As a result of the high prices in the Toronto real estate market, parents are assisting their children with the purchase of a home. Depending on the type of assistance provided, care must be taken in how the deal is structured so that the parents, kids and the bank are all informed and protected.
Sometimes parents assist with the down payment. Questions need to be asked if this is intended as a gift or a loan. If it is a loan, there will likely need to be a second mortgage registered on title to protect the parents. The bank will have to be notified about this and approve.
When the kids cannot qualify for the mortgage payments because of their income, parents are offering to include their own income in the equation and guarantee their kid’s mortgage. This would be a good solution, however, many lenders are now requiring the parents, either one or both, to be on title to the property and sign the mortgage, even if they are holding just a 1% interest. Apparently lenders feel more secure if the parent is on title as opposed to a guarantor, although most lawyers could not explain the difference.
However, taking even a 1% interest in the title means that the deal must be carefully structured. How is the 1% supposed to come back to the kids, if that was what was intended? Stephen Pearlstein, a lawyer from Minden Gross inToronto, recently gave a seminar on this point to several hundred lawyers and many questions arose. For example, if the parents try and transfer the 1% interest back to the kids, without telling the lender, this will actually cause the mortgage to go into default, because the standard terms of a mortgage typically state that the mortgage becomes due at the option of the lender if someone sells their interest. It is worth explaining that even if the parents do transfer their 1% share, they are still responsible if the kids don’t make the mortgage payments, since they signed the mortgage originally.
Alan Silverstein, another lawyer speaking at the same event, noted that if the person assisting with the loan and taking a 1% interest is not the parent of the buyer, but perhaps an aunt or uncle, who is not moving into the home, then it could jeopardise the kids’ eligibility for the HST new home rebate, if it is a new home or condominium. This could cost a buyer up to $27,000 if investigated by the income tax authorities.
It was suggested that the parents just leave their 1% share to the kids by just doing an amendment to their will, so the kids would end up with it later. Without a will, problems could arise later if the parent dies and the other beneficiaries do not wish to co-operate and want to sell the home to get their share paid for.
Sometimes it may be necessary for one of the kids or even the parents to have a different lawyer advise them, as there may be conflicting interests.
As you can see, it is not simple. Te best thing is to make sure that before parents make any offer to assist with any purchase decision of their children, they get legal advice in advance to make sure that everyone is properly protected.
Click here to read the article: http://www.thestar.com/business/personal_finance/2013/11/30/the_perils_of_helping_kids_buy_a_home_weisleder.html
Initial all changes and pages of real estate contracts
I am often asked if every page or change on a real estate contract needs to be separately initialed by a buyer and a seller to make it legal. The short answer is no, but if it is initialled, it is better proof that all terms were clearly brought to the attention of the buyer or seller and agreed to.
Here is what can happen when things get missed:
In the spring of 2011, a company controlled by Sushil Batra and his wife were looking for a property in Surrey BC to open a store selling wholesale and retail cloth. He became interested in a 2 acre piece of land owned by a company controlled by Satish Kumar. An offer was presented on June 28, 2011, and was open for acceptance until June 30, 2011 at 9 pm. The price was negotiated back and forth and finally agreed at $4,000,040, with a deposit of $100,000, closing on July 28, 2011. The deposit was supposed to be paid within 48 hours of acceptance.
In the original offer by Batra, it stated that the deposit would be paid to Century 21, the real estate brokerage, in trust. When it was signed back and accepted by the seller, the words “Century 21” were removed and replaced with “direct to seller.” The words “in trust” were not removed. This clause was initialed by Mr. Kumar, the seller, but not by the buyer Mr. Batra.
The deposit was paid to the real estate brokerage on July 2, 2011, not to the seller. Batra later found out that Kumar had sold the property to someone else on July 14, 2011 and completed the deal on July 21, 2011. Batra buyer sued for damages of $300,000, which were as outlined in the agreement itself if the deal did not close because of the fault of the seller. The seller took the position that there was no deal with Batra’s company because the deposit was paid late and to the wrong party. In addition, since the deposit language change was not initialed by Batra, the contract was void.
The judge disagreed. In a decision dated June 21, 2013 out of the BC Supreme Court, Madam Justice Barbara Fisher decided that even though the deposit clause was not initialed by the buyer, it did not result in the contract being void. She stated further that even if the parties were not in agreement on this issue, there was a binding contract, as the parties had agreed on the essential three elements of the contract, namely the parties, the property and the price. This was the principle laid down by the Supreme Court of Canada in the case of Mckenzie v Walsh in 1920. She also noted that the words “in trust’ were not deleted by the seller. So even if there was no final agreement on where the deposit would be paid, it would not make the contract void.
