Real Estate Talk:
Income property / 3

A look at the promise to purchase conditions: the first visit

By Joseph Marovitch

Updated August 31, 2022

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:

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

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

Desjardins Economics forecasts a 25% drop in home prices across Canada by 2023 due to interest rate hikes and high inflation and states that there is already a 15% drop in Montreal sales. There has been a decrease in demand and an increase in supply. Further, current residential prices have not fallen lower than pre-pandemic prices.

If a buyer purchased a home during the pandemic when supply was low and multiple offers were rampant, the buyer paid above pre-pandemic market prices. This means the buyer must hold their property longer to sell at a profit, and this is okay because prices will continue to rise.

‘If sellers are going to sell, they need to know where the current market is at, and that it is now a buyer’s market.’

For sellers, there must be a re-evaluation of the price to match the current market. Today, with higher interest rates and inflation at 8.1%, there are fewer buyers which means there are no multiple offers and property remains on the market much longer, which is never good for sellers. If sellers are going to sell, they need to know where the current market is at, and that it is now a buyer’s market.

For buyers, there is negotiation room and time to properly perform due diligence, including an examination of documents and inspection. As well, there is room to negotiate a purchase price. Whereas in the past two years, an offer would start at asking and rise, now buyers can come in at less than asking and negotiate.

Have a great week!

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Feature image: Andrew Burlone

Other articles by Joseph Marovitch