Buyers Realty Blog

Condo Documents Check-List

2009-03-05T12:44:00.003-05:00

An agreement to Purchase a Condo should always be 'conditional upon review and approval of the Condominium Documents'. Here is a check-list of the main items that I review before forwarding to you and your solicitor

1/ Are all the necessary documents included in the package ( Cover Letter, Status Certificate, Declaration and Description By-Laws, Budget, Insurance Certificate ) ?

2/ Does the Legal Description agree with the Listing and the Agreement?

3/ Is the person who is selling us the property the registered owner?

4/ Are the Condo Fees as described in the Listing and do they include the items described?

5/ Are there any additional fees that we were not made aware of?

6/ Are there any 'special assessments' (lump-sum charges to each owner for necessary common element repairs not covered by the budget) announced or planned?

7/ Is the current owner up-to-date on their fee payments?

8/ Is the necessary Insurance current and adequate?

9/ Does the 'Reserve Fund' appear adequate?

10/ Any Major Changes Planned?

10/ Are there any restrictions on Pets?

11/ Is there anything else in the By-Laws / Rules and Regulations that is concerning?

12/ How many of the units are rented out rather than owner occupied?

13/ Are there any judgments or lawsuits against the Condo Corp and if so what is the status and outlook on them?

14/ Does the package include the necessary info to arrange ongoing payment of Condo Fees?

For more information on Condos visit http://www.buyerscall.com/

Take-Back Mortgages

2009-02-25T14:09:00.006-05:00

When the spread between Prime lending rate and typical Mortgage rates was greater than today it was fairly common for an Offer to Purchase to be conditional upon the seller ‘taking back’ a mortgage to finance part of the purchase price. It was frequently possible for the buyer to pay a lower rate than he could otherwise obtain while the seller received a better rate of return than he would typically get on an equivalent term money market investment.

Today, with a relatively small spread between these rates and greater competition among lenders there are less situations where this type of mortgage is advantageous to the buyer. For the seller, there are few situations where taking back a mortgage provides any benefit other than assisting the sale of a unique or difficult-to-finance property.

Nevertheless there are certain market segments and situations where a take-back may be considered.

A take-back First Mortgage is most frequently seen in sales to family members or friends who might have difficulty qualifying for arms-length financing, in Commercial sales of going-concern businesses and in rural residential or land sales. It is less common in arms-length sales of urban residential property.

A take-back Second Mortgage, while more likely for commercial or rural transactions, does have a limited place in the urban residential market.

For the purchase of a going-concern business it may be that both the buyer and the seller have more confidence in the cash flows of the business than do the commercial lenders. This is particularly true in the case of a purchase by an employee who may lack the track record that an arms-length lender requires. Also, where there is more cash business than the books suggest, the existing owner may be less reluctant than the bank. Equally, where the assets include a high proportion of goodwill or where the business is only of full value to someone with very specific and unusual skills, an arms-length lender may find that if the down-side materializes, the potential liquidation market is too limited and the liquidation value does not merit the risk.

For the purchase of rural residential property it may be that there is limited demand at the time when the seller wishes to close and that the buyer who is prepared to pay the highest price does not qualify for the loan with a commercial lender. Also, if the property does not meet the criteria for mortgage insurance on high ratio financing ( eg located where there is only a volunteer fire department) a seller take-back may be the only way of obtaining full value.

For urban residential transactions with an arms-length party there are typically only 3 reasons why a buyer will request a seller take-back
1/ The buyer can get the required level of financing but wants the seller to finance at a lower rate than the bank, thereby in effect cutting the price.
2/ The buyer lacks sufficient down payment to obtain a conventional mortgage and wishes to avoid paying a mortgage insurance premium or paying the full additional interest rate on a regular second mortgage, again in effect looking for a price concession
3/ The buyer cannot get the required level of financing through a regular lender due to inability to prove adequate income, insufficient length of employment ,insufficient length of Canadian residency or past bankruptcy/flawed credit history.

If representing a seller, I would counsel serious consideration before taking back a mortgage on a saleable urban residential property, even if they have no better immediate use for the proceeds of the sale. If one wants to invest in the mortgage market one can do so as a completely separate transaction in an amount and on terms and conditions that suit one’s portfolio.

Regarding scenarios 1/ and 2/ if the seller needs to make a price concession he can simply cut the price without the hassle, complexity and risk of taking back a mortgage.

Under scenario 3/ if the issue is one of past bankruptcy or credit history, it makes little sense to lend to someone who could not persuade any of the competitive mortgage lenders to qualify them and you will not be able to re-sell the mortgage at an acceptable discount.

If, however, the issue is one of insufficient time as a Canadian resident or insufficient time at a particular employment a more open-minded view is warranted, particularly if current income coverage is more than adequate and if the buyer was similarly employed in his home country or at a prior position. This is one area where some lenders have not yet fully caught up with all of the changing realities of contract work, self-employment, a more mobile workforce and skilled immigration. Though mortgage insurers such as CMHC can make some allowances for professionally qualified immigrants not every lender knows how to present their information in the best manner to get them approved.

In the event that a seller does favor taking back a second mortgage behind a conventional 80% first mortgage, I would advise :

A/Never take back more than 10 % of the selling price. As a minimum the buyer should have more invested in the property than you do.
B/ Include a condition upon you being able to re-sell the mortgage at a specified acceptable discount within a reasonable period of time prior to closing and ensure that the interest rate is sufficient to accomplish this.
C/ Include a condition that the Standard Charge Terms of the mortgage will be determined by your solicitor. Among other things this will protect your place in the ‘pecking order’ and prohibit any increase in the First mortgage which would dilute your coverage
D/ Have your Realtor brief you fully on the risks and on what is involved in the event of a default.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Real Estate Valuation

2009-02-25T14:03:00.002-05:00

In this issue we examine the various types of real estate valuation and the methods of conducting them. While most people know the term Appraisal, few words are as frequently misused.

Real estate owners will frequently assert that their property was recently appraised at such-and-such a value and while they fully believe this to be true, in most cases what they actually received was either a Letter of Opinion or most frequently a Comparative Market Analysis ( CMA).

A true Appraisal can only be conducted by a certified Appraiser who has the appropriate designation for the jurisdiction where the property is located. A certified Appraiser applies substantial research to the task and assumes a higher degree of accountability for the accuracy of the valuation therefore a formal appraisal will provide an acceptable value for purposes of Court Proceedings, for transactions under power-of-sale and for settling disputes as to value between adversaries in circumstances such as an expropriation or disputes over valuation for property tax purposes.

The Letter of Opinion, while intended to provide a true value is not appropriate for settling disputes. It is frequently used for determining value in an estate where there is no controversy, for justifying income tax submissions and in some cases for obtaining financing. However, for the latter, unless the financing is at a low ‘loan-to-value’ ratio and the property is fairly standard, the lending institution will often prefer to obtain its own Appraisal at the borrower’s expense. Beware of spending time or money on a Letter of Opinion unless the lender has previously agreed to be guided by it.

Finally, the CMA or comparative market analysis is simply a limited study by a Realtor, comparing the subject property against similar properties currently available and against other properties recently sold. It is used to assist a client in setting a listing price and negotiating a sale or lease and has no authority with courts or lending institutions.