When contract terms are ambiguous, a judge is permitted to hear evidence from the people involved in order to correct any ambiguity. It was clear from the decision that the judge preferred the evidence given by Mr. Batra, the buyer, over the evidence of Mr. Kumar, the seller.
The main lessons from this case are that although a contract can be fixed sometimes if certain terms are vague or not properly agreed to by everyone, it makes much more sense to make sure that all contract changes and pages are initialled by both the buyer and the seller, so that there is no confusion or unnecessary legal expenses later. In addition, do not try to cancel any contract before obtaining legal advice.
Click here to read the article: http://www.thestar.com/business/personal_finance/2013/11/22/heres_why_you_should_always_initial_all_pages_of_a_real_estate_purchase_offer.html
Now is the time for home closing protection insurance
Since writing my column on how to avoid a real estate train wreck, I have received many inquiries from buyers, sellers and realtors about home closing protection insurance, and how it can solve many of the problems associated with delayed closings.
Due to the growing possibility of buyers being declined their financing at the last minute, sellers need some protection in the event their closing is delayed or cancelled and they are forced to carry 2 homes for an extended period of time.
One company that I have dealt with that provides this coverage is Canadian Home Shield. Their President, James Vlachos, who is an insurance broker, advises me that for as little as $99, sellers can purchase a $25,000 insurance policy that will cover all mortgage payments, real estate taxes, utilities and insurance premiums up to a total of $25,000 in the event that the deal does not close through no fault of the seller. I personally have had 2 seller clients recover over $9,000 in costs after a buyer failed to close their purchase agreement.
Buyers can also purchase breakdown insurance protection for their home systems and appliances. Since most real estate contracts provide that sellers only warrant their systems and appliances to the date of closing, this provides buyers with the opportunity to purchase additional insurance protection for a year after closing.
For further information, visit: http://www.canadianhomeshield.com and http://www.thestar.com/business/personal_finance/2013/08/16/bridge_financing_can_ease_closing_day_stress.html
Use 2 deposits for buyer protection
Unfortunate occurrences are taking place in the Toronto real estate market when buyers have a change of heart after inspecting a home. The sellers are refusing to return the deposit.
Here’s what is happening:
Most real estate offers in the GTA today contain substantial deposits, in many cases $25,000 or higher. The accepted offer is conditional on the buyer being satisfied with the results of a home inspection report, completed by a professional home inspection company. The buyer conducts the inspection and then says they are not satisfied with the home, and ask for their money back. The sellers are upset, because if other buyers hear about this, they will ask what is wrong with the house. The seller can’t answer because the first buyer does not have to give them a copy of the inspection report.
In general, the courts have indicated that when buyers are trying to satisfy any condition, including a home inspection condition, they must act honestly, reasonably and in good faith. Unfortunately this will have to be proven in court, and the result is that a buyer’s deposit could be held up for up to 2 years while this is being argued.
Sellers are not entitled to a copy of the inspection report unless it says so in the clause itself. In my opinion, sellers should always include a clause in any offer that if the buyer wants to negotiate a reduction or cancel the deal because of problems in the inspection report, then the buyer must give the seller a copy of the report. This will give the seller the opportunity to check this for themselves, with their own inspector or contractor, and will be able to explain it to any future buyer.
If the buyer does not conduct the home inspection at all, or perhaps brings in an unqualified person to conduct the inspection, then I believe that these might be examples of not acting reasonably and in good faith and it would thus be difficult for a buyer to try and cancel the agreement and argue that they acted in good faith. It is thus very important that buyers always use qualified home inspectors to conduct any inspection of a home.
If a buyer is not in a bidding war, I advise that you consider 2 deposits, a small deposit when the deal is accepted, and a larger deposit once you are satisfied with all of your conditions. That way, if you are not satisfied, there is not much of a deposit that will be worth fighting over. It is very important for buyers to understand all their legal rights and obligations relating to conditions before signing any offer to buy a home.
Click here to read the article: http://www.thestar.com/business/personal_finance/2013/11/08/why_two_deposits_on_a_home_purchase_offers_protection.html
Why 2013 has been a good year for GTA housing
A year ago many pundits were predicting a real estate collapse in 2013. My view was different. I expected the market to stay strong and prices to hold up, which is what has happened.
