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Archive for January, 2015

Five things to know when buying from a bank

I have started receiving inquiries from buyers who notice residential properties for sale and the seller is shown to be a bank. This usually indicates that the owner could not make their mortgage payments and the lender is selling the property to recover the mortgage amount owing. If you are considering making an offer on one of these homes, here are 5 things you need to know:

  1.  The process that most lenders will follow in Ontario is Power of Sale, and not Foreclosure. The main reason is that a Power of Sale can be completed much faster than a Foreclosure. Powers of Sale can be completed generally in 3-4 months, while the Foreclosure process will typically take up to a year to complete. Banks also prefer this method as it permits them to get bad loans off their books quickly and if there is any shortfall, they can immediately sue the original borrower for the deficiency.

    2.    Lenders are supposed to try and get fair market value for the property that is sold, so it is not automatic that you will be able to buy the property at a substantial discount. Use a professional buyer agent to make sure you know what this property is worth before making any offer.

    3.    The lender will usually contain special clauses in this contract that will be important to any buyer. For example, all appliances will be sold on an “as is” basis, with no warranty, meaning you are out of luck if the appliances are not working when you close. No warranty will be given regarding the room sizes or even the lot size for the property. If there is a tenant on the property, no guarantees are given about the length of any lease or how much the tenant may be paying in rent. If HST is payable, for example if the property had a business running in it before the lender took over, or if it had been substantially renovated, then this extra HST has to be paid by the buyer on closing. Finally, if the original owner comes up with the money before closing to pay off the mortgage, then the deal is over.

    4.    In order to deal with the above clauses, buyers should make sure that any purchase is conditional upon a detailed home inspection so that everything can be verified, including the condition of the home, the room and lot sizes, and whether there was any business, such as a day care, operating in the home before closing. This could involve discussions with the neighbours as well as any tenant that the buyer will be assuming after closing. Regarding the lot size, ask the bank’s real estate agent if the bank has any survey relating to the property and if not, check at www.landsurveyrecords.com or www.protectyourboundaries.ca as there are over 1.5 million surveys available for purchase through these websites to assist you when the boundaries are not certain.

    5.    Buyers should attempt to close the deal quickly, once they have satisfied themselves as to all conditions, to avoid having the original owners come back and pay off the mortgage before closing, thus ending the deal.

    When you understand what is involved in buying a home from the bank, you should not have any unwelcome surprises either before or after closing.


Six tips to make sure your buyer closes on time

When a seller is faced with bids from more than one buyer at the same price, how do they choose which buyer’s offer to accept? If a buyer cannot close, this can have dramatic negative consequences on the seller, especially if they have already committed to buy a new home, based on the money they expected to receive from the sale of their current house.

Let’s look at what can happen if the buyer does not close. You have sold your home for $400,000, with a $5,000 deposit. The buyer can’t close. You subsequently re-sell the home for $370,000, suffering a $30,000 loss. You can now sue the buyer for the $5,000 deposit and the balance of your loss of $25,000. However, let’s say the buyer is bankrupt. You will collect nothing except the $5,000 deposit.

Some buyers try other tricks to reduce their liability, such as putting the offer in the name of a corporation that has no assets. That way, even if they cancel the deal, there is no one to sue successfully. Another trick is to include an assignment clause so that the buyer can transfer the deal to another buyer, without any liability. You can also have a situation where a married couple puts an offer in the name of only one of the spouses; the spouse that has no money or no assets in their name. You get the picture.

Here are six tips to make sure that you choose the right buyers every time, and that your deals close on time:

1.    Insist on a high deposit, usually 5% of the purchase price. In my experience, with over 30 years of closing real estate deals, when a buyer comes up with at least 5% as a deposit, they find a way to come up with the money to close the deal.

2.    Ask the buyer’s agent to verify that any interested buyer has been pre-qualified for financing, meaning that they have already been approved to carry any mortgage required to close the purchase. For extra proof, ask to see a copy of the buyer’s mortgage commitment, or consider making the deal conditional on your being satisfied with the buyer’s credit report.

3.    Ask the buyer if they need to sell their existing home to be able to buy your home. You may want your own agent to do some due diligence to make sure that this buyer will be able to sell their home in time to get the money to close your deal.

4.    Always insist that any offer from a married couple be in both names, written on the offer itself.

5.    Do not accept any kind of assignment clause that limits the liability of the original buyer. If the buyer wants to transfer the agreement, that is fine, but they must remain responsible if any subsequent buyer does not close the deal with you. This will insure that they only transfer the deal to a qualified buyer.

6.    If an offer is submitted by a corporation, make sure that the president of the corporation also signs the offer personally, so that they are also liable if there is any default.

By doing the right homework in advance on your buyers, sellers can rest assured that their deals will close on time, without any unnecessary aggravation.

Mark Weisleder is a Toronto real estate lawyer, speaker and author. He may be reached at mark@markweisleder.com