Archive for July, 2012
Although this article focuses on the Toronto market, the advice Mark gives could equally well apply here in Ottawa. Robert.
As GTA real estate softens, how to reduce risk
By Mark Weisleder | Sun Jul 29 2012
For every pundit who says the GTA real estate market will crash, there is someone else who says it will remain stable or even grow. I fall into that camp. Even so there are signs of weakness in the market. June resale figures for the GTA are 5 per cent lower than a year ago, according to the Toronto Real Estate Board. June prices were also lower than April and May, although still 7 per cent higher on average than last June. Some say this is a typical summer slowdown while others see storm clouds on the horizon. Whatever your view, here are some ways to reduce your risk, whether you own a home or investment property.
Pay down your mortgage: Increase your monthly payment. Even a little makes a difference. The more equity you build in your home, the bigger the cushion if prices go down.
Lock in your interest rate: There has never been a better time to lock in your interest rate. Three year rates are 2.84 per cent this week and 6-years at 3.59 per cent. This cushions you from unexpected rate or price swings.
Cover your costs: When thinking about a real estate investment, do the math. After making the down payment, the rent should at least pay for all expenses on the property. This includes mortgage interest, property taxes, insurance and utilities. Add another 10 per cent to pay for a property manager, who will make your life easier in managing your investment. Do not invest in real estate that does not carry the expenses. That’s just speculation that prices will increase. You can get caught if there is any slowdown.
Share your risk: Consider taking on a partner in any investment real estate. You get some equity out and share the bills and risk. Always get tax advice to check how much tax you may have to pay as a result of any sale. Draw up a partnership agreement to make sure everything is clear.
Do tenant checks: This is true for commercial or residential tenants. Do proper background checks and get additional guarantees if you are not satisfied with anyone’s credit or prior rental history. If you lose your tenant, you will have trouble paying your expenses.
Treat your tenants with respect: Your tenants are protecting your investment. If you treat them with respect, they will look after your building better. If your tenant is nearing the end of their lease, especially in a commercial situation, approach them to negotiate an extension to the lease early, to protect against someone else taking them away. If you treat your tenants the right way, they won’t bother to look anywhere else.
If markets collapse, no investment is safe, including stocks and real estate. Still, by taking the proper precautions, you should be able to safely ride out the storm and may even be in a position to take advantage of any falling prices by becoming a buyer.
– Mark Weisleder is a Toronto real estate lawyer.Contact him at firstname.lastname@example.org
Royal LePage is celebrating its birthday – one that most of us don’t see! Our company is 100 years old! 100 years of experience has allowed the company to get better and better. It provides its agents with on-going training and state of the art tools, allowing us to serve the public in the best possible manner. I am proud to belong to Royal Lepage.
I have never liked bidding wars but one has to accept the fact that sometimes they do happen. Mark Weisleder has once again written an excellent article. Robert.
One of the best-read Moneyville stories last week was the article about the couple who bid $90,000 over the asking price
on a $1-million Toronto home in the belief that they were in a bidding war. They were shocked to find out they were the only bidders.
The seller was eventually persuaded to accept half that — $45,000 over asking, but the question remains: how did this happen?
According to the law, in a bidding war, the agent must tell everyone how many offers have been received for house. But the agent is not allowed to give out the buyers’ names or say how much they have bid.
In Toronto, a practice has developed whereby the buyer’s agent calls the seller’s agent and tells him that they plan to bring in a formal offer later that day. But that doesn’t mean they have to do it. If the would-be buyer changes his mind, he doesn’t have to bid.
What this means is that the seller may get a handful of these so-called “registered offers” during the day — with no guarantee any will be actually presented later. Even so, the listing agent, to create a sense of urgency, will usually tell potential buyers he is expecting offers.
Buyers should understand this and safeguard themselves.
I developed a bidding war clause a few years ago that is widely used. The clause says the buyer is presenting his offer based on the assumption that multiple offers will be presented to the seller that same evening. The clause goes on to say that if the seller receives no other offers by a certain time, say 10 p.m., the buyer can change his mind, cancel the deal or change the price.