The Real Estate Council of Ontario ( RECO) ,whose rules are binding upon all Realtors specifies that “ A member shall not give an opinion or advice about the value of a property unless the Member has the knowledge,skill and training to do so for that type of property and the member has done the necessary research”. RECO then includes within its guiding principles “Evaluations and Comparative Market Analysis are distinct from Formal Appraisals. A member should not perform a Formal Appraisal unless the member has the appropriate designation or certification”

The intent of these rules is to protect the client :
1/ By prohibiting a Realtor from giving an opinion on types of property or properties in locations that are outside of that Realtor’s sphere of expertise and
2/ By ensuring that the client receives the right type of valuation for his purpose, which is not always simply to list the property.

The method or methods of valuation used will vary according to situation and the type of property. They include the Comparative Sales Method, the Income Method and the Cost Method.

The Comparative Sales Method is an important component of any type of valuation. Essentially it is a common-sense determination of what a fully informed buyer should pay and a fully informed seller should accept, in current market conditions, with neither operating under duress. The subject property is compared to similar properties that have sold and to similar properties available for sale, with adjustments made for each positive or negative of the subject property’s features and condition in comparison to the other properties. Adjustments will also be made for timing, variations in economic conditions, changes in interest rates and developments in the neighborhood which all play an important role in comparing to properties sold previously.

The Income Method is of course used for Investment properties. Essentially it looks at the ratio of Cash Flow to Selling Price of similar properties that have recently sold and similar properties currently for sale, and then applies this ratio to the Cash Flow of the subject property. Care must be taken to compare the cash flows on an apples-to-apples basis so that items like financing and management costs and capitalization versus expensing of repairs/improvements are accounted on exactly the same basis for each property or eliminated from the equation on all. This method would rarely be used by itself but in conjunction with the Comparative Sales Method as a cross-reference. It is important to note that not all Realtors would have the accounting expertise or up-to-date knowledge of rental property to use this method with authority and would also need to be fully aware of all legislative or economic factors which might impact the future cash flows of the subject property.

The Cost Method as the name implies, establishes the total cost that would be involved in acquiring land and materials and paying for labor, design costs, permits, legal expenses and all the other ‘soft costs’ to replicate the property at today’s costs. The resulting total, minus the land costs could then be used to determine a current replacement value for Insurance purposes or as a basis for current cost depreciation .Alternately one can establish a ‘depreciated value’ for the current structure by looking at its present age versus the total ‘useful life’ and construction cost. This depreciated value can then be added to the land and soft costs as another cross-check of value.

For Residential work many Realtors will know current raw land costs, soft costs and the range of typical per-square-foot construction costs.

For Commercial/Industrial work specialized assistance is recommended for anything beyond a broad preliminary estimate.

No matter what the purpose or type of valuation it is always a ‘snap-shot-in-time’ so to be of any practical use a fundamental requirement is that it be up-to-date.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Real Estate Conditional Offers-Part 3 of 3

2009-02-25T13:58:00.002-05:00

A Seller’s viewpoint

In recent issues we looked at the difference between warranties and conditions ,reviewed the purpose and structure of each within offers to purchase or lease and examined the pros and cons of commonly used conditions from the buyer’s perspective.

This issue addresses the same topic from a seller’s viewpoint.

It is generally accepted that, all other things being equal, a ‘firm’ offer is more attractive to a seller than a conditional offer. If representing a Seller and receiving equivalent competitive offers at the same time I would support this view, subject to four important considerations.

First, is time on our side or against us? The answer depends on our real needs or preferences in terms of a completion date and upon what is happening and likely to happen to supply and demand and therefore to selling prices in the short-term marketplace. If time is against us due to seasonality or softening demand or if we need a closing date that is too close to the time required for fulfillment of conditions it will be safer to deal with the ‘firm’ offer. However, if time is on our side, it may be that the firm offer is a little less negotiable, whereas the conditional offer can be squeezed a little harder because they are more likely to pay a premium in order to secure acceptance of conditions that they really need. If prices are rising and we are not pressed for time, then even if the conditions fall through we are likely to receive subsequent offers that are as good or better.

Second, is each offer sufficiently close to our requirements for Terms, Inclusions, Closing Date and Price that both are likely to be negotiated to our satisfaction? If neither offer is clearly within striking distance of our target it is often better to thank both parties for their efforts but advise that with competitive offers in play neither will be receiving a sign-back and to invite each to come back with something better. This will generally cause the party making the firm offer to come back with a price that is close to their limit and will also cause the party making the conditional offer to re-think whether any of their conditions can be foregone and, if not, to bring back what they think is their very best price.

Third, can any of the conditions be signed back as warranties so that we retain control of the deal while satisfying the buyer’s legitimate concerns?

Fourth, whether or not competitive offers are in play, are the conditions reasonable; are the timeframes for fulfillment acceptable and what is the likelihood of them being fulfilled?

If there is a condition on financing, it is both prudent and reasonable to inquire whether the buyer has been pre-qualified for the required amount and to request proof of this; whether they will need a high-ratio mortgage and what their total down payment will be. Unless their Realtor has struck out the pre-print clause, by signing the offer the buyer has already consented to investigation of their credit information and their Realtor should know the answer to these questions before presenting the offer.

If there is a condition on ‘satisfactory home inspection’ you and your listing Broker should already know if there are any potential areas of concern and you can take control of the situation by re-writing the condition to allow you the option of remedying any latent defects rather than permitting the buyer to arbitrarily bail out.

If there is a condition on ‘sale of buyer’s property’ the buyer’s Realtor should bring the MLS listing and comparable sales information so that your listing Broker can counsel you on the likelihood of the property being sold at the required price within the specified time. If this appears satisfactory there should always be an ‘escape clause’ in your favor whereby you may continue to market your property and the buyer must ‘firm up’ or void the agreement if you receive another satisfactory offer. Be aware, however, that many Realtors prefer not to show and many potential buyers don’t want to see properties that are already conditionally sold. You must expect a marked decrease in showings after accepting such an offer and should understand that if it does not firm up you may be facing different market conditions when you come back on stream.

Generally, providing that you have a strong comfort level regarding the likely fulfillment of a finance or home inspection condition you can expect the offer to ‘firm up’ within a week and should consider it accordingly whereas a condition on ‘sale of buyer’s property’ should only be accepted if there is strong support for the view that the property will sell on time and that the buyer will net sufficient funds to complete their agreement with you. If in any doubt, tell them to come back when they have a letter from their bank confirming that ‘bridge financing’ will be available if their property sells on time but with a closing date later than the closing date of their purchase from you. Meanwhile, your Broker can inspect their house and more thoroughly confirm its value and salability. If you are under any type of time pressure to close this condition should be avoided and under no circumstances should you assume that everything will be fine for purposes of buying your own next home with the proceeds.

Another condition that should be treated with great caution, especially by a residential seller, is a condition on ‘taking back’ a mortgage. Certainly there are circumstances where it may be beneficial but if you really want to be in the mortgage loan business there are ways of doing it without the personal aggravation that will result if the borrower defaults.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Real Estate Conditional Sales-Part 2 of 3

2009-02-25T13:54:00.004-05:00

A buyer’s perspective

In this issue we will look at commonly used conditions from a buyer’s perspective, with the next post reviewing the topic from a seller’s point of view.

In most situations the buyer initiates the offer and most of the conditions included in it are there to protect his interests. Nevertheless in preparing an offer on behalf of a buyer an experienced Realtor will generally minimize the number of buyer conditions, anticipate any that are likely to be required by the Seller and include these from the outset.

By doing this the offer will become more attractive to the seller and the buyer will have the best opportunity of concluding a deal at the best price. This is especially true in a competitive environment where other offers are in play or expected or where the seller is not particularly motivated, but in all cases the simpler the offer the easier it is for the seller to accept or to ‘sign back’ with the least number of revisions. A complicated offer, even if not rejected outright, is more likely to be first referred to the seller’s lawyer which poses two problems for the buyer.

