving that evening. He felt okay about the property and asked his realtor, “what do you think, should we inspect all the suites?” “Probably a good idea,” said the realtor, “but it’s your call.” Our member replied, “will you do the inspection for me?” The realtor said, “you know, I’d like to do that for you but it makes me a little edgy. I’m not a property manager and so I’m not comfortable.” Our member thought it over for a while and said, “I’m okay with the building and what I’ve seen so far. Let’s just make sure we amend the offer to purchase so that the seller fixes that cracked mirror.”

And so the contract was amended regarding the mirror and accepted by the seller. After closing and after an inspection of every suite, here’s what our investor’s property manager reported.

• The cracked mirror wasn’t fixed
• Two vacant suites were missing, respectively, all the appliances and the top kitchen cupboards
• Six suites had pets. Three of those suites had pet-related carpet damage and strong urine smell
• Three suites had been badly treated and really needed new paint, lino, carpet, and appliances

Lessons Learned:

1. Inspect every suite every time. Make careful notes.
2. Quantify the issues, what’s it going to cost to fix?
3. Add a schedule that sets out exactly, and in great detail, what you want the seller to do.
4. Negotiate a holdback and re-inspection clause.

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

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“Downtown Chelsea Residential HD Chelsea MA 02” image by Jameslwoodward used under CC Attribution-ShareAlike 3.0 Unported.

This is the story of one investor’s path from single-family dwellings to multifamily properties. Multifamily lenders fund mortgages based on rental revenue. On closing day, every vacancy reduces the amount of mortgage money. What does it mean when two vacancies turn into eighteen vacancies on closing date?

Download the audio file HERE and the text/handout HERE.
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Mortgages and Unrented Suites:
You’ve Got How Many Vacancies?

It was an okay building, in an okay part of town. 36 suites, just about the size our investor had targeted in his plan to acquire 200 units. The road to this investment was typical. Like a lot of investors, he started out small.

First he bought a condominium townhouse in a rental pool. Then he bought a couple of houses with secondary suites, one legal and one illegal. Then it was a fourplex and another fourplex. This process took three years. In order to reach 200 units he was going to have to ramp up his purchasing program. He found a realtor and started looking. Concurrently, he talked to his regular mortgage broker who referred him to a commercial lender. They had preliminary conversations with the result that our member knew roughly what amount of money he could borrow.

The hunt for the appropriate building continued until he and his realtor found the 36-suiter that seemed to fit the bill. Negotiations started; offer and counter offer with both sides bargaining hard. Finally, a deal was struck with a four-month closing date. On the day the offer went unconditional, only two of 36 suites were vacant.

Fast forward to the week before closing almost four months later. The lender wanted, as lenders do, an updated, certified rent roll. The seller had provided a rent roll as part of the buyer’s diligence. But, the lender said, “that was four months ago, we need to know how many suites are going to be rented on the closing date.” The seller provided that certified rent roll, which to our member’s surprise and horror showed that vacancies were way, way up. Exactly half, 18 suites, were now vacant.

Apparently, the seller had just let suites stay vacant as tenants moved out. The lender said, “you do understand that your funding is driven by revenue. The fewer suites rented, the smaller your revenue and therefore the smaller your funding.” Our member hadn’t really understood that part of his mortgage. He thought that he had qualified for a mortgage in a specific amount and that’s what he was going to get. Not so. He said to the lender, “I have an excellent property manager in place. Here is our management plan. We will fill up those suites in no time.” The lender replied, “Great, we’re glad to hear that. As soon as you reduce the vacancy rate, we will fund more of your mortgage.”

Well, the scramble was on. With the mortgage reduced by over $1 million, more cash was required. The seller agreed to extend the closing by one month in return for a further $50,000 non-refundable deposit. Our member and his property manager put together an advertising blitz that rented 12 of the 18 empty suites. This raised the amount of mortgage funding, but more cash was still required. Fortunately for our member he had an untapped line of credit and a family that were prepared to give him short-term financial assistance. He closed the deal with the reduced mortgage funding and started the rental process. He quickly discovered just how difficult it is to rent suites at the rental rate you need, in the winter, when the vacancy rate is 7½%. It took another three months before he reduced vacancies to the original 2 vacancies existing when he made his offer.