If the seller accepts the buyer’s offer, he must provide the buyer with proof he has received another offer. This means providing, at minimum, the name, address and phone number of the real estate agent who presented the rival offer.
By using this clause, the buyer has assurance that if his offer is accepted, the seller will have to prove that he indeed did have at least one other offer available.
If this kind of clause had been used in the recent case in which the buyers offered $90,000 over the asking price, then the buyers would have been able to cancel their offer once they found out that no other bids had been received.
So could these buyers have complained about the behaviour of the seller’s agent?
In my opinion, if the seller’s agent knew that other offers were not coming in and that the buyers mistakenly believed that they were in a bidding war, that’s unethical. You cannot mislead a buyer just to get a higher price.
Could the buyers have cancelled the deal? This is a difficult area of the law. If the buyers could prove that the seller misled them, maybe. Or if it could be proved that the seller knew the buyers were mistaken when they presented the offer, it is possible the buyers could claim this was a legal mistake. However, this will involve legal fees to attempt to sort it all out.
In this recent case, the parties settled the matter by having the buyers agree to pay $45,000 over asking. This was probably better than paying lawyers to figure it all out. Still, by using a bidding war clause whenever you are suspicious about the possibility of a bidding war, you can successfully avoid this happening to you.
– Mark Weisleder is a Toronto real estate lawyer. Contact him at email@example.com
Royal LePage annouces it’s second quarter House Price Survey (Q2) and Market Survey Forecast. I will be attaching a link to the survey on my website.
Mark Weisleder’s articles are always so interesting and informative that I am pleased to reproduce them here on my blog. Robert.
By Mark Weisleder | Fri Jul 6 2012
The standard Ontario real estate contract says deals must be concluded no later than 6 p.m. on the day of closing. But if you’re a minute late, will that kill the deal?
On Friday, Nov. 30, 2007, lawyer Michael Gatien went to the Cornwall, Ont., registry office to register a deed on behalf of his client, who had just bought a plaza. He had wired the purchase funds to the trust account of the seller’s lawyer just after 4 p.m. and received the final go-ahead to register the deed at 4:53 p.m. But when he tried to register the deed, he missed the 5 p.m. deadline by one minute. The registration system would not accept anything after 5 p.m.
The seller then tried to cancel the deal, claiming the deed was not registered in time. The buyer’s lawyer argued that since all steps had been taken to close the deal, the deed registration could take place when the registry office reopened on Monday.
The sale had involved difficult negotiations and there were some hard feelings, which all contributed to the seller trying to cancel the deal. It went to court in March 2009 and a judge ruled the seller could not refuse to close.
Normally, real estate deals close when the money has been delivered from the buyer’s lawyer to the seller’s lawyer and title has been transferred to the buyer. Funds are usually sent by wire transfer. The seller’s lawyer releases the deed for transfer on the government computer registry system and the buyer’s lawyer then completes the computer registration.
Why does the standard agreement say that deals can be completed by 6 p.m. if the computers close down at 5 p.m.?
In order for the computer registration process to operate efficiently, lawyers for the buyer and seller sign an agreement that says all the money will be held in escrow until the deed gets registered. In many cases, buyers are waiting for their own sale deal to close in order to get the money to close their purchase. As a result, there is often not enough time to get the money wired into the trust account and to complete the electronic registration before 5 p.m. This is especially true at the end of the month, when many deals are closing on the same day.
As a result, in many cases, the deal closes after 5 p.m. “in escrow.” The lawyers agree that even though the deed is not registered, the buyers can move into the home, the seller’s lawyer will hold the money overnight in their trust account and the deed will be registered the next morning. This escrow agreement is typically completed before 6 p.m.
Can a seller get out of the deal if the money is not delivered to their lawyer before 5 p.m.?
While this did not occur in the above case, a judge will also look at the local practice of how real estate deals are conducted.
In another case, a buyer’s lawyer was late getting the cheque to the seller’s lawyer. The seller tried to cancel the deal. The court found that the seller contributed to the deal closing late by delaying the final closing visit of the buyer and not giving the buyer’s lawyer instructions as to how to make the cheques payable until late in the afternoon.
Another question that arises on closing is when does a seller have to let the buyer into the house?