First, the longer the delay the greater the opportunity for competitive offers to be received. As the parties registering new offers must be advised that an existing offer is in play they will come with their best price and firmest offer right away which will leave your conditional offer out in the cold.\

Second, the seller’s lawyer is less interested in getting the deal done than in providing iron-clad protection for the seller. His job is not to negotiate a fair deal as he does not have to persuade the buyer to accept it. His primary task, and quite rightly, is to prevent anything that might remotely turn into a problem for the seller even if the alternative is no deal at all. If your offer passes through the hands of the seller’s lawyer, it is likely to come back with terms that are detrimental to your interests as a buyer. Remember that your Realtor should never, ever discourage YOU from taking legal advice but should take reasonable steps to minimize the likelihood of the other party’s lawyer getting involved before it is necessary and allowing an adversarial situation to develop.

The key to minimizing your number of conditions as a buyer is to first assign each into one of three categories.

First, eliminate the items which should be dealt with as warranties by having them written as warranties i.e as items which don’t break the deal but will give you suitable pre-defined compensation if not fulfilled.

Second, take the items which are outside of the seller’s control and deal with them before the offer is presented. The conditions which most commonly cause a competitive offer to lose out are “Conditional upon Financing” and “Conditional upon Solicitor’s Approval”. For conventional financing you can get pre-approval within 24 hours so why not get pre-approved for your maximum amount before making an offer or even looking at properties? For high-ratio financing 3 business days may be required to obtain a CMHC appraisal of the specific property so as a worst case you can attach a copy of your pre-approval to the offer showing that you will get the financing so long as the property appraises satisfactorily.

Similarly with Solicitor Approval. Simply having your lawyer look at the offer before it is ever presented and working out any issues between your lawyer and Realtor in advance will eliminate the need for this condition. If the initial offer results in the seller ‘signing-back’ a counter offer and including terms which you feel should be reviewed by your lawyer, have him look at them at that time.

The third group may now contain nothing so that you have a totally firm, unconditional offer, which gives you the strongest competitive position and will get you the best available price.

At worst it will contain only those items without which you simply cannot or will not do the deal. For commercial properties this may be a zoning approval; for a residence it may be a satisfactory home inspection or possibly the sale of your current home. Frankly, if a competitive offer does not include any such conditions then providing their price is in the ball park you will lose out.

However, you can still put your best foot forward by a/ making the timeframe for fulfillment as short as possible and b/ where the condition is on ‘sale of buyers property’ including an escape clause whereby if the seller receives another acceptable firm offer you have 48 hours to either firm-up your own offer or void the deal.

Remember the seller’s basic objection to conditional offers. By accepting or signing back an offer that contains conditions which are beyond his control he has revealed what price and terms he will really accept. If the conditions are not fulfilled he has lost some valuable time and marketing opportunity and weakened his position for the next negotiation by revealing his bottom line.

Why include conditions in favor of the Seller?

Examples would be where the property is currently tenanted and the seller needs the tenant’s agreement to vacate before closing, or where your Realtor knows that the seller has not yet bought and may need a condition on finding a suitable new home within a reasonable period. If it is obvious that the seller is going to need certain conditions it is better that your Realtor includes them. This will ensure language that everyone can live with, minimize delays, improve your competitive position, position you as reasonable, and most importantly avoid the possibility of the seller signing a deal that he ultimately cannot fulfill with the costs, inconvenience and legal complexity which that would entail

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Real Estate Conditional Sales 1 of 3

2009-02-25T13:51:00.002-05:00

In this post we will look at the difference between ‘warranties’ and ‘conditions’ and examine the purpose and structure of each within a conditional offer to purchase or lease. In coming posts we will review specific commonly used conditions from the viewpoints of both sellers and buyers.

The important distinction between a warranty and a condition is that while failure to fulfill a condition allows the injured party to declare the agreement null and void, failure to fulfill a warranty does not.

If the other party fails to fulfill the terms of a warranty you may have grounds to claim compensation but the burden of proving facts will be on you. Depending upon the wording of the warranty you may also have to prove the costs to you and to prove that you did everything possible to mitigate against them. Further, you may incur the expense and aggravation of trying to collect on your claim.

If you regard a particular item as a deal breaker and you would not be prepared to proceed with the transaction without having that item in your favor, make sure that it is written as a condition and not as a warranty, since a basic warranty is simply an assurance of facts by the other party which does not have termination of the deal as its pre-defined recourse.

Nevertheless, there are certain items that are best handled as warranties. These are items where you need to have some recourse beyond the completion date or beyond the date where it is practical to walk away from the deal, or where you are simply defining who will have financial and legal liability for various issues.

A common warranty required by a buyer or lessee will be for the seller or lessor to warrant that specified equipment will be in good working order upon completion or that the seller is entitled to sell the property without spousal consent. If either party is a Corporation the other may require them to warrant that the signatory is authorized to bind the Corporation. If either party is acting under a Power of Attorney or representing a Blind Trust, the other may require them to warrant that the appropriate beneficial trust agreement exists. It is also common for either party to have the other warrant that they have no knowledge of certain facts that would affect the value of the property. In some cases, such as a seller warranting to have no knowledge of a ‘special assessment’ on a condominium, such a warranty could include the Seller’s commitment to pay for any such special assessment.

This is an example where there is a pre-defined recourse that protects the buyer without the inconvenience of having to void the whole deal and start over, as one would have to do if the agreement was ‘conditional on no special assessments’. Wherever practical , warranties should be written in a manner whereby the injured party’s recourse is pre-defined. In addition to eliminating the burden of proving costs and mitigation the other party is less likely to fail to fulfill if the penalty for doing so is clearly defined.

Each ‘Condition’ unlike a warranty is designed to allow a specified party to void the deal unless a certain important item is fulfilled. A properly written condition consists of WHO must do WHAT at WHOSE EXPENSE and by WHEN and WHAT WILL HAPPEN IF NOT and FOR WHOSE BENEFIT the condition exists and therefore which party has the right to waive the condition if they so desire

E.g . “This Offer is conditional upon THE BUYER obtaining SATISFACTORY FINANCING at HIS OWN EXPENSE within5 DAYS following acceptance of this Offer, failing which THIS OFFER SHALL BE NULL AND VOID and the deposit money shall be returned in full. This condition is included for the BENEFIT OF THE BUYER and may be WAIVED BY HIM by notice delivered in writing to the Seller within the specified time period.

A Condition may be written as either a “Condition Precedent” like the one above whereby the condition is deemed NOT to be fulfilled and the deal is off UNLESS the waiver removing the condition is signed and delivered to the other party within the specified time period, or as a “Condition Subsequent” whereby the condition is deemed to be fulfilled and the deal goes forward unless the other party is advised otherwise within the specified time period.

For Real Estate purposes Conditions Subsequent are lazy and dangerous. Unless there are very compelling reasons to do otherwise, it is prudent to have Conditions Precedent that require signed waivers. A Condition should not have been included in the first place unless it was crucial and unless there was at least some uncertainty whether it could be fulfilled so the use of waivers disciplines the review of whether a Condition has actually been fulfilled to your satisfaction and avoids any disputes after the fact.

With increasing use of faxed notices the Waiver document should include a place for the party receiving the signed and dated waiver to sign and date acknowledgement that they have received it and a requirement that they fax back this acknowledgement to the Broker for the party who signed the waiver.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Renovate or Move ?