Lessons Learned

1. Understand that once sold, sellers often quit managing.
2. Ask the lender how they handle vacancies and funding.
3. Improve your diligence with a thorough lease review.
4. Deal with vacancies and other management issues by adding clauses or schedules to your offer to purchase.

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

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“Downtown Chelsea Residential HD Chelsea MA 02” image by Jameslwoodward used under CC Attribution-ShareAlike 3.0 Unported.

Many things can slow down a mortgage application. Two weeks is a minimum for your financing condition, but some sellers might not like it; getting pre-approved is a safer option. To avoid human error, make sure to read over your own mortgage documents carefully.

Download the audio file HERE and the text/handout HERE.
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Mortgage Delays:
It Took How Long?

Tales from the Trenches often talk a lot about timing. For example, we recently had a good example of timing on a mortgage application. Two weeks to get the original CMHC application approved, but another three weeks when circumstances changed. That’s five weeks to get your mortgage approved, and I know most of us think two weeks should be sufficient.

That is what one of our investors thought in a recent Joint Venture (JV) situation where he was the Real Estate Expert with what seemed like a slam-dunk Money Partner. The Money Partner’s Beacon Score is 795. Her tax return shows $95,000 worth of income, her debt service ratios are excellent, the property was already leased with positive cash flow, and she was putting 20% down. How long did the mortgage application take to be fully and finally approved?

The mortgage application started out well enough. Complete the application and provide the usual stuff: Notices of Assessment from the CRA, letter of employment, list of other properties owned, etc. It all looked good. Then the questions and issues started cropping up.

The application was in late April 2013 and the current year’s tax return showed a $10,000 tax bill. The lender wanted that paid. Fair enough. The Money Partner was applying for the mortgage in her maiden name and the lender wanted proof by way of marriage certificate that Emma Jones and Emma Smith were the same person. Smith is Emma’s maiden name, which she maintains, and it was that name in which she was making the application. Of course, the marriage certificate, which is almost never used, was not in Emma’s documents folder. After the usual time-wasting back and forth, the lender accepted a sworn affidavit of identity.

With the marriage certificate issue out of the way, the lender moved on to a property that Emma the Money Partner had purchased for her niece, Brittany, to live in with her three children. Brittany pays all the expenses, but Emma is on the title and the lender just had a hard time figuring out where this non-rental property fit in their approval process. Why? Because they were not able to recognize the payments as being made by the niece because they come from Emma’s bank account. To the lender, that meant that mortgage payment must be carried by Emma’s income, hence much tighter ratios.

During the process, Emma’s 2012 tax return was filed and it turns out that, due to a competent accountant saving Emma a bundle on taxes, she and her husband now shared some new investment income that Emma had thought would be all on her return

Just when our member thought they were through the mortgage approval loops, the lender pointed out a couple of other income producing items on Emma’s tax return. It wasn’t enough that those items have appeared on her tax return for the last five years. They wanted to know the details. Where was this money coming from? Of course, there are answers to all of these questions, it was all explainable. But, it all took so much time. Five weeks from start of application to approval. Then it took another 10 days for the lender to instruct lender’s lawyer (not us here at RMLO Law LLP) and for that lawyer to call Emma for her appointment to sign mortgage paperwork.

As side comments that did not affect timing, but that are extremely relevant, the wonderful, smart, with-it legal assistant at the lender’s law firm got in touch with Emma early in the process. Then she went on holiday, and the job was taken over by a standard legal assistant to replace the first wonderful assistant. Good-but-not-great assistance really showed how having top-notch staff means a smooth transaction. It might have been the reason when Emma sat down with the lawyer to sign the paperwork, she noted an error in the interest rate and in the term of the mortgage. She pointed that out to the lawyer and followed up with an email to the assistant. You guessed it, when Emma got her reporting letter and reviewed the documents, both errors were still there!

