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Real Estate Talk:
Income property / 5

A look at promise to purchase conditions: Examination of documents

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 2nd condition, the “Inspection”. Today we are going to discuss the 3rd condition, “Review of all documents”.

Four conditions that allow the buyer to verify the information:

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

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

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, income from common area laundry machines, income from parking, income from 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 there are factors that are not indicated and make a major difference. It is great that the Cap Rate is 6 or 7 based on income and expenses, however, what if:

• Some rents expire in the next two months and they are not being renewed?
• Some tenants do not have a lease?
• Tenants are in arrears and have not paid their rent in the last three months?
• Certain expenses are missing
• Garbage removal, building insurance, accounting fees, superintendent salary, electricity 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 finish up the due diligence with the final condition of financing.

If it is determined that the expenses are higher than indicated, or 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
2. Purchase “as is”
3. Cancel the promise to purchase

Next issue we will discuss Condition 4 – Financing.

Should you have questions or require further details, please feel free to contact me.

Have a great week.


State of the market

As I stated in previous articles, inventory is low for detached homes and buying power has been reduced due to new mortgage rules and rising interest rates, However, as in every market, there is always an opportunity. In this seller’s market, the opportunity is for those who wish to downsize. Many parents keep their home equity for retirement or as a safeguard should their children require the money in the future. In many cases, the children have grown up, moved out and made it on their own. Now the parents are living in a 3 or 4 bedroom home that they do not require. The opportunity is perfect to sell the home at a great price, move to a luxurious condo and travel the world.

Bouton S'inscrire à l'infolettre – WestmountMag.caImage: Kate Hiscock via StockPholio.com

Read also: Real Estate Talk: Income Property / 4


Joseph Marovitch - WestmountMag.ca

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 josephmarovitch@gmail.com


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