Creative Real Estate Goes Mainstream

Legal Strategies for Investing in Canadian Real Estate When the Market Is Down.

Finally! The real estate industry is starting to recognize that there is such a thing, indeed, a very worthwhile thing, as Creative Real Estate. I’m a real estate lawyer in Edmonton, Alberta, and for years I’ve been helping clients put together Creative Real Estate deals. I’ve also been teaching Focus Workshops (next event May 4–5, 2019) on Creative Strategies: Rent To Own a.k.a. Lease-Options, Agreements For Sale, Assignments a.k.a. Wholesaling, Fix & Flip, and Joint Ventures. For a long time, these strategies have been the poor cousins in mainstream real estate investing in Canada, at best ignored and at worst demonized by some as scams. As a lawyer, I can assure you that these are perfectly legal investment strategies—if you use them right!

Recently  the Real Estate Council of Alberta (RECA) has published what I think is, overall, an excellent commentary on safely navigating the seller financing side of Creative Real Estate.  Take a look at what they say in their excellent publication from January, 2019:

Consumer Alert: RECA Urges Vigilance When Engaging in Seller Financing

Calgary, Alberta – As Canada’s mortgage rules have tightened, the Real Estate Council of Alberta (RECA) acknowledges consumers may consider alternative financing options to purchase or sell real estate.

RECA urges vigilance, as incidents of fraud or misleading behaviour around seller financing are on the rise in Alberta.

Seller financing, also sometimes known as a vendor take-back mortgage, is a type of mortgage in which the seller lends funds to the buyer to facilitate the purchase of a property. “Rent to own” agreements fall into this category.

“Seller financing is an acceptable alternative to securing financing through a traditional lender,” said Bob Myroniuk, Executive Director. “However, when entering a deal that involves seller financing, we’re urging consumers to be vigilant, and understand exactly what they’re getting into.”

As the governing authority for real estate and mortgage brokerage professionals in Alberta, RECA asks consumers to consider the following advice and red flags:

  • Hire your own licensed real estate brokerage: a licensed real estate professional must act only in your best interests; above their own interests and those of other people. Your own representation can make sure your interests are looked after if you encounter a seller’s real estate agent offering seller financing. Consumers can find out whether or not an individual is licensed by using RECA’s Find a Professional tool on the RECA website.

  • Talk to a lawyer: have your own lawyer review the contract to ensure the agreement is legal. If the seller or the seller’s real estate professional insists on using a specific lawyer, this is a red flag.

  • Verify the property title: it is always good to know exactly who owns the property and what is registered on title, particularly a mortgage. If a substantial mortgage is registered on title, then the funds the seller claims they will lend you may be the bank’s funds, not their own. This is another red flag. You can search titles online through Service Alberta’s Spatial Information System.

  • Ensure the contract is complete: read the contract to ensure it specifies who will make mortgage payments, to whom, and if applicable, that any lender on title is aware of and approves this seller financing arrangement. It’s a red flag if the contract does not specify who will be making payments, and to whom.

This is all good advice, and anyone interested in the seller financing side of Creative Real Estate should read and heed. I particularly agree with their four major bullet points, which are repeated below but this time with my further comments:

      1. Hire your own licensed real estate brokerage: Absolutely!  If you come across a property listed for sale and the seller is offering seller financing, hire your own licensed real estate professional to represent your interests. I don’t think any buyer should use the seller’s realtor. Thankfully, it appears to me that the industry is moving towards encouraging both buyer and seller to each use their own licensed real estate professional.Where there is a uncommon wrinkle in the deal (like seller financing), buyers definitely need their own representation. Similar to my comments below in #2, you are best served using a licensed real estate professional that has some experience with analysing mortgages and how to put them together.
        Does your licensed real estate professional recognize that if the seller already has an underlying mortgage to another lender that will not be paid off, then selling the property to you with seller financing means you are assuming the seller’s existing mortgage? These days, even in Alberta, if you plan to assume a mortgage you must qualify with the existing lender just as you would have to do if you were getting a new mortgage from that existing lender. You need an experienced licensed real estate professional to handle the twists of a Creative Strategy.
      2. Talk to a lawyer:The description “seller financing” covers more than just a plain, vanilla, vendor take-back mortgage. Agreements For Sale are, certainly at their core, seller financing.  Rent To Own can also be characterized as seller financing. While any lawyer whose practice focuses on real estate should be able to help you with a straightforward vendor take-back mortgage, Agreements For Sale and Rent To Own are not as familiar to many lawyers.
        So, my point is you absolutely need to talk to a lawyer, but make sure it’s a lawyer who practices real estate law and who is knowledgeable about the strategy you want to employ. One more thing that I think is  important when choosing your lawyer is that he or she should not be fundamentally opposed to implementing creative strategies.
        Many real estate lawyers understand these creative strategies but don’t like them very much. You need a lawyer who will be able to explain the strategy in detail, give you chapter and verse on the advantages and the risks—with perhaps even a little more emphasis on the risk side. Then, it’s up to you to make an informed decision based on your lawyer’s advice. So, yes, protect yourself by retaining an experienced lawyer whose practice focuses on real estate, and who understands and can advise you on Creative Strategies.
      3. Verify the property title: It is always essential to get a copy of the property title and review it before you make any  offer. Typically, if you are using a licensed real estate professional, they will get a copy of the title in preparation to write your offer to purchase, properly known as a real estate purchase contract. This is especially important with seller financing.
        Most sellers just want their money; they don’t want to be your bank. Take a look at the title, review it with your licensed real estate professional before you write your offer, and take into account the state of the title in any existing financing. If there is anything odd about the title, you might want to consult your lawyer as well.
      4. Ensure the contract is complete:   The words “seller financing” almost always mean the seller wants a mortgage as security to protect his/her loan to you. If you have ever purchased a property and had to apply for a mortgage, you know that there is a tremendous amount of detail when you get to the stage where your application has been approved and turned into an unconditional mortgage commitment from your bank. There are pages and pages of information with details that confirm exactly what the bank means when they say, “Congratulations, you have been approved for a $400,000 mortgage.”Unfortunately, my experience with seller financing is that any description is almost always lacking the critical level detail that a bank would use. I often see offers to purchase with a seller financing schedule that basically says, “seller agrees to lend buyer $400,000 at 4.5% for three years.” That’s it! And, this description of seller financing is missing a ton of detail that both buyers and sellers need to properly put together the seller financing, ensuring that both buyer and seller are properly protected. This is where your experienced, licensed real estate professional, perhaps in conjunction with your lawyer, can really help out in making sure that any offer of seller financing is adequately set out in a financing schedule.

Yes folks, seller financing as a strategy is on the rise here in Alberta. Tougher times yield opportunities for creative deals. House prices have fallen in Alberta, leading to a flat/negative market.

Sellers who can’t sell conventionally because falling prices have eroded their equity to zero, or very near it, are interested in seller financing.  Some sellers don’t want to accept that the property is just worth less based on current valuations. Some of those sellers are prepared to offer seller financing to buyers who can’t qualify for a mortgage. The seller can often sell for at least a little bit more than current market price and the buyer can purchase now instead of waiting until they can qualify for a conventional mortgage.

I could go on and on. There are lots of examples and lots of strategies to implement in Creative Real Estate. Register now for the Rapid Cash Program on May 4–5, 2019, to learn all about using these Creative Strategies to make you money!

“Be creative” image by Ramdlon used under CC0 Public Domain.

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