| Basically, it’s currently a buyer’s market in Regina. House prices have come down in the past year and there are a fair number of listings on the market. Vacancy rates have climbed in the past few years from our previously very low rate of 0% to what feels like about 6 or 7% this spring. The reason: overbuilding in Regina in the past 2 or 3 years and less in-migration of working newcomers to Canada.In addition to this, it seems that the buyers are being very selective in what they are buying. They seem to want brand new! For an investor, this means a Smörgåsbord of good deals on old houses. Paulo just said exactly this other day: “Man o Man! We could be buying a house a week if we were in Canada full time”, but we just don’t have the time this year. And what he means by ‘buying’ is that we would be getting houses under contract using the Agreement for Sale strategy.Paulo and I, and our team, have purchased millions of dollars worth of property with this strategy and we love it! However, I could write a small book on the ins and outs of Agreement for Sales. There is a lot to know about them but the great thing is that once you get good at buying property with an A. for S. contract, you can buy as many properties as you can physically take care of.The tricky thing about this type of purchase is that it can either be absolutely NO RISK to the investor or it can be extremely risky. It is an excellent strategy to buying real estate with ‘nomoney down’ and can be a ‘WIN-WIN-WIN’ for the buyer, the seller and the bank. Or, on the contrary, it can turn into a big mess.From the investor’s perspective, you need to be completely confident from the BEGINNING of the deal that you are able to close with a sizeable or substantial balloon payment at the END of the term. The right way to do these deals is to improve the property by investing in the property from the beginning of the contract, so that in the worst case scenario, at least the value of the property has been maintained and/or increased. Improving the property forces appreciation, which builds equity, which becomes your built in down payment. If we were doing Agreement for Sales these days, we would be asking for at least a 5 year term to allow for mortgage pay down and time to appreciate, and we would be making some fairly low offers to some pretty motivated sellers. What is the difference between a Vendor Take Back and an Agreement for Sale? With a VTB, the title is transferred into the buyer’s name at the time of purchase and the buyer makes regular payments back to the seller over time, usually with a mutually-agreed-upon interest rate and a balloon payment due at the end of the term. With a VTB, there are fewer unknowns. Basically, the seller lends the buyer some money and the buyer has to pay back the loan plus interest. If the borrower (the buyer) does not make all the payments, the only legal recourse the lender (the seller) has is to either register a lien against the property and get paid back when the property is re-sold, or start foreclosure proceedings against the buyer, but the chance of the latter happening is very unlikely. With an Agreement for Sale, the title stays in the seller’s name for the duration of the agreement, so the buyer does not legally own the property until the end of the agreement, which can be a bit unnerving for both the buyer and the seller because from the seller’s point of view, someone else is responsible for the well-being of his/her asset, and from the buyer’s point of view, he/she may be investing money and time into a building in which he does not yet hold the title. So in the end, the agreement is only as good as the wording in the contract, the legal steps each party takes to protect themselves, the buyer’s word that he/she will do everything possible to complete the deal AND HAS THE CAPACITY to close this deal! In essence, the buyer (the investor) has to qualify himself/herself, because it is most likely the seller is not an investor and is trusting the expertise of the buyer. So the fact is, an Agreement for Sale CAN be of absolutely NO FINANCIAL RISK to the investor. It would be easy to go around convincing desperate sellers that you will solve all their problems, take over the property, promise that they would never have another worry in the world regarding their troubled property, try to get the loan at the end of the contract and then default on the agreement if you can’t qualify for the loan, with no ramifications to you as the buyer. The worst thing that could end up to the seller is they get back their property and you, as the buyer (investor) can walk away thinking “Oh well… that didn’t work! Next!” Maybe this doesn’t seem bad to you as the reader? After all “business is business!” But here’s the problem with doing that. They believed in you and you let them down. The whole point (the goal) in doing Agreement for Sales is you solve the seller’s problem and make a good deal for yourself at the same time. The MOST IMPORTANT key factor with an Agreement for Sale contract is the Exit strategy. Agreement for Sales are very fun to do at the beginning and not as much fun at the end of the term when the crunch is on to come up with the cash which is the balloon payment, so exit strategy is really important. Our best example of a high-risk Agreement for Sale where the exit strategy is the most important part of the plan was the purchase of our dive resort in Honduras. We put up a huge deposit/down payment at the beginning of the 3-year term, committed to huge monthly payments at 6% interest, have spent quite a bit of money improving the property, and have committed to a sizeable balloon payment at the end of the 3 years, so you can see from this scenario, the exit strategy is the most important factor since we can not get a mortgage on a non-Canadian property and the sellers are not flexible. We were warned by seller right from the beginning, there would be NO re-negotiating at the end of the term what-so-ever! (And we believed him since he also said “Ah… Don’t worry! If you don’t pay me, I will keel you!” in his thick Italian accent – which doesn’t make any sense because he has well over $1 million of our money as a deposit.) He’d be lucky if we defaulted at this point! However, After 18 years on the island, I believe him when he says he doesn’t want the property back. He really just wants his money and be done with it all. Anyway, so far everything is on track and we plan to stay alive by completing the deal on time or even earlier than scheduled. But as you can see, in this case, we did not base our exit strategy on the appreciation of the property and a new bank loan at the end of the three years. It is based on these 2 things: paying down the loan and a full-proof exit strategy (selling or doing an equity take-out on other property in Canada). If the exit strategy is based entirely on speculation that the market will go up during the course of the term, and that interest rates will remain low, and that the banks will be in a generous lending mood in 3 to 5 years, then this strategy becomes a little risky. For this reason, they are not for everyone! However, if you are interested in learning more about Agreement for Sale contracts, I’d be happy to send you some sample agreements that we have used in the past or answer any questions you may have. Just give me a shout by email and we can go from there. Happy Investing! ‘Tis the season! But take care out there!! Invest responsibly! by Kathy Berner |
