Podcast Episode 27: “Is It Black, White, or Grey? (Part Two).”
Part two of this mini-series on the basics of real estate investing continues the discussion of situations as black, white, or grey. You’ll hear three more real-life scenarios to make the idea of mortgage fraud concrete.
Third Scenario: Occupying a Property for a Short Time to Get a High-Ratio CMHC Mortgage
You already own your personal residence and are looking to buy your first investment property. Your friend/realtor/lawyer/mortgage broker says, “Get one of those 5% mortgages. Using the 5% down payment strategy means you can use your limited funds to buy at least three properties. It’s okay as long as you move into the property for a while.”
Is It Black, White or Grey?
Inexperienced investors often think this scenario is White for at least a couple of reasons. Firstly, there is inexperience. Because they are inexperienced, they frequently don’t know because it has not been properly explained that these ultra-high ratio, small down-payment mortgages are strictly for owner-occupiers.
Secondly, there is bad advice. Sometimes inexperienced investors have an idea, or sort of understand, that these types of mortgages are for owner-occupiers. They aren’t really sure but they sense they could be in the Grey area.
What to do? Maybe you raise the issue with members of your team, and a trusted friend / lawyer / realtor / mortgage broker tells you it’s okay as long as you occupy the property for some period of time. In some people’s minds they have moved from that uncertain Grey area back to White. The problem is that “some period of time” isn’t very clear.
The real answer is that this situation is not White or even Grey, it is definitely Black. If you are getting a high ratio owner-occupier mortgage, you must really and truly mean to move in to the property and be an owner-occupier. Moving in for a day/week/month or even six months or a year does not make you an owner-occupier. It’s always about intention and if, in the end, your underlying intention is cheap investor financing, you are in the Black area. Just to be clear, knowingly buying investment properties with owner-occupier financing is MORTGAGE FRAUD!
Fourth and Fifth Scenarios: Buying a Home with a 5%-down Mortgage but Circumstances Change
A client called me and said that he had an unconditional real estate purchase contract to buy his new home. He and his family were really looking forward to moving in and enjoying the new schools and neighbourhood. Their financing was 5% down and the usual high-ratio, CMHC owner-occupier mortgage. One week before closing, their realtor called and said, “I know you love your new home but your dream home just came on the market”. He and his wife couldn’t resist; they went to have a look and fell in love. They had to have this home.
Since their first deal was unconditional, they were now buying two homes. They figured they could rent out the first one and turn it into an investment property. Our member thought that, because he 100% intended to move into the first home, he was okay keeping that 5% down owner-occupier mortgage and getting another 5% down owner-occupier mortgage for the new dream home.
Is their situation, Black, White or Grey?
In a similar scenario a client had only been in his brand-new home with his brand-new 5% down, owner-occupier mortgage for one month. Then, he got the email from his boss. “You’re being transferred to head office” (300 miles away). He could sell the home and not lose any money because of his company’s generous monetary transfer policies. Or, he thought, “what if I keep this place and rent it out? I can buy a new home and get another 5% down, owner-occupier mortgage.”
Is his situation, Black, White or Grey?
The answer to both scenarios is Grey. In both cases, our members purchased homes with 5% down, owner-occupier mortgages, one intending to and the other actually moving into the new home. Now that circumstances have changed, neither member knows if they are off side with their lender and CMHC. So, it’s Grey.
Saying nothing exposes both members to potential problems if a CMHC auditor bangs on the door of what was supposed to be an owner-occupier property and meets a renter. Audits are rare but they do occur. The answer for both our members is to sit down with their broker/lender and explain the new circumstances. The broker/lender should review the circumstances and follow internal policy which might mean consulting with CMHC.
In the end, the answer might be that each member has to pay down their 5% mortgage to meet current CMHC requirements for investor property. Or, policy might say that our member who was transferred one month after moving in, doesn’t have to do anything. Or there might be other answers. That’s the thing about policy, we never know quite what it is and it’s always changing.
Both of these scenarios were Grey—whether my clients knew it or not. There was an issue, a new element where it could be a problem, but no one knew the answer. By meeting with their broker/lender, disclosing the new circumstances, getting advice and acting on the advice, these folks move this Grey scenario to a White scenario. Remember, whatever advice you get from your broker lender, confirm with a letter or e-mail.
Getting and holding a mortgage can be tricky, which is why you need a lawyer. Contact Barry for reliable Alberta legal counsel.