This article was almost about our latest purchase. Last weekend was filled with excitement as we almost purchased a tri-plex in Vancouver. It all happened so quickly: In the afternoon Dave received an email telling us the property was about to be listed on MLS. When we called, they were having a showing at 4pm that day. He took a look, ran some numbers, and we decided to put in an offer. After dinner we signed the contract, and before we went to sleep that night, we had an accepted offer. It was a sleepless night for both of us as we wrestled with the good aspects and challenges of this deal. We were both excited about the prospect of owning a good income property so close to two skytrain lines, and in a great rental area. The numbers were pretty good. But, we hadn’t done any research yet, and we weren’t sure we wanted to buy another residential property. As we started to line everything up to complete the due diligence a few red flags went up (for example, we were pushed to strike the inspection condition from our deal; we did it but said we would still do an inspection. We later found out there was another higher offer that had the inspection clause in the deal and that was why they had accepted ours). As the red flags went up and we started to walk away the seller was suddenly making concessions. Things really started to smell fishy.
So, we walked away from the deal. And, we both feel good about it because we listened to our gut. We’re realigning ourselves to our goals and have a plan of action for the next twelve months. But we also feel good because we tried. Don’t be afraid to stick your neck out and try. Putting in an offer on a property, as long as you put it in subject to financing or an inspection, still gives you time to complete due diligence and determine if it’s the right decision. And you can do it comfortably because you have the property tied up. Sometimes all of the lights will be green and you’ll fly through the process and get a great new property. Other times you’ll find some yellow lights, and you may wish to proceed with caution. Or, you may find a red light and stop there. With every offer you learn something. And while we didn’t acquire a property this month, we did gain a renewed focus on our goals and finances.
So instead today, we’re going to help you be prepared for your next deal by giving you some legal terms that are good to know.
10 Words to Know: Real Estate Investing Lingo
by Julie Broad
It’s fun to tell you all of the stories about our wins and losses in the real estate game, but sometimes we just have to give you good, solid practical information that you must know as a real estate investor (or even a home owner). So, I will keep it short and simple and give youten real estate words to know.
Types of Interest in Land
1.FREEHOLD: Owning a freehold property means you have the right to use the land for an indefinite period of time and, subject to any bylaws or restrictive covenants, may do what you wish with that land.
2.LEASEHOLD INTEREST: Owning a leasehold on a piece of land gives you the right to use the land for a certain period of time. The owner of the leasehold may sell the land, but the new land owner will be subject to the terms and conditions of the original lease.
3.JOINT TENANCY: Typically how you would own the home you live in with your spouse, as it has the right of survivorship which means if one of the owners dies the other immediately is given the other person’s share of the home. Interest is undivided but equal in this ownership type.
4.TENANTS IN COMMON: This is how we own most of our properties together as it allows us to specify the percentage amount of ownership, and it does not carry the automatic right of survivorship. For investment properties this makes a lot of sense because you may not want your partners to automatically get your share of the property if you pass away. For example, Dave and a partner M.M. have bought properties together as Tenants in Common. If Dave passed away, he’d likely want his share to pass on to me or his family, not necessarily to M.M.
If you are putting in unequal amounts of money into the investment you may want the ownership percentages to reflect this. For example, early on in our relationship, we bought property where Dave did 100% of the work on the deal and put up most of the money. We own this property together as Tenants in Common with him owning 60% of the property and me owning 40%. At tax time, he claims 60% of the income and expenses and I claim 40%.
Terms you will see in a Purchase and Sale Agreement
5 & 6.FIXTURES vs CHATTELS: If an item is built in or attached to the property in a permanent way, then it is considered a fixture and will be transferred with the property unless it’s otherwise stated in the purchase and sale agreement. A chattel, on the other hand, is something that is movable like a fridge or a washer and dryer. These are assumed to not be included unless otherwise stated in the agreement.
7. & 8.CONDITIONS and WARRANTIES: A condition is a fundamental part of the contract. We always make our contracts for purchase and sale subject to at least one condition for at least 5 business days. In the tri-plex we almost bought, we struck out the subject to inspection condition but had the deal subject to us being able to obtain satisfactory financing. A breach of a condition within the set time period stated in the contract allows you to get out of the contract. We were able to walk away from the contract without losing any money during that 5 day conditional period because of the financing clause. A warranty, on the other hand, is a promise but it is not fundamental to the contract. In a breach of warranty you may sue for damages but it does not allow you to neglect your contractual obligations. A warranty may apply to something like condominium fees. A seller may warrant that his/her fees are $300 a month. You may find out they are actually $400. This is not a fundamental breach of contract, but you could seek damages as it will cost you $100 more per month.
9.CONSIDERATION: In contractual terms consideration refers to something of value. When you buy a property, the price you pay is the consideration. This is not always a dollar amount, as it could be another property or a promise of value.
10.DAMAGES: Damages refer to financial losses that have arisen from failure to complete the deal as stated in the contract. You have to prove you have suffered financially as a result of the other parties actions, and then you can sue for those damages. For example, you could sue for the $100/month difference in condo fees if you could prove you’ve suffered financially by the sellers misrepresentation of the condo fees.
There’s a fantastic CANADIAN resource for all things real estate by Douglas Grey, which I used to check some of my definitions above. It’s called: Making Money in Real Estate: The Canadian Guide to Profitable Investment in Residential Property, Revised Edition. He covers everything including insurance, tax, legal information and provides additional resources. It’s a solid book to have in your library as a Canadian real estate investor.
Published March 25, 2008