Podcast Episode 136: “AFS Paperwork and Education.”
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Two Ways to Learn Real Estate Investing
Remember, it takes time to learn how to do anything—especially if you want to do it well. Real estate is no different. The most efficient way to learn is by acquiring the proper education. You might think I’m biased because I teach real estate investing workshops and sell home-study kits. But this episode of Tale from the Trenches shows how investing in your education can save you money in the long run.
Some people prefer to learn by using the “I’ll figure it out as I go along” method. As a lawyer, I can’t recommend that approach for anything to do with the law. Trial-and-error is not only a less efficient way to learn, but it’s always way more expensive when it comes to real estate!
What Is an Agreement for Sale in Real Estate?
Anyone familiar with my blog posts, podcasts, home-study kits, and workshops on Creative Real Estate Investing Strategies has heard of Agreements for Sale (AFS). But the key to learning is repetition, so let’s review.
AFS is a seller financing strategy. A seller becomes a buyer’s bank. The seller stays on the title and lends the buyer some or all of the sale price. The buyer makes payments to the seller on the loan as well as takes care of insurance, utilities, and maintenance on the property.
This can be a very attractive strategy for any buyer, but especially investor buyers. If the seller is your bank, you don’t need to qualify for a new mortgage!
How Not to Do an Agreement for Sale Deal
With that background, back to our story. Our seller wanted $375,000 for his well-kept three-bedroom bungalow with a legal, two-bedroom secondary suite. The buyer offered the choice of $345,000 now, or $365,000 in 18 months if the seller would agree to an AFS as the sale mechanism. Remember, this was four months ago. My client (the seller) and I chatted about the transaction. I forwarded him some information on AFS and then didn’t hear anything until just last week. What showed up was a real estate purchase contract, which is often referred to as an offer to purchase. I could tell immediately that my seller client had found this contract on the Internet, and I could further tell that it was an American contract designed for the sale of US properties. Not good!
Overall, trying to use an American contract in Canada causes way more problems than it solves. No one is familiar with it, and so Canadian lawyers have to go over every word, always requiring massive amendment. I suggested to my seller that he try and work with the buyer to craft an appropriate contract. Fortunately, the buyer was agreeable.
And, of course, my seller client had not created a financing schedule either. With the cooperation of the buyer, we worked out a new contract, created that financing schedule and nailed down all the details of the AFS deal. The buyer was then able to take the signed contract to his lawyer and, between the buyer’s lawyer and our Field Law office, we then finalized this AFS deal.
Getting to the stage where we had a proper contract and schedule took way, way more legal time and therefore created a much bigger legal account. My client’s bill was likely $2,000 bigger than it would have been if he had done any training in how to make an AFS deal. It would actually have saved the seller money to have invested in taking one of my AFS workshops or home-study kits before trying to do the deal.
How to Use an Agreement for Sale the Right Way
Now we get to the point of this blog and the teaching moment. When you create a purchase contract to buy or sell by way of AFS, there’s a process to be followed. Taking the right steps in the right order protects both buyer and seller. It also takes less time and effort, which saves you money in lawyer’s fees. First, start with the boilerplate contract that is specific to your area and will be familiar to professionals like lawyers and real estate agents. Here in Alberta, I suggest that you use the standard Alberta Real Estate Association (AREA) contract. Your friendly realtor can provide a copy.
Write up that contract the way you would write any purchase contract but with one key difference. You must add the following clause to the terms section: “This contract will proceed by way of Agreement for Sale.” Adding these words tells buyer, seller, and the respective lawyers that this is an AFS deal. Second, whether you are a buyer or a seller, the financing schedule attached to the offer to purchase crucial. All of the most important parts of any AFS deal are found here, and they must be negotiated to the satisfaction of both parties.
The financing schedule sets out the details of the AFS transaction. It really is the nuts and bolts, with all pricing, deposits, how much money the seller is lending the buyer, other seller obligations, interest rates, maturity date, and renewal possibilities. Without this all-important financing schedule, no one knows what to do!
- The AFS strategy is alive and well here in Alberta and in many Canadian provinces.
- To use an AFS, you need to understand how to write a purchase contract and financing schedule. Either you do it, because you have the training to do so, or you consult with your lawyer early on.
- The School of Hard Knocks still charges “tuition.” You can try to learn on your own by making those inevitable mistakes, but be prepared to pay for that experience!
- Educated investors are successful investors. Your best bet is to get some solid education on the topic of AFS and limit down those expensive errors.
Join us on Saturday, September 24th, 2022 in Edmonton, Alberta, Canada for an AFS Live Focus Workshop: