Real Estate Talk:
Income property / 3
A look at the promise to purchase conditions: the first visit
By Joseph Marovitch
Updated May 5, 2021
You are a buyer and you found an income property of six units or more in a good location with a cap rate of 5.2, in what appears to be good condition from either a drive-by viewing or pictures you received.
Either on Centris or by calling the vendor or the vendor’s broker, you discover that a visit cannot be arranged, the tenants disturbed and documents made available unless the vendor accepts your promise to purchase. Why would the vendor go to the effort if the price is not within the asking range?
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:
- First visit
- Review of expenses, leases and any other financial documentation
The order of the conditions is important. Condition 1 and 2 cost the buyer nothing but time. Condition 4 and 5 require capital expense and time.
If conditions 1, 2 or 3 do not satisfy the buyer, the buyer can either cancel the offer, renegotiate the purchase price, or purchase “as is.”
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 that 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. On 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 vendor 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 five 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.
Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.
Next article: Income property /4 – Condition 2: examination of leases, expenses and phase 1 environmental test for contaminants, if required
State of the market
Often I am asked, how is the market? Will prices continue to rise? Will we see a drop in prices if everyone is inoculated and more homes come to market? The answer to these questions is yes and no. Yes, prices will likely continue to rise, and no, prices will likely not drop.
Barring some sort of terrible event, prices will continue to rise but not as fast as they have in 2020. Real estate prices always rise, sometimes slowly and sometimes fast. Prices are subject to supply and demand, less supply means higher prices, and more supply means lower prices. Prices are also subject to the commodity of land, and on the island of Montreal, available land is always decreasing. At some point, the island will run out of real estate to build, and Montreal will be a reseller market only.
‘Real estate prices always rise, sometimes slowly and sometimes fast. Prices are subject to supply and demand, less supply means higher prices, and more supply means lower prices.’
What we may see is fewer multiple offer scenarios with more inventory available. Prices have risen dramatically during the pandemic because people were hesitant to allow others into their homes, nor did they want to start searching during a pandemic for another home. With few homes for several buyers, prices rose as property received multiple offers.
With more inventory, there are more homes for buyers to choose from, therefore bidding wars will not be required. A multiple offer causes the price of a property to rise, as if on steroids.
This is not to say prices will not rise – they will. However, they will not rise as fast.
Have a great week!
Let’s not forget that people with cancer are vulnerable too!
You are invited to keep giving to the following organizations since it’s now more important than ever to support cancer research! Click on the logos below to find out how:
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 for, 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 email@example.com