2009-02-25T13:47:00.003-05:00

As the better weather starts to arrive, so it seems do friends and family , causing many homeowners to wonder what it would be like to have a larger kitchen, an extra bathroom, a finished basement or a main floor family room.
This often leads to the dilemma: “Should I renovate or just move?”

It is a major change to uproot the family and move to a new home, especially if one has settled in and become comfortable with the neighborhood. This is why we are often tempted to “over improve” our homes instead of moving to something that really meets our changing needs. While it is difficult to separate emotions and memories from financial considerations it is important to at least step back and take an objective look at what sort of return you get when investing in a major renovation.

The Appraisal Institute of Canada conducts a Renovation and Home Value survey, identifying the renovations which give the greatest financial return at the time of resale. In a nationwide poll Appraisers were asked to rank renovations by the recovery of investment. The results are summarized as a percentage of the money spent that homeowners can expect to recoup when they finally move.

Average Recovery of Investment
Kitchen Renovation ……….68%
Bathroom Renovation……64%
Painting………………………….64%
Finish Basement…………….50%
New Furnace………………….50%
Family Room Addition……49%
Landscaping…………………..45%
Basement Apartment……42%
New Windows & Doors….39%
Add Central Air……………….38%

While it may be surprising to see that there is not one single renovation that consistently ‘pays for itself’ it is important to emphasize that these are purely averages and that individual results can be very different.

For example a neutral interior paint job or flooring replacement on a property that really needs it will often bring a recovery that is well above the capital cost.

Similarly, a total re-fit of a Kitchen or Bathroom is seldom fully recovered but a partial re-fit such as replacing old vinyl floors with neutral ceramics or replacing ‘dated’ appliances with inexpensive modern ones will upgrade overall appearance and if carefully planned can give a recovery of over 100%.

These items are particularly worth considering on moderately priced properties where the new buyer may not have much cash to do their own renovations but can pay for them by having them effectively built into the mortgage.

While ‘decorative’ landscaping is a poor financial investment ‘camouflage’ landscaping such as a water feature to cut traffic noise or cedar hedging to distract from a nearby eyesore will give a better return.

Naturally, Appraisers are looking only at the increase in Resale value. As a homeowner you would also weigh in the enjoyment that you will get from each item for the period that you continue to own the home.

In the case of a New Furnace or New Windows and Doors you would also consider the energy costs which, over a 3 or 4 year period, may bring the total recovery up to what you pay for the improvement.

In looking at the financial aspects the key is to not simply assume that you’ll automatically recover what you spend. In the end it is your land which increases in value, so in the same way that you won’t be able to re-sell a car in 3 years time for what it cost today, any home improvement will depreciate over time and some will simply be viewed by the new buyer as being a ‘normal maintenance’ item which they would expect to find in most similar homes.

In particular bear in mind that your tastes may not be the same as the typical new buyer so the more ‘decorative’ the item the lower your chances of getting a good return. Always remember that before anyone buys your home they must first visualize themselves living there Your friends may love your very expensive green broadloom and your silk wallpaper but if it doesn’t go with the buyer’s red furniture their first thought is not “Hey this is quality material, I’ll have to pay more for this home” but “How much will I knock off the price for the cost of ripping this out and replacing it with Hardwood and neutral paint ?”

Conversely, the more’ neutral’ the appearance and the more ‘functional’ the renovation, the more value the eventual buyer will attribute to them.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

What is Mortgage Insurance and why do I need it?

2009-02-25T13:42:00.004-05:00

There are 2 distinct types of Mortgage insurance. Though both are paid for by the Borrower, one is for the Borrower’s benefit while the other is for the benefit of the Lender.

Insurance in favor of the Borrower is an optional item which provides coverage of your mortgage payments in the event of long-term disability or death. It is typically handled as an ‘add-on sale’ by the lending institution.
In principle this may seem like a good idea but there are two things you need to consider.

First, the purchase of this insurance should not be used by the lender as a basis for approving or disapproving the loan, nor should it affect your interest rate. These items should be determined by creditworthiness, Income coverage and property value. While some lenders may behave as though it is ‘assumed’ that you will buy their proposed coverage, remember that it is absolutely at your discretion and you should be skeptical of any attempt to create linkage.

Secondly, what the lender offers must be compared to buying the same amount of Insurance independently. Assume for example that your initial Mortgage Principal is $300,000. With traditional Borrower Insurance your premium will be based on $300,000 to cover the worst-case scenario where disaster strikes quickly and the Insurer is liable for the full amount. However, with the passage of time your outstanding balance will reduce, so if the carrier’s liability is limited to the outstanding balance you may find yourself continuing to pay a high premium for an ever-diminishing benefit .You may be better served by buying a policy through your regular Insurer whereby the benefit remains constant or, if you prefer, whereby you annually review the outstanding balance and choose whether to insure a surplus, reduce the premium or re-direct the excess into paying down the mortgage principal.

Lender Insurance

is compulsory for non-conventional mortgages that is for 1st Mortgages where the down payment is less than 20% of the Property Value. The threshold used to be 25% but has been reduced. Most commonly provided by Canada Mortgage and Housing Corp(CMHC) and paid for by the Borrower, Lender Insurance protects the Lender against a Borrower’s failure to pay.

Initially introduced as an aid to the first-time buyer and a stimulus to the Housing Sector, its availability was subsequently extended to all Buyers and the original price ceiling was removed. Based on the premise that the Lender bears a greater risk where the Borrower has a lower investment in the property and that the lower the investment the higher the risk, CMHC Insurances operates on a sliding scale, depending on the percentage down-payment,added to the Principal amount of the Mortgage and repaid, with interest over the duration of the loan. Borrowers should note that the Insurance premium is subject to Provincial Sales Tax and that this PST is payable on closing of the transaction.

For example, a Buyer purchasing a $400,000 home with a 10% down payment would currently be subject to CMHC Insurance of 2% on the $360,000 balance therefore $7200would be added to the balance leaving a total of $367,200 to be amortized. In addition to Legal Fees, Land Transfer Tax and any other ‘closing costs’ the Buyer would pay the current CMHC property appraisal fee as well as $576 PST on the CMHC Insurance

Purchasers frequently ask whether they might be better off to eliminate their CMHC costs by taking on a 2nd Mortgage. Typically the answer is NO, since they will require 15% initial equity in order to qualify for the 2nd Mortgage therefore the fee to be saved is only 1.75% .Offsetting this, they will bear the costs of registering and ultimately discharging a 2nd Mortgage and will pay a much higher rate for the 2nd Mortgage. The only exception being where the Seller of the property is willing to take back a 2nd Mortgage at a very favorable rate.

Although expensive, this form of insurance does open the doors to home ownership for many people who would otherwise have to rent and allows others to buy a larger home more rapidly. Further, a CMHC Insured Mortgage must contain various provisions for the protection of the Borrower which are usual but not compulsory in other Mortgages. These include limitations on penalties for early discharge and the ability for a subsequent purchaser to “assume” the mortgage with the CMHC Insurance already paid.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Check-list for Selling Commercial Property

2009-02-25T13:39:00.003-05:00

If you have commercial space to sell or lease out, some basic preparation will ensure that you attract the maximum number of potential buyers and realize the full market value in a timely manner.

The first step is to decide whether you plan to list “exclusively” or via the Multiple Listing Service ( MLS).

An exclusive listing has, at best, only 2 potential advantages. The first is that you will generally pay a slightly lower commission percentage. However, since your objective is to realize the maximum NET value after selling expenses, this is almost invariably a false economy since the property will only be exposed to the direct contacts of the Listing Broker. Assuming that the Listing Broker has say a 20% Market Share, then you would miss out on 80% of the potential buyers and your chances of getting full market value would be correspondingly reduced. One option to consider is a ‘collateral agreement’ whereby the property is listed on MLS but with the proviso that you will pay a lower commission rate if it is sold or leased to a client or customer of the Listing Brokerage.

The second and more common consideration for an exclusive listing is where you wish to maintain a degree of confidentiality about the fact that the property is for sale, other than to parties who may have a specific interest in buying it. Under this scenario, most likely for the sale of a going-concern business, the address of an exclusive listing would not be promoted . However, any party making a general inquiry as to availability of such a business through the listing firm would soon be aware of the details and in most industries the ‘grapevine’ would soon spread the rumor, un-fettered by any actual facts !

If you opt for an MLS listing to gain the broadest exposure, your next step is to create your own basic information sheet. If you do this before ever calling in Realtors for their marketing proposals, it will save you a lot of tedious repetition in answering their questions and ensure that everyone is on the same page in assessing Fair Market Value.

Irrespective of whether you wish to sell or lease, create copies of all existing surveys, site plans,floor plans and your most recent property tax bill, then make up a single sheet of paper answering as much as you can of the following.
Zoning ? Taxes ? Lot Dimensions ? Building Age ? Construction Type ? Building Dimensions ? Total Square Footage ? How much Office ? How much Retail ? How Much Commercial / Industrial ? Sprinklers ? Heat Detectors ? Clear Ceiling Height ? ( If this varies, note how many square feet for each ceiling height ) How Many Dock-Level Doors ? Dimensions ? How Many Truck Level Doors ? Dimensions ? Outside Storage permitted ? Rail Access? Elevators ? Floor Drains ? Electrical Supply Volts ? Amps ? Heat Source ? City Water and Sewers ? Number and Type of Washrooms? Changing Room Facilities ? Cafeteria? Number of Parking Spaces ? In addition, for a going-concern business, Financial Statements and Chattels list ? For the sale of Tenanted property, Lease, Expense and Net Income Details?

This information will all be required for the MLS Listing . All of these items as well as information on any underground storage tanks and any outstanding environmental or fire-safety issues will have a bearing on the suitability for potential users and upon the Market Value.

Next, provide this information to each Realtor who you will invite to tender a marketing proposal and request from each an opinion of value supported both by factual data on recently completed sales and leases of comparable properties in the vicinity and on currently available properties which will be in effect the ‘competition’ to your property. This step is critical to giving you a fully informed view of what the property is realistically worth so that you can determine who to list with based on their marketing proposal and not make the costly mistake of just going with the ‘Highest Bidder’ in terms of their valuation. In the end it will be neither you nor your Realtor who determines the actual selling price, it will be the competitive situation in the marketplace, so comprehensive factual information is essential.

A related step is to determine the List Price that is most likely to achieve full value. As with a residence, an excessive List Price does not lead to a higher selling price. It merely slows down the process and discourages buyers. Ask each Realtor to review the spread between Asking price and Selling price for comparable properties and observe how long each was on the market.

It is important to discuss how ‘showings’ are to be conducted. This should cover the hours during which showings can take place, how you will be notified, how much notice you will require and who is to be present. For safety, security and confidentiality it is recommended that you document your requirements as an addendum to the Listing Agreement and insist that your requirements be relayed by the Listing firm to all co-operating Brokers in order to protect your interests and correctly assign any liability.

You will often be asked whether you are prepared to ‘take back’ any mortgage financing to help effect a sale Whether you are or not, there is seldom any benefit to referencing it on the Listing.

Lastly, consider the pros and cons of putting a ‘For Sale’ sign on your property. Since a serious prospect will have their agent scouring the MLS for suitable sites, you might question whether a sign will draw anyone but tire kickers and the benefit of this must be weighed against any negative perceptions from employees or regular trade visitors.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC.

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

The Importance of a Home Inspection

2009-02-25T13:36:00.002-05:00

When buying or even when selling a resale home a professional home inspection is a very sound investment.

At a current cost of around $300 to $500 depending on the size and age of the home you will receive a comprehensive report on each main element of the structure and systems, a summary of important items requiring immediate attention and their estimated cost, plus a rough cost guide to other common home improvements and a recommended schedule for ongoing maintenance.

Additional costs will be involved if you require inspection of an older fireplace by a W.E.T.T technician for insurance purposes and a structural engineer will be required if you wish to determine load-bearing capabilities for adding an additional storey etc, however the cost range above will cover the typical requirements for most houses, townhomes and condominiums.

Q/ I’m an engineer or I’m in construction. Why should I hire an inspector ?

A/ Chances are you have a specialty and though you have a good grounding in other areas it is rare that someone would know not only what to look for in each element but also exactly how it compares with the norm for its age and type. Also, a professional Home Inspector is trained to proceed in a disciplined manner with a very long check-list of items to be covered, not just the ones that you or I might deem ‘priority’. Further, you’ve probably got to this stage because your spouse likes the property so the word of an objective third party can be useful if any deficiencies are severe enough to put the purchase into question. Similarly, if deficiencies need to be corrected or a price concession made because of them, the seller and his agent are less likely to dispute the findings of a professional inspector

Q/ For what age of home is a professional inspection required.

A/ Even at 1 year of age an inspection is worthwhile. Although the ONHWP warranty affords some protection of the water shield for 7 years after completion, the coverage for other items is much shorter so the earlier that problems are identified the better. Even if the owner hasn’t done a spot of re-wiring that seems to work but has reverse polarity/shock hazard or a bit of gardening that has affected the grading and the flow of water away from the walls, you should not assume that everything was right even when the home was brand new.

Q/ How do I find a good Home Inspector ?

A/ As always, a reference from a satisfied relative, neighbor or friend is helpful and your Realtor can certainly recommend professionals who meet the standards of the industry association and have done good work for other clients.

Q/ Should I have a condominium inspected when I’m going to receive an engineering study as part of the status certificate (condo documents) package ?

A/ The engineering study only covers the ‘common elements’ of the condo, not the plumbing, electrical, HVAC and structural aspects within the ‘owned’ portions of an individual unit. Nevertheless most buyers of newer condominium high-rise apartments forego a professional inspection without undue risk as the potential costs of deficiencies are relatively low. For condominium townhomes a professional inspection is just as relevant as for a detached home and should also be considered for older high rises.

Q/ How does it work ?
A/ Typically the inspection will result from a ‘condition on satisfactory home inspection’ in an Agreement of Purchase and Sale.
Because the buyer will normally only have a few days to fulfill this condition and most inspectors have a full schedule you should book the inspection immediately the conditional agreement is accepted.
The inspector will give you a date and time and quote you a price, payable on the day of inspection, as soon as you give him the address, age, style and size of the property. Your agent, having made arrangements for access, will meet him at the property and advise him of any salient facts or specific areas of concern. Depending upon your own schedule and the preferred methodology of the particular inspector, you may choose to attend for the entire 3 or 4 hour inspection, or to arrive just for the last 30 minutes in order to receive his report and visually review key items. The findings will be presented verbally with the opportunity for you to ask questions and you will then receive a detailed written report. The format will be to compare each aspect of the home with the ‘norm’ for properties of similar age and type

Q/ What are my options after receiving the report?

A/ Assuming that all is satisfactory you would normally sign the ‘waiver’ which removes your condition, making the agreement firm and binding.