Now Emma is spending more time and effort attempting to get the lender to properly recognize the errors and make an appropriate amendment. The error was corrected, but the bank documentation left Emma wanting more. It didn’t slow down the process, but points out how carefully you have to read and follow up. When you go in to sign, take along anything that summarizes what you believe are the terms/outline of your new mortgage. This would normally be the Commitment Letter provided by your bank or mortgage broker. Mistakes get made and nobody means to do it, but it’s your money, so you check.

When it was all over our member had a debriefing conference with the mortgage broker and they ended up concluding that Emma’s application was not enough “plain vanilla.” Her financial situation is fantastic but shows things that lenders don’t see all the time, which makes them ask for more information because they are curious or nervous, which slows down the process.

Lessons Learned:

1. Whether you are a strong, weak, or middle-of-the-road mortgage applicant, stuff happens! Two weeks is the minimum time for your financing condition. That’s what I say as the lawyer who has to process these deals. The other side of the practicality coin is that our experienced brokers and realtors out in the field say that in this pretty busy market many sellers don’t want to give two weeks. An improvement to this dilemma is to get yourself pre-approved by a competent, experienced, investment property mortgage broker. Or use a bank you know well and trust through experience to be competent.
2. If you are pre-approved then you can ask for seven days, or ten days if you have a complicated personal or purchase situation. Consider writing these times as business days rather than just days, which gets you weekends for free and extends the time.
3. Ask your mortgage broker or bank if they supply advance documents and a summary of the key facts of the deal to your lawyer so s/he can match that against the mortgage instructions. Note, ours did, but somehow that review must not have occurred at Emma’s lawyer’s office (again, not RMLO Law LLP). Then, at the lawyer’s office, read your mortgage paperwork especially the mortgage commitment, disclosure forms and first couple of pages of the mortgage. Most of the changeable details show up here. Mistakes get made; everyone is human. It’s your responsibility to read and make sure everything is correct.

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

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“Duck crossing Louisiana 2010-10-15” image by Richard David Ramsey used under a Public Domain Release.

What happens when a real estate deal is delayed past the closing date? The seller can choose not to sell, but they still keep your deposit. Verbal agreements for things like extensions aren’t enough; you need signed documents or else people can change their minds.

Download the audio file HERE and the text/handout HERE.
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Get It In Writing

A brand-new investor was looking to buy her first investment property. She had a couple of friends who were buying properties left and right using those cheap, high-ratio mortgages. Everybody’s doing it right?

She found a realtor and they started looking for property. Fairly quickly they found an appropriate bungalow and put in an offer subject to financing.

I have to think that our brand-new investor and realtor didn’t have very much conversation about the whys and wherefores of this new purchase. Why do I think that? Because fairly early on in the mortgage approval process, the mortgage broker wanted confirmation of, “You are moving into the property, right?” The answer was, “What? Of course not. I’m putting in tenants.”

Our new member was shocked when the broker said, “But you can’t do that. A 5% down payment means that you have to get your mortgage insured by CMHC or other mortgage insurer.” Having no idea this was the rule, but not wanting to stray into the grey (actually in this case, black) area, our brand-new member decided to try for a conventional mortgage.

Having upset the financing apple cart, time was running out on the financing condition in the offer to purchase. The realtor got a one-week extension to the financing condition, but it wasn’t enough. Conventional financing meant a brand-new mortgage application and the application was not yet approved by the time the financing condition extension was expiring.

The realtor asked for a second extension, but the seller was out of town and not available. The seller’s realtor insisted that the seller wanted to sell the home and thought, but did not guarantee, that the seller would have no trouble with an extension. The extended financing condition day came and, on the basis of the seller’s realtor’s comments, our member removed the financing condition. This was now a firm deal.

