Real Estate Talk:
Income property / 3
A look at promise to purchase conditions: the 1st visit
By Joseph Marovitch
You are a buyer and you found an income property of 6 units or more, in a good location, with a cap rate of 5.7, in what appears to be good condition, from either a drive-by viewing or pictures you received. Either on Centris or by calling the vender or the vendor’s broker, you discover that a visit cannot be arranged unless the vendor accepts your promise to purchase.
Now you are thinking, wait a second, how can I provide an offer if I have not seen the building or examined the expenses and leases? As mentioned in the last article, the purchase price of an income property is based on the rate of return or capitalization rate, as well as the location and the condition of the property. The purchase price is not based on comparable properties or city evaluations, it is based on the income stream.
… the purchase price of an income property is based on the rate of return or capitalization rate, as well as the location and the condition of the property.
If the vendor has provided accurate information regarding all these factors, then the buyer must verify the information with proof that will justify the asking price. This is where the conditions of the offer come into play.
There are four major conditions that allow the buyer to verify the information:
1. First visit
3. Review of expenses, leases and any other financial documentation
If conditions 1, 2 or 3 do not satisfy the buyer, the buyer can do one of the following; either cancel the offer or renegotiate the purchase price. If, in the condition of financing, the financial institution the buyer is borrowing from refuses to lend the money for any number of reasons, then the offer can be cancelled as well.
‘… the first condition placed in the promise to purchase is a first visit to verify what the listing or other information appears to state.’
Condition 1: First visit
The buyer, upon viewing pictures or driving by the building, determines the property appears to be clean and well maintained. Note that when a vendor or broker is selling a property, they will attempt to make the property as sellable as possible by placing the best pictures in the listing and/or cleaning the property, so it will show well.
Therefore, the first condition placed in the promise to purchase is a first visit to verify what the listing or other information appears to state.
The first visit is arranged between the buyer and the vendor, usually within seven days of an accepted promise to purchase. In a first visit, the buyer will view the basement, boiler room, two or three apartments and the roof, to verify the condition of these areas. The buyer will also look for graffiti on the interior or exterior walls, the condition of the balconies and exterior brickwork, and take notice of tenants, if they are coming and going. The buyer will also note the proximity of the property to other property such as train tracks, city waterworks, towers and any other structure or establishment that may not appear in the pictures but may affect the value of the building.
‘The first visit is arranged between the buyer and the vendor, usually within seven days of an accepted promise to purchase.’
Should the buyer not be satisfied with the first visit, the buyer would provide a written document to the vender indicating that they no longer wish to proceed with the offer.
Should the buyer be satisfied with the first visit then the buyer would proceed to condition two, the inspection.
Note that in purchasing an income property of 5 units or less, such as a duplex or triplex, the same conditions apply, however you do not usually have to have an accepted promise to purchase to visit the property.
Next issue we will discuss Condition 2: Inspection.
Should you have questions or require further details, please feel free to contact me.
Have a great week.
State of the market
This past week the bank of Canada raised the 5-year mortgage rate from 5.14% to 5.34%. It is the five-year mortgage rate the banks use to assess the ability of home buyers to pay their requested loans. Home buyers who intend to put down less than 20% of the purchase price of a home, must be able to qualify for the five-year mortgage rate, even if they are taking a two or three-year mortgage.
Since January 1st, 2018, home buyers who do not require mortgage insurance are required to prove they can handle more than the five-year mortgage rate. These provisions have been put into place to reduce risk of home owners unable to pay their mortgages due to rising inflation and cost of lending. A few years ago, the US banks were granting mortgages to homebuyers who did not qualify. The cost of goods and services rose due to political and economic factors and the people with mortgages could not pay. The situation caused a worldwide recession. To avoid this issue, the bank of Canada is insuring that those that borrow money can afford to pay it back.
The rising interest rate coupled with the new mortgage rules may make it more difficult to purchase a property, but buyers can compensate by purchasing smaller homes, putting down more money and taking smaller mortgages.
Read also: Real Estate Talk: Income Property / 2
Joseph Marovitch has worked in the service industry for over 30 years. His first career was working with families from Westmount and surrounding areas, hosting children between the ages of 6 to 16 as the owner and director of Camp Maromac, a sports and arts sleep away summer camp established in 1968. Using the same strengths caring for the families, such as reliability, integrity, honesty and a deep sense of protecting the interests of those he is responsible to, Joseph applies this to his present real estate broker career.
Should you have questions please feel free to contact Joseph Marovitch at 514 825-8771, or firstname.lastname@example.org