If there are serious deficiencies you may elect not to waive the condition, thereby making the agreement null and void. If there are latent problems which imply significant expense and which are beyond what might reasonably have been expected but are not sufficient that you want to null the deal, discuss with your agent the likelihood of negotiating a price concession and replacing the ‘waiver’ with an ‘amendment’ which both reflects the price concession and removes the condition.

Q/As a Seller, why would I commission a professional home inspection?

A/ In most cases a Seller does not , however a professional inspection will bring to your attention any latent items that need to be fixed and if you have a limited amount of time to complete your sale your agent can make potential buyers aware that a current professional inspection report is available. This confirms that you have nothing to hide and in many cases will be accepted by the buyer, saving them the money and eliminating the time delay of fulfilling a condition.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

20 Mistakes to avoid when Buying or Selling

2009-02-25T13:27:00.004-05:00

20 Mistakes to avoid when buying or selling a home

Selling or Buying a home can be a lot easier if you plan ahead and avoid the most frequent pitfalls. This month we look at common mistakes to avoid when either buying or selling.

MISTAKES WHEN BUYING

Relying on the advice of the Seller’s Agent

The Seller’s Agent represents the Seller’s interests , not yours .Always use your own Agent who has no vested interest in you buying any individual property and will represent your interests exclusively

Signing Documents without fully understanding them

Don’t wait until the last minute before reading documents. Get sample copies of all relevant documents and have your Agent walk you through every line of a sample Offer so you can ask all the right questions before you’re caught up in the excitement of a particular home

Making Verbal Agreements

Under Contract law verbal agreements are not enforceable when they deal with Real Estate.

Get it in writing !

Not Asking for a Seller Property Information Statement

This simple form requires the Seller to reveal any known defects or relevant issues and to take responsibility for the truthfulness of the information provided. If you don’t ask for it, you won’t get it.

Buying without a professional Home Inspection

You are investing Hundreds of Thousands of Dollars. Spend $300 to $400 and know what you are getting for your money.

Letting ‘First Impressions’ cloud your decision

There are entire books about how the first impression of a home is the single most decisive factor and a whole industry of ‘staging’ has sprung up to help create the best first impression.

On the one hand, don’t let the flowers and candles and the smell of baking bread have too much influence. None of them will be there when you move in.
On the other hand don’t let bad décor or messy housekeeping scare you away from a structurally sound home that meets all your needs. Remember, you are buying the house, not the furnishings or the housekeeper.

Looking for a home without being pre-approved by a lender

When you are pre-approved you are in effect a cash buyer which improves your negotiating position.
Don’t mistake pre-qualification, which is simply the first step, for pre-approval. Ask your Lender or your Agent for details.

Assuming that Mortgage Rates are cast in stone

Like every industry Banking is competitive. Depending on the market and current spreads it is usually possible to negotiate substantial savings from ‘posted rates’.

Failing to check out the neighborhood thoroughly

How do traffic patterns change depending on the day or time of day ? Are there any future developments in the works ? Is that nice green space actually zoned for development ? Ask around-check it out.

Making an Offer based on ‘Asking Price’ rather than actual Market Value

What have similar properties sold for in the immediate area ?How long were they on the market ? How does this one compare ? Does the Listing Agent have a history o over-pricing ? Have your Agent do the homework.

MISTAKES WHEN SELLING

Pricing Too High

Make sure you correctly determine the market value. If your asking price is higher than the market is currently paying, many of the potential buyers will never see your home as they will first look at similar ones that are better priced. Not only does this limit your prospects but it increases the chance that your home will ultimately sell for LESS than market value. This is due to the ‘discount’ associated with homes that have been on the market for longer than average.

Pricing Too Low

At certain times and in very specific neighborhoods a low list price may help to start an ‘auction’. However for most sub-division homes and most neighborhoods it will simply result in a low selling price.

Losing Sight of the ‘Big Picture’

Moving up in a market downturn ? If your $300,000 home has dropped 10% in value, so has your $600,000 dream home. Yes, you drop $30,000 on the current property but you probably save $60,000 on the new one.
Ignoring Market and Economic Trends
Is it a Buyer’s market ? A Seller’s Market ? A Balanced Market ? Ask your Agent for details.

Choosing the wrong Agent

It is crucial that you have full confidence in your Agent’s experience and abilities. You need someone who listens to your priorities, will explain the whole process, has a good feel for the market, and offers sound advice on how to improve your sale value.

Choosing an Agent for the wrong reason

Don’t choose an Agent on the basis of which one gives the highest estimate of the home’s value. The Agent may influence the list price but doesn’t set the selling price; the Market does that !

Limiting Market Exposure

Part of your Agent’s job is to ensure your property is marketed in the most productive manner. Not allowing a sign on the property or restricting viewing times will dramatically reduce the number of prospective buyers and will reduce your selling price.

Failing to “Showcase”

A little work can improve the important ‘first impression’ and can greatly affect perceived value.

Trying to “Hard Sell” during viewings

No one likes being pressured and buyers will wonder why you are so anxious. Let your home speak for itself

Confusing “Lookers” with “Buyers”

Many people who look at homes for sale may be just getting a feel for the market, seeing how others showcase their homes or even just looking for decorating ideas. Your Agent has the experience needed to separate the Lookers from the Buyers so let them do their job.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Industrial Real Estate ,Right-Sizing Your facility

2008-10-08T11:59:00.003-04:00

When you plan a new facility it is clearly important to determine the optimum size , but what is the best process for making your decision ?

The first step is to analyze your operation at current volumes and at the volumes that are forecast for the future.

The second step is to examine the range by which volumes might vary over periods of 5 Years, 10 Years and beyond based on your best assumptions regarding market volume, market share and product mix. You will also need to build in the impact of strategic plans for adding or exiting customer segments, adding or abandoning product sectors and any changes that you foresee in geographical territory coverage.

Third, the impact of technological change upon demand, product mix and operations must be considered.

Fourth, will volume changes be evenly spread throughout the year or will there be “seasonality” that dictates significant peaks and valleys in activity from one period to another?
Unless you are in a very mature and stable industry these projections will be at best crude estimates, with their reliability dropping as the time-frame lengthens. For this reason your forecasts for each year should be expressed as a range from “Best Case” to “Worst Case” with a larger spread between the extremes for each succeeding year, and with seasonal peaks and valleys identified for each scenario.
While all of this seems obvious, the point is that there are so many variables for most businesses that producing a reliable long-term forecast is very difficult, therefore the objective is to have a facility that can accommodate a fair amount of flexibility in volumes.

The fifth question is whether the operation is currently running 24 hours, 7 days a week and if not, can volume changes be accommodated by increasing the hours of operation? If adding shifts is not an option then volume changes above and beyond what can be handled by increased efficiency will require additional capacity and therefore additional space.

At this stage it is helpful to work with a professional facility planner to calculate the following :
A/ Determine the space and layout that would most efficiently handle your “Best Case” or highest volume, then calculate your total Occupancy Costs and your Labor Costs under this scenario.

B/ Determine the space and layout that would most efficiently handle your “Worst Case” or lowest volume, then calculate your total Occupancy Costs and your Labor Costs under this scenario

C/ The difference in Total Occupancy Costs now represents the maximum financial risk if you planned for your Best Case but in fact your Worst Case materialized. In practice this risk would either be increased or partly offset by changes in unit labor costs arising from the more spacious layout. Your facility planner will be able to identify these and thus determine the “Net Risk” of excess space.