Unfortunately, the mortgage application process just went on and on and on. A 20% down payment meant our member needed to get help from parents, in the form of a gift letter. The lenders took a closer look because of the previous history.

Meanwhile the seller returned from his travels and seemed cooperative, but somehow was always unavailable to sign extensions to the closing date, although new dates were discussed and agreed on verbally. Five weeks later when the mortgage was finally approved and the realtor was asking for a new closing date (the latest verbally agreed-to closing date was long passed), the seller said, “I’m not closing. I’ve changed my mind; I don’t want to sell the house.”

Despite eloquent and concerted effort by our member’s realtor, the seller wouldn’t budge. The deal was over and soon the letters appeared from the seller’s realtor indicating that they were going to release the $6,500 deposit to the sellers. There wasn’t any way to argue that the deposit was not forfeit because that’s what the contract says. If you remove conditions and don’t close, the seller gets the deposit.

Now my concern was whether this investor would have further exposure. When you don’t close, a seller has to re-market the property and if they get less than what they were going to get when they sold to you, they can sue you for the difference. I took a flyer and threw up a few red herrings about why our member should keep her deposit. Then I suggested to the seller’s lawyer that we would release the deposit without a fight if they would release our member from any further liability. Even though most sellers take the deposit and don’t sue, I thought getting a release was going to improve a bad situation at least a little bit. We did get the release protecting against further loss but the $6,500 is gone.

Lessons Learned:

1. 5% down or other cheap CMHC financing means you are actually moving into the property. Not for a day or a week but you intend to move in as your personal residence.
2. Use a realtor with investment experience
3. To quote Toronto lawyer Shayle Rothman, “If it isn’t in writing, it doesn’t exist.” Get those extensions or any other amendments or changes to a contract in writing!!!
4. If you don’t close, you will almost for sure lose your deposit. Plus other seller’s losses are potentially your responsibility.
5. Ask for a release in return for a quick discharge of the deposit.

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

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“Power of Words” image by Antonio Litterio used under CC Attibution-ShareAlike 3.0 Unported.

When doing joint ventures with friends and family, you still need formal documentation. If problems arise, deal with them promptly or pay the price.

Download the audio file HERE and the text/handout HERE.
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A Tale of Greed and Treachery:
Some Deals Have It All

This Tale is all about opportunity lost. The story talks about dealing with family and friends, failing to deal promptly with trouble, lack of documentation, no professional advice taken, greed, loss of profit, and—maybe more importantly—loss of relationships.

This is a classic Tale. It illustrates so many of those ‘Basic’ situations all of you must understand and guard against. This Tale is in the investor’s own words. Let’s have a read.

“Hi Barry:

5 years ago, I was approached by one of my best friends and he asked if I wanted to participate in a land deal with him and his cousin. My friend, along with his brother and sister, had inherited the land from his mother. The idea was that his cousin would buy out my friend’s brother, I would buy out his sister, and the 3 of us would proceed as equal partners. The property was a half section of land near Edmonton, including a house and yard site. The idea was that the 3 of us would market and perhaps develop the property over time and eventually we would sell off the parcel and divide the proceeds equally amongst the three of us.

Each partner had to put up approximately $300K into the entire project.

As we were close friends and family, we basically proceeded into the partnership on a handshake and did not have a formal joint venture (JV) agreement in place. One of the partners (cousin) kept all of the paperwork including a ledger that tracked of any expenses incurred, income from the property that was disbursed, as well as any funds that changed hands amongst the partners.

Approximately 1 year into the partnership, we had a potential buyer who wanted to buy the entire property for a total of $4M. The purchaser offered to put up a deposit of $1.3M. We agreed to provide vendor financing by way of a VTB mortgage due in 4 years.

The initial deposit covered all of the initial capital investment for all of the 3 partners so we were happy to wait out the 4-year term as we were receiving income from two sources. The house and yard were rented to a tenant. The land was leased to a local farmer. Once again, the cousin documented this proposal on behalf of the JV. The initial deposit paid by this purchaser was sent to the lawyer representing our partnership.