By the end of September, 68,909 total homes had changed hands in the GTA, 1,000 units less than the same period last year. But the first half of October was strong – about 20 per cent higher than a year ago. So, it seems that sales for the year will exceed 2012’s 82,200 units. Average prices are also almost 5 per cent higher than a year ago and there are still bidding wars in many areas, because there are more buyers than listings.
Here’s why this is happening:
Low interest rates
Events like the U.S. fiscal cliff, civil war in Syria and instability in the Middle East, have had little impact here. Canada remains an island of stability. Things will only improve as economies in the US and European Union continue to improve. Interest rates may rise a little over the coming year, but the moves are unlikely to have a serious impact on the market..
Canada’s appeal to immigrants
We continue to be the envy of the world when it comes to quality of life and the fact that so many cultures and communities can live in harmony. That is why over 150,000 people come to Ontario each year, with the majority in the GTA. They have to live somewhere.
Low rental vacancy rates
The Toronto condo market has slowed somewhat, but prices haven’t crashed. The reason is that the vacancy rate for rental condominium units in downtown Toronto is 1.7 per cent. As a result, the average rent for a two bedroom condominium is about $2,500, which is also the amount an investor needs to carry an average two bedroom condominium, even if it costs $500,000. If you can carry your condo, you are in no rush to sell or lower your asking price.
People have been predicting the real estate market crash in the GTA for the past 13 years. It hasn’t happened yet and won’t happen next year either.
Click here to read the article: http://www.thestar.com/business/personal_finance/2013/11/01/why_2013_has_been_a_good_year_for_gta_housing.html
5 Things to consider when buying a resale home
The decision to buy a resale home is one of the most important ones your family will ever make. In order to be properly protected, here are 5 things to consider:
1. What information is the seller providing in advance?
Sellers used to provide property disclosure statements, telling buyers in advance about the condition of their homes and disclosing problems. Lawyers told them not to do this anymore, because of the potential for lawsuits. Some sellers are now conducting home inspections by a professional home inspection company before they list the property for sale and are giving a copy of the report to any buyer. This has proven to be a benefit to a seller, since they can correct any deficiencies noted by the inspector so they do not have to negotiate with the buyer later after the buyer conducts their own home inspection. Some sellers are also providing home history reports, which can be obtained from homeverified.com or Iverify.com which indicate whether the home has been the subject of an insurance claim for water, fire, flood or sewage backup, and whether the home was ever listed as a grow house or meth lab. The more information a buyer has in advance, the more informed their purchase decision. Still, even with this information, buyers should complete their own home inspection before committing to any purchase.
2. Ask the seller hard questions
Ask the sellers or their agent if they have had basement flooding problems, or mould or roof leaks, even if the leaks have been repaired, or any other adverse neighbourhood conditions, whether it is a suicide or murder in the home, or a half way house down the street. Watch how they answer. Sellers are required to respond truthfully to these questions if you ask them directly. If the seller refuses to answer or acts suspiciously, then you need to discuss this with your home inspector and your real estate agent and either adjust your purchase offer or walk away.
3. Check with the neighbours
During your home inspection, or before you put an offer in the first place, walk around the neighbourhood and ask the neighbours about the house you are interested and the neighbourhood itself.
4. Include the right additional clauses
Make sure that everything you expect to receive on closing is included in your offer. This includes mirrors, closet organizers, window coverings and TV brackets. Ask for 2 complete sets of keys, to get into the home and garage, especially if it is a condominium unit.
5. Make sure you can afford it
Get qualified in advance by a professional mortgage broker or your bank so that you know how much you can safely borrow. Make sure your lender will complete their appraisal of the property before you waive any financing condition. Be careful about getting caught up in a bidding war, because if your lender thinks you paid too much, they will not lend you what you may be expecting.
By following these tips, you should be better protected the next time you buy a home.
Click here to read the article: http://www.thestar.com/business/personal_finance/2013/10/25/5_key_things_to_consider_when_buying_a_resale_home.html
My Law Practice
I have received many inquiries about my law practice, providing legal services to real estate buyers, sellers and investors. Working with Real Property Transaction Centres, I am now able to close real estate transactions throughout the GTA. If you require any assistance on a transaction that you are working on, please email me at mark@markweisleder.com
If you or your clients are looking for a written quote, please visit www.realproperty.ca and search under “How much does it cost” or contact Suzanne at 1-877- 219-9618, ext. 231.
About Mark Weisleder
Mark is a lawyer, author, instructor, Toronto Star columnist and keynote speaker for the real estate industry.
Mark Weisleder
www.markweisleder.com