This should happen as soon as title registration takes place and not later than 6 p.m. if it is an escrow arrangement. In one case, a buyer’s movers sat in the driveway from 6 p.m. on the day of closing until 9 p.m., waiting for the sellers to leave. It cost the sellers more than $1,000 to pay for the buyer’s additional moving costs, since they were late leaving the home.
Sellers also cannot leave junk in the house on closing. If they do, the buyer can sue to pay for the cost of removing it.
Sellers, vacate your home early on the date of closing and take everything with you. If you need more time, make changes in the contract at the time you sell it.
Buyers and sellers, do not try to change your mind and cancel a deal because a deed cannot be registered in time. Let your lawyers complete the escrow and move on.
– Mark Weisleder is a Toronto real estate lawyer. Contact him at firstname.lastname@example.org
Real estate lawyer Mark Weisleder’s articles are always interesting and informative. Here he explains something that many buyers and sellers may be uaware of. – Robert.
With the number of foreign investors in Canada’s real estate market increasing, buyers need to ensure that sellers who are non-residents have paid capital gains tax before the deal closes. Otherwise, the buyer could be on the hook.
By Mark Weisleder | Fri Jun 29 2012
There have been a lot of stories of foreign citizens buying Canadian condominium units from floor plans and then reselling them, for a profit, as soon as the building is registered. These sellers must be aware that the Canadian taxman must be paid before they get their money. In some cases, the entire deal could be delayed until this gets done.
In general, you are a resident of Canada for tax purposes if you have lived here for at least 183 days in the past year. If you are a resident, and you sell any Canadian real estate, you do not have to pay any tax owing until you file your tax return at the end of the year.
For instance, if you are a resident and sold a property in July 2012, you would owe income tax, if any, by April 30, 2013 — the deadline for filing your 2012 income tax return.
However, if you are a non-resident, you must clear up your taxes before a real estate sale closes. This means applying to the Canada Revenue Agency (CRA) for something called a Certificate of Compliance. In general, you need to pay 25 per cent of the capital gain on your sale in order to get the certificate.
If the certificate is not received prior to closing, the buyer will insist on a holdback, typically 25 per cent of the entire purchase price, until the certificate is in fact produced. (In some cases the holdback amounts to 50 per cent of the purchase price.)
In more and more cases that I see in my practice, these certificates are not available for closing, owing to a backlog in processing the requests by the CRA. The reason the buyer insists on the certificate, or the holdback, is that if the seller sells without paying the required taxes, the tax burden then becomes the buyer’s responsibility.
Let’s look at an example: the non-resident buys a condominium for $300,000 in 2010 and wants to sell it now for $400,000. The gain is $100,000. The tax on the $100,000 must be paid before closing in order for the seller to receive the certificate. However, if the certificate is delayed, then the sum of $100,000, being 25 per cent of the total purchase price, will be held back on closing until the certificate is delivered.
If there is a mortgage on the property, this might require the seller to come up with his own money to pay off the balance of the mortgage before closing, since there may not be sufficient funds left after the holdback to do this.
Even if the property is sold at a loss, the seller must still obtain the certificate or else the same 25 per cent of the purchase price will be held back on closing.
The CRA may also delay the delivery of the certificate if the seller owes outstanding income tax for prior years, or if the seller has not, for example, paid the proper withholding taxes on any rental income he received from the property during his years of ownership.
How is all this tracked? In every real estate deal in Canada, the seller is required to provide a sworn declaration that, on closing, he will not be a non-resident of Canada. When such a declaration is made, the seller may receive the full purchase price from the buyer and he has until April 30 of the following year to pay the taxes. However, if the seller is not a resident, then the taxes must be paid early, as described above.
Real estate agents should explain this process immediately to clients selling a property in order to ensure that lawyers and accountants are aware in advance that tax filings must be made before any deal closes.
If you are buying from a non-resident, you should also ask questions to make sure that there is nothing that might delay your anticipated closing.
Foreign citizens might make a profit buying and selling Canadian real estate, but they will not escape Canadian taxes. In all cases, seek professional advice before signing any agreement to sell a property.
Mark Weisleder is a Toronto real estate lawyer. Contact him at email@example.com