Real Estate Talk:
Income property / 4
A look at promise to purchase conditions: Inspection
By Joseph Marovitch
Last week we discussed the four conditions that must be in the promise to purchase for an income property, to protect the buyer, and we focused on the first condition of “first visit”. Here again are the four conditions that allow the buyer to verify the information:
1. First visit
3. Review of expenses, leases and any other financial documentation
The buyer requires protection in the offer since the buyer is providing a promise to purchase with a purchase price based on the information the seller provided, before the buyer has examined the property. The buyer is providing this offer because the purchase price is based on the cap rate, location and condition of the building.
When the first condition of ‘first visit’ is performed, this is only to verify if the building appears to be in reasonable condition from its outer appearance…
As mentioned in the last article, the purchase price is not based on comparable properties or city evaluations, it is based on the income stream. When the first condition of “first visit” is performed, this is only to verify if the building appears to be in reasonable condition from its outer appearance, as based on the information the seller has provided. However, this does not indicate if the:
• Plumbing works
• Electrical system works
• Building has proper insulation
• Windows are sufficiently sealed
• Brick on the exterior of the building is properly caulked
• Boiler room water tanks will last or are expired and need to be replaced
• Roof is in good condition or requires replacement
• Flashings are in good condition
• Each apartment requires work or not
• Building is up to city bylaw codes
Condition 2: Inspection
There are many more factors to consider in examining the condition of the building that only a trained expert can determine. While it is not a law to have an inspection performed by a professional inspector in Quebec, I would highly recommend it.
Imagine purchasing an income property, or any property, without an inspection, then finding out after the deed has been signed, that almost everything in the property requires repair or replacement. This causes the buyer to invest much more money than the purchase price and anticipated cost. The indicated cap rate of 5.7, suddenly becomes a 3 cap rate.
While it is not a law to have an inspection performed by a professional inspector in Quebec, I would highly recommend it.
Therefore, the next condition is inspection. In Quebec, an inspector is not required to be certified. Almost anyone with a pad and pencil can be an inspector. Many inspectors may have engineering degrees or have worked as a civil engineer, however, to be safe, some of the certification the buyer may want the inspector to have are:
• AIBQ – Association of Quebec Building Inspectors
• CAHPI National – Canadian Association of Home & Property Inspectors
• Infrared Certified
There are more certifications available and there are certified inspectors who are working towards government regulation, ensuring professionals have certifications, however, for now buyers will have to ensure the inspectors they choose have a certification. Many buyers are developers and they may use their contractors to perform the inspection. However, certified inspectors are usually up to date on city bylaws while not all contractors are.
The inspection of an income property can take anywhere from three to five hours or more, depending on the size of the building. It is always best for the buyer to accompany the inspector during the inspection so that if there is an issue, the inspector can point out and explain the issue.
Approximately two to four days following the inspection, the inspector should provide a written report to the buyer, detailing the condition of the building. Should the buyer be satisfied with the report, the seller would receive a document indicating the condition of inspection has been satisfied and the buyer would move on to the third condition which is the review of documents, including leases and all expenses. It should be noted that should the buyer not provide a written document indicating there is an issue by the inspection deadline, as stated in the promise to purchase, the condition of inspection shall be automatically considered satisfied.
‘It is always best for the buyer to accompany the inspector during the inspection so that if there is an issue, the inspector can point out and explain the issue.’
In the event the inspection report indicates there is an issue that must be addressed and can significantly reduce the value of the property and/or the revenue of the property, the buyer has three options:
1. The buyer can cancel the offer
2. The buyer can attempt to renegotiate the purchase price
3. The buyer can purchase the property “as is”.
In option two, the seller can refuse to negotiate and state they are selling the income property “as is”, in which case, the buyer only has option one and three.
Next issue we will discuss Condition 3 – Review of leases, expenses and all other documents pertaining the property.
Should you have questions or require further details, please feel free to contact me.
Have a great week.
State of the market
According to the Canadian Real Estate Association, home sales decreased significantly for the month of April, more than in the last five years. The decrease in sales is attributed to the tougher mortgage qualification rules that have been implemented, such as buyers being required to prove they can manage higher interest rates so as not to affect the overall financial system negatively.
The reduction of home sales was recorded in several cities, including Montreal. After a winter and fall season of increased sales, the market appears to be slowing down, though housing prices remain steady.
In the luxury property market, the situation is not as apparent and homes in the upper income ranges are selling as prices continue to rise. In the lower to middle range priced properties, buyers can consider smaller property and putting more money down to reduce the cost, as mentioned last week.
Read also: Real Estate Talk: Income Property / 3
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