D/ Next, assume that you planned your Worst Case volume but it turned out that the opportunity for Best Case had existed. Your facility planner can help you calculate how much of this business you might manage to ‘Shoe-Horn” into an under-sized facility as well as the costs of over-time and the general labor inefficiency that would be involved. It is very important to remember that some labor inefficiency would apply to your entire volume, not merely to that which exceeds your Worst Case forecast. To these costs must be added the lost profit contribution on volume that could not be accommodated as well as attributing a value to the loss of Customer Service that would likely result. The resulting total represents the “opportunity cost” of having insufficient space.

E/ The final step is to compare the net risk / cost of having excess space……. rent or capital cost, taxes, insurance, heat and utilities etc………. identified under C/against the opportunity costs under D/ With this comparison in hand you can make an informed decision on whether to plan for one of the two extremes, or more likely on where best to strike the middle ground.

Naturally, the lower your unit Occupancy Costs, the higher your unit Labor Cost as a percentage of Sales and the higher your profit contribution on Incremental Sales, the more attractive it will be to provide space for your up-side volume. Conversely, the higher your Occupancy Cost per unit of volume, the lower your Labor Cost as a percentage of sales and the lower your incremental profit contribution, the more conservative you will need to be.

As always, if you plan to own rather than lease, then allowing room to construct additional finished space later will help provide a “Win / Win” situation

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Commercial Realty Design/Build. The Pros and Cons

2008-10-08T11:29:00.007-04:00

Whenever a new site is planned it makes sense to analyze the merits of a Design/Build custom facility versus an existing structure.
The advantages of a Design/Build are substantial as you can plan the optimum material and communication flow and then create the structure that best supports it.
Your Realtor can help match you with a single source developer who will provide a ‘turnkey’ facility to meet your specifications and if you do not have the necessary skills on your permanent payroll can recommend a qualified professional to help you identify the optimum process layout and translate it to the Design/Build architect.
This approach allows you to have the exact footage that your operation requires and the correct mix between plant and office, avoiding the occupancy costs of too much and the inefficiency of too little. Celiling heights and cube can strike the best balance between efficiency, building costs and heating and cooling costs while accommodating the appropriate lighting and sprinkler or heat detector systems. Building columns can be planned for maximum efficiency ; yard design can reflect your particular traffic patterns ,parking requirements and security issues and you can ensure the right configuration of docks and doors . Appropriate mechanization can be built into the design to accommodate factors unique to your business. Future expansion can be allowed for by pre-planning where and how you would add footage, roughing in the necessary docks and doors on the expansion walls, including footings that would support mezzanines if required and ensuring that grading, drainage and snow removal take account of both present and future needs.
With such advantaged any operation large enough to require a free standing building of 10,000 sqaure feet or more should consider a Design/Build with analysis of these 4 issues
1/ What is the timetable for being operational in the new site?
A reasonably straightforward warehouse/distribution facility can be physically built within a few months but to this must be added the time requirements for operational design, building design, planning permission, building permits and any substantial customization and automation. In many cases the design can be a modification to an existing module and it will help if the developer has existing pre-approval for a structure of similar size and usage to your requirements. However the time-frame for building permits varies greatly according to intended use and municipality. It is prudent to double the length of time that you are advised for any municipal approvals so if rapid expansion or other circumstances dictate a quick move an existing structure may be your only short-term option.

2/Are you financially prepared to buy rather than lease ?
If you are a reasonably well-established business and your requirements are such that the resulting facility would be generally appropriate for a broad range of subsequent owners or tenants you may be able to lease a Design/Build project through a developer who already owns a suitable piece of land.
In this case it is likely that the capital costs of certain custom features that will have limited residual value to the developer must be paid for by you as “leasehold improvements” . However, unless you are a genuine blue-chip or “triple A” operation intending a very long lease you will have difficulty getting a substantially custom project built for you to lease, particularly on land that the developer does not yet own and must buy for the purpose. So generally for a highly unique facility you should be financially capable of buying.
In this case your Realtor can advise you of appropriate sites that are held by developers who are prepared to undertake a design/build. This provides the important advantage that you do not bear the cost of financing the land during the planning and construction period and give the developer a powerful incentive to complete the project on time !
3/ What is the supply and demand for existing space in the local market ?
You need to determine whether the market is balanced or whether there is an over-supply which should result in better costs for either existing or design/build space.
If there is a significant excess supply of existing facilities that meet your basic needs for footage and ceiling height you may save enough on the acquisition to pay for some key improvements and then review any overall cost savings against any reduction of efficiency compared to a custom site.
However, if the market is reasonably balanced the capital cost premium for a design/build is usually more than offset by the operational savings.
As a ‘rule of thumb’ the larger your overall space requirement the greater the payback on a design/build as the potential for operational savings is exponential while the costs of design and customization rarely rise in direct proportion to the size of building.
4/ Don’t forget the intangibles.
In comparing design/build against existing space the capital costs versus operational savings can usually be quantified quite accurately. However, design/build can also offer significant intangibles in terms of both employee morale and customer satisfaction and loyalty. Employees appreciate an environment that has been designed to make them as effective and productive as possible and to reduce their fatigue and ensure their comfort. Seeking their input on the new facility is not just good PR it is also good business as they usually know where the bottlenecks are. From a customer standpoint there is both practicality and prestige in providing a state-of-the-art facility, with opportunities for good publicity during the planning and construction phase and for strengthening relationships by means of facility tours when your site opens for business.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Commercial Real Estate Buy or Lease ?

2008-10-08T11:13:00.006-04:00

The question of buying versus leasing involves not only the same items you would consider for Process Equipment, Vehicles or Computers but also a few that are specific to Real Estate.

In general there are 5 factors to consider.

1/ You’ll first want to look at Cash Flow. Many elements of your outflow……. Property Taxes, Insurance, Routine Maintenance, and Utilities will be the same under either scenario. So will initial renovations or improvements and GST ( an outflow on commercial purchases or leases but claimable as an ‘input credit’ like the GST on your other business expenditures ) so all of these items can be largely ignored for purposes of comparison.
A Purchase will typically involve a higher initial outflow when you compare the down payment, Land Transfer Tax and higher Legal & Mortgage costs for a Purchase against the typically lower Legal costs plus a couple of months’ rent ( perhaps 2% of Capital Value ) for a Lease.
After the initial outlay a Purchase will lower ongoing monthly costs and will not be subject to annual escalation clauses or to base cost increases on each renewal term .
Up to this point, the decision is quite like the decision whether to buy or rent a house so the first question is “ Can you afford to commit the upfront costs in order to reduce your ongoing monthly costs, forestall escalation in the future lease rate and benefit from the appreciation of the property ?”
The follow up question is “ Is this the best use of cash resources or would I get a better rate of return investing the funds elsewhere ?”

2/ The next consideration is Tax Deductibility. The Lease payment is a straightforward operating expense while the Purchase involves both an Interest expense and a capital cost/depreciation allowance. The latter is typically based on the value of the structures, excluding the value of the land. Your accountant can show you how to maximize the deductibility of your purchase costs and you should remember the old maxim “ never do anything for tax reasons that doesn’t make good business sense anyway”

3/ Specific to Real Estate are the questions of how much customization or “leasehold improvements” the premises will require and how much will it cost to install equipment in terms of mechanical, plumbing, electrical, heating, ventilation and air systems and other “sunk costs” that will not be recoverable if you relocate ?

Further, will you incur costs at the end of the lease to remove custom installations, remediate any environmental issues and restore the site to its original condition. Clearly,the more costly and disruptive that a relocation would be, the more attractive it becomes to purchase rather than lease.