Unfortunately, the lawyer released the funds to the cousin (the partner that had kept the documentation) even though my friend and his cousin were both on title (my interest in the property was identified using an irrevocable assignment of proceeds signed with my friend as I was never added to title initially).

Over the course of time, the cousin decided to move away from the original agreement of equal thirds ownership in the property. He felt that since he had spent some time and money on the house, that he was now entitled to ownership of the house and yard site.

He had prepared documentation supporting his position on the ownership of the yard site. My friend and I indicated to him verbally that we did not agree with his position, however we did not produce any documentation to refute his claim nor did we seek legal advice at the time. We both felt that since we were family/friends that we could work something out in the end. The cousin-partner also wanted to shift the percentage of ownership in the land itself whereby he owned 50% of the land, as well as the house and yard site 100%, while the remaining two partners owned 25% of the land only. Once again, my friend and I were not in agreement with this but did not produce any documentation to refute this claim either.

The 4-year term for this deal was up on March 30th of 2012 whereby the purchaser did in fact pay the balance of the funds and the remaining funds were held in trust until Nov 2012 while the partners discussed the distribution of funds. The cousin was firm in his position in that he owned the yard site outright (even though this was never subdivided and registered with land titles) as well as 50% of the lands and the other 2 partners were entitled to 25% each of the land-only proceeds.

My friend and I always thought we could set aside our difference in opinion with the cousin and reach some agreement that would be a win-win for all three partners and would be more in the spirit of the equal partnership that we had initially agreed to. The cousin held fast in his position so we had to bring in a lawyer to act as a quasi-mediator in order to try and reach an agreement.

At the end of the day, the lawyer indicated that while the cousin’s documentation was sloppy and unprofessional, we did not have any documentation of our own to support our position and as a result, the lawyer felt that a judge would side with the cousin. He advised that we could move to litigation in order to try and reach a settlement, however the litigation process would be costly and due to our lack of supporting documentation, would not likely turn out in our favour. In light of this, we reached an agreement whereby my friend and I received approximately $600K each and the father-in-law received approximately $2.8M.

Here are the lessons that I have taken away from this deal:

1)      Always have a proper, written JVA in place for any partnership. I would suggest that it is even more important to have a written agreement when dealing with friends and family as there may be a tendency to think that you do not require the same level of diligence when dealing with friends/family as you can always work something out. This is not always the case.

2)      Seek a lawyer’s advice at the beginning of a deal, not the end of a deal. Legal fees may seem costly, however in this case, we left a large sum of money on the table due to lack of documentation and legal guidance.

3)      Always register your interest in a property on title. Had the title accurately reflected the equal ownership in this case, perhaps a more equitable settlement would have been reached.

4)      When creating documentation including correspondence between partners, be mindful of how that documentation would be seen by a lawyer/judge should the deal or partnership require litigation or mediation in the future. In this case, simply refuting the cousin’s claims in writing would have helped support our position when a settlement could not be reached amongst the 3 partners.

5)       If you have a concern or uncertainty about any matter related with a deal or partnership, deal with it sooner rather than later. Even though we were in disagreement with many of the cousin’s claims, we chose to address these concerns at the end of the deal as opposed to earlier in the term. The longer we waited to address our concerns, the more documentation the cousin created in order to support his position, which ended up costing us a lot of money!”

Lessons Learned:

As set out above in # 1-5 with a couple of extras. Let’s go over them again.

1. Dealing with family and friends is tough. You need more rather than less paperwork. Deals that go bad destroy relationships and cost you money ($700K in this case).
2. Greed exists. Don’t pretend it doesn’t.
3. Always consider getting professional advice. Do it early. Your Team should be available to discuss new deals at least briefly. Do you need to go further?
4. Document your deal. A Joint Venture Agreement or other contract is best. Detail and confirm changes.
5. Register your interest on title.
6. Don’t wait. Time does not improve a bad situation. It always gets worse
7. Lawsuits are expensive, stressful, lengthy, and not guaranteed to solve your problem.

