Real Estate Talk:
Income property / 4

A look at promise to purchase conditions: Examination of documents

By Joseph Marovitch

Updated November 27, 2024

In my previous article 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, the first visit. Today, we are going to discuss the second condition, the review of all documents.

Four conditions that allow the buyer to verify the information:

1. First visit
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2. Review of expenses, leases, and any other financial documentation
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3. Inspection
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4. Financing

The buyer requires protection in the offer since the buyer is providing a promise to purchase with a purchase price based on the seller’s information prior to the buyer examining the property. The buyer is providing this offer because the purchase price is based on the Cap Rate, location and condition of the building.

The purchase price is not based on comparable properties or city evaluations, it is based on the income stream.

The major factor in determining whether the price the seller is asking is a fair price that will provide a feasible financial return is the balance sheet.

The buyer requires protection in the offer since the buyer is providing a promise to purchase with a purchase price based on the seller’s information before the buyer has examined the property.

In the balance sheet are the assets and liabilities. Assets, on the left side of the sheet, will list income from all possible sources, such as income from rents, common area laundry machines, parking, billboards on the side of the building, and any other source available.

On the right side of the balance sheet are liabilities such as vacant units, building repair expenses, garbage removal, superintendent salary, insurances, business taxes, school taxes, water taxes and other miscellaneous expenses.

At the bottom of the balance sheet is the total gross income, minus all expenses, to show either an annual profit or loss.

The balance sheet provides an overall picture of the financial situation of the income property but some factors are not indicated and make a major difference. It is very good that the Cap Rate indicated in the listing is 4.5 or 5.5 based on income and expenses, however, what if:

• Some rents expire in the next two months and they are not being renewed?
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• Some tenants do not have a lease?
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• Tenants are in arrears and have not paid their rent in the last three months?
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• Certain expenses are missing such as garbage removal, building insurance, accounting fees, superintendent salary, etc.?
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• What if electricity and/or gas fees are all rising?

‘If the buyer is not trained to examine the balance sheet and pertaining documents, it is wise to have an accountant perform the task.’

All these issues will affect the Cap Rate in a downward turn. Therefore, there is a condition where the buyer has the right to examine all the leases and expenses to their satisfaction and verify that the Cap Rate is accurate. Nobody wants to purchase a money hole and no landlord wants to remain in one. Therefore, the buyer must carefully examine all the documents. If the buyer is not trained to examine the balance sheet and pertaining documents, it is wise to have an accountant perform the task.

If in examining the documents, the buyer determines the information is accurate and the Cap Rate is correct, then the condition should be satisfied, and we move on to the next condition, inspection.

If it is determined that the expenses are higher than indicated, or that many leases are about to expire, or there are outstanding invoices to creditors, then the buyer has three choices:

1. Negotiate a reduced purchase price
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2. Purchase “as is”
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3. Cancel the promise to purchase

The seller has the right to accept or refuse the price, in which case the buyer has only two options.

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.

State of the market

Currently, lower interest rates and inflation appear to be bolstering the real estate market and the economy. However, what has been stated in this column in prior articles appears to be coming to pass as of January 1, 2025. Many issues will come to bear on our economy from the U.S. but the one that will have an immediate effect is the announcement by Trump that he intends to apply a 25% tariff on all goods and services imported from Canada.

‘Many issues will come to bear on our economy from the U.S. but the one that will have an immediate effect is the announcement by Trump that he intends to apply a 25% tariff on all goods and services imported from Canada.’

Economists on both sides of the border agree that these tariffs will hurt the economy of the U.S. and Canada. If our government then decides to apply tariffs on exports to the U.S., no one will buy anything. Inflation and interest rates will rise and carrying costs on property and living expenses will also rise significantly. Hopefully, if U.S. and Canadian citizens and corporations apply enough pressure on the incumbent president, we will avoid a bullet. Many buyers and sellers in Montreal are in a holding pattern to see what comes.

Note that there will always be those who must buy and sell. The only question is how expensive or inexpensive the process will be. We will find out soon, ho ho ho.

Have a great week!

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Feature image: Kate Hiscock – flickr

Other articles by Joseph Marovitch