Naturally you can protect your business by means of a very long term fixed-rate lease but in essence you will pay the same financing costs that you would pay to purchase plus a premium for the owner’s profit and perceived risk. A shorter lease term with renewal options leaves you in a weak negotiating position for renewal when it is evident that a move would be costly and disruptive to you.

For these reasons the conventional wisdom used to be that a manufacturing facility should be owned while a warehouse could often be leased. There is still some merit to this approach however many of today’s distribution facilities are sufficiently complex and sophisticated that the costs and disruption of relocation are comparable to moving a plant, while some ‘light assembly only’ manufacturers can move as readily as a conventional warehouse.

4/ What will be the future availability of suitable alternative sites if you have to move ? This must be addressed on several levels. First, if you have a skilled workforce you need to consider whether suitable options will be sufficiently close to the present location to retain your skills. Second, if proximity to specific highways, rail spurs or other facilities is vital, will alternate sites be suitable? Third, are there zoning or regulatory issues that will limit your choice of sites and are these likely to become more restrictive ? if so it will be a lot more difficult to obtain a variance on a new site than to continue an existing one. This issue will be a major consideration for food, chemical or auto businesses and for anyone with requirements such as floor drains or outside storage.

Again the ‘rule of thumb’ would be “the more difficult it would be to find an alternate site, the stronger the case for buying versus leasing”

5/ What are the extreme highs and lows of your volume projections over the forseeable future and how might these affect your space requirements ? Whether you buy or lease you generally have 2 main options for dealing with significantly lower-than-planned space requirements, i.e rent out the excess or relocate. If you lease you should ensure that you include specific wording to allow a full or partial sub-lease. Unlike residential leases for commercial leases this is not an automatic right unless negotiated.

Similarly, if space requirements are higher than planned you have the options of finding additional off-site space or relocating. However, if you purchase a free-standing building on a site where total coverage is less than permitted, you have the further option of adding space without relocating. In a mature industry where the range of possible volumes is predictable you can make a fully informed decision. If you are in a new sector where volumes are more volatile you may want to consider a relatively short-term lease that includes both an option to renew at a pre-determined rate and an option to purchase. Your Realtor can advise you of properties where the owner is amenable to this type of arrangement.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com

Working With A Realtor

2008-10-05T16:40:00.001-04:00

This article applies equally to Residential Real Estate and to Commercial property.

Feel free to use it but bear in mind that it is based on Ontario law and may not be applicable elsewhere.

As a potential Buyer or Lessee, Real Estate is one of your rare opportunities to benefit from qualified professional help that won’t cost you a cent! However you need to understand how it works and to make sure your ‘agent’ is really on your side. When selecting a Realtor, it is vital to know where the Realtor’s legal obligations and priorities stand.

Sellers and Lessors

A Seller or Lessor usually engages a Realtor ‘The Listing Broker’ to act on his behalf.
While this Brokerage is expected to deal truthfully with all parties, his obligation is to serve the best interests of the Seller. This includes getting the Highest Price and the best terms and conditions for the Seller. Also, while the Code of Ethics and Standards of Business Practice require an honest answer to any specific question the Buyer might ask, the Listing Broker is not expected to emphasize any negatives about the property or about its value in relation to others . Further, while the Listing Broker is not going to reveal the Seller’s real ‘Bottom Line’ he will certainly disclose to the Seller any information he obtains about the Buyer’s budget or degree of interest in the property.

It is VERY important to understand that the Seller’s Contract is never with the individual whose name may appear on the sign, but with the entire firm. This means that every agent of that firm has the same duty to serve the Seller’s best interests. If you’re the Seller or the Landlord it’s a great arrangement!

What about the buyer ?

Naturally you can simply call the Listing Brokerage for a property you’ve noticed and take your chances, but if you were buying a business, would you let the seller’s lawyers and accountants handle everything ? If the answer is NO! ……then you’ll understand the need to have a qualified expert representing your best interests.

A Buyer Broker, operating under a Buyer Agency Agreement will first assist you in making a systematic review of your specifications and then make sure you’re made aware of ALL the properties that fit your specs, not just specific properties in which he has a vested interest.

Your Broker can then pre-inspect all of the sites which fit your key specifications, report back on the pros and cons of each and provide you with a factual analysis of real market value as opposed to the asking price. When a suitable site is selected your agent will draft on Offer to Purchase or an Offer to Lease which fully protects your interests, without including terms and conditions which make life impossible for the Seller. This will often be geared to obtaining a Conditional Agreement, perhaps subject to final approval by lawyers, but will cover all the essentials of a workable deal without starting out on an adversarial note.

Your Buyer Broker will negotiate the terms of the Agreement, or help you to do so, deal with surveys, waivers and amendments, co-ordinate with Lawyers for both parties and if required can assist with any zoning issues. Most Buyer Brokers can also refer you to sources for financing specific types of properties.

What does the buyer pay for this service ?

For an MLS Listed property, you should pay absolutely nothing
When the Seller placed the property on the MLS Listing service he contracted to pay the Listing Broker either a fixed fee or a percentage commission. The Listing Broker in turn contracted to share this amount with any co-operating Broker, whether a sub-agent (also representing the Seller’s interests) or a Buyer Broker representing the interests of a Buyer. This assures the Seller of maximum exposure of the property through many thousands of agents, instead of just one brokerage, while assuring that each party to the transaction can have expert professional assistance.

There are dis-reputable agents who will try to convince gullible buyers that by 'eliminating the buyer agent' the seller can save commission and therefore you will get a better price.

Do you REALLY think that either the Seller or the Seller's agent is driven by the desire to put more of their money in YOUR pocket...............

How do you find a Buyer Broker ?

In addition to specialized Buyer Brokers, any qualified Realtor may elect to work as your Buyer Agent, with the exception that it is difficult do so for his own company’s Listings, since his entire Company is obligated to promote the Seller’s interests on those ! So basically, the more Listings that a particular Brokerage has, the LESS effectively they can represent the buyer's interests !

Each Brokerage will have its own policy regarding Buyer Agency and this must be fully disclosed to you in writing from the outset.

Make sure your Realtor is knowledgeable about the type of property that you want and the issues that affect you. The type of questions that he asks or fails to ask on your first contact will quickly determine if he has the right background to add value to the process.

Whatever you do for a living, if you've done it every day for many years, you surely do it better than I would do it. Accordingly, no matter how intelligent you are, and no matter how good a negotiator you may be, a good Buyer Broker, who buys properties every day will do a better job of ensuring a fair deal, with terms and conditions that fully protect your interests than someone who only does it every few years. And most certainly he will do a better job of protecting your interests than the Listing Agent who has a legal requirement to serve ONLY the best interests of the Seller

Paul Graham is the President and Broker of Record for BUYERS REALTY INC

Please direct your questions to paul@buyerscall.com or visit www.buyerscall.com

What to expect from this Blog

2008-10-05T16:23:00.004-04:00

Over the next few months I'll publish a series of Real Estate articles that I wrote for ONTARIO INDUSTRIAL Magazine, some of which were re-printed in the MISSISSAUGA BOARD OF TRADE Magazine

Interspersed with these will be news about developments affecting the Mississauga, Brampton, Peel and Greater Toronto Real Estate Markets.

Also I'll keep you abreast of any important developments on Mortgage Rates and availability as well as news affecting the Real Estate market as a whole.

Paul Graham is the owner and Broker of Record for BUYERS REALTY INC

Feel free to send any questions that you may have to paul@buyerscall.com or visit web-site at www.buyerscall.com