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.

There are many things that can delay real estate transaction. 30 days is a minimum, but keep in mind that closing time should only begin after final conditions are removed.

Download the audio file HERE and the text/handout HERE.
(control click or right click + save as).

“30 Days To Close, That’s Just Crazy!!”

This Tale comes under the heading of ‘The Basics.’ For new investors especially, there are certain things or situations that keep coming up again and again. Even senior investors often need reminders of The Basics.

One of those Basics is timing. I get this question all the time: “Barry, how long should I leave myself for closing? 15 days after final acceptance is good, right? Not good? What about 30 days after final acceptance? My realtor and mortgage broker both say that should be plenty of time.” Wrong and wrong!

Standard deals need to be written so that closing is 30 days after final condition removal, not 30 days after final acceptance. For out-of-province buyers make that 35 days after final condition removal to allow for couriering of documents back and forth. Note: I said ‘standard’ deals. There are exceptions.

“30 days, that seems like a long time. It can’t take 30 days to prepare documents.” True, it doesn’t take 30 days to prepare documents. But here’s how it goes. Before we can get started on preparing your file we need what are called ‘Real Estate Instructions’ and ‘Mortgage Instructions.’

You remove conditions. Your realtor gets that condition removal in to the conveyancer at the real estate office. The listing realtor’s office then sends out the real estate instructions, which include a cover letter telling both lawyers who the other lawyer is along with full and final signed copies of the real estate purchase contract, schedules, and addenda.

Your final condition removal also goes to your mortgage broker, who then instructs the lender that the deal is unconditional. The lender then tells their administrative department to send what are called ‘Mortgage Instructions’ to us. Mortgage Instructions are what we need to prepare a mortgage on your behalf.

To prepare your file we need both the Real Estate Instructions and the Mortgage Instructions. After final condition removal it can take up to 10 days to get both sets of Instructions. That chews up 10 of your 30 days and we still haven’t started working on your new purchase.

Once we do have both sets of Instructions and we get going, things don’t always go smoothly. Life doesn’t go smoothly. It doesn’t matter what you are doing or trying to accomplish, it’s always better if you have a little extra time for the unexpected. With the above background let’s talk about some of those ‘Unexpecteds.’

Here are a couple examples we have experienced:

For one transaction, we ordered funds from the lender scheduled for the closing date. Funds didn’t come in. When we called the lender, they said their lines were down and they couldn’t wire any money anywhere. It took one full day after the closing day to get funds. Calls have to be made to the seller’s lawyer requesting extensions. This was a “no money, no possession” deal. Movers and utility people were not allowed access. Our clients had to stay in a hotel overnight.

In a similar situation the lender advised that there was a fire in their building causing a full evacuation and therefore they could not fund any mortgages. Closing was delayed one day with similar stress for all involved.

We all love the Cornerstones Program here in Edmonton, Alberta. Grant money up to $24,000 to construct legal, safe suites. This month we had three scenarios where members were refinancing, buying, and selling properties with Cornerstones Suites. The logistics of dealing with assumption or discharge of the Cornerstones Grant and Caveat are new, mildly confusing, and certainly time-consuming. The refinance took an extra three months to close!!

Some other delay items:

• Incorrect mortgage instructions
• Late amendments to deals
• Real Property Report issues
• Compliance issues
• Client vacations
• Unexpected title issues

Lessons Learned:

1. The list of things that can delay a transaction is endless. Give yourself time to solve problems. Get 30 days to close (35 days if out province) after final condition removal.
2. Delays are hugely stressful and often expensive. Examples: late closing interest, extra legal fees, or how about the seller won’t let you close late. Sellers don’t have to give extensions.
3. On the other hand, if it’s $20,000 under market and the seller wants to close in a week not 30 days, call us at Field Law right away. A quick consult can help you determine if you should take this short closing deal. Rush deals can be often be done at relatively small extra expense compared to the $20,000 benefit.