Standby Credit.
My client had found the perfect investment property, but the rushed timeline of the deal made getting a mortgage tricky.
There was a short fuse on the financing condition because the sellers were divorcing and wanted a quick sale. My client’s mortgage broker was able to find a mortgage with a 2nd tier lender (not one of the big banks) in the limited time available. 2nd tier lenders are Canadian examples of what our American friends call “sub-prime” lenders. Their credit requirements are less stringent, but their interest rates are higher.
Even though my client did not like the higher interest rate with its higher payment, the numbers would still work and she was able to meet the short timing on the financing condition removal. Then her mortgage broker advised her that he had another mortgage available at a better interest rate if her husband would also sign the mortgage. Hubbie agreed and the new mortgage company approved the mortgage subject to a satisfactory appraisal (the first mortgage company did not require an appraisal).
An appraisal usually requires access to the property. Access was requested on numerous occasions through realtors and the seller’s lawyer. In the end, the sellers denied access for no apparent reason other than, because they denied access. Numerous efforts were made to obtain access and all to no avail.
My client was, of course, surprised and upset that such a small request would be refused. The difference in the mortgage rate was 2%, so this was a serious issue.
I explained to her that having removed the financing condition and all other conditions, this was now an unconditional contract. The fact that she needed access to organize a better mortgage deal did not mean the seller had to cooperate. My client felt putout and thought the sellers were acting unethically and immorally.
While I am not sure about the morality and ethics of the seller’s position, they were certainly uncooperative. However, they did have an unconditional contract and had no obligation to be cooperative.
Then, my client had a brain wave! Her sister had recently paid off her home, and had a large untapped line of credit. Her sister was happy to help and be paid a reasonable rate of interest for a short-term loan. Considering that the closing day was very near, my client got a certified cheque from her sister for the whole purchase price. Cash meant that we were able to meet the timing deadline and do a very quick closing.
My clients now owned the property and, of course, had access for the appraiser. The appraisal was satisfactory. I got mortgage paperwork from the new mortgage company at a much better interest rate. The new mortgage was registered against the property and the sister’s loan was repaid from the mortgage proceeds.
Lessons Learned:
- Double check before removing conditions:
Once your deal is unconditional, a seller does not have to change anything or agree to any of your requests. They can just dig in their heels and say they aren’t doing anything. So, before you remove all conditions, just do a quick review of whether you need anything else from the seller. - Use an access clause:
If you are an investor, consider trying to negotiate an access clause in your contract, something like, “seller will allow access to buyer or buyer’s tradesmen, lenders, and appraisers on 24 hour notice.” - Secure standby credit:
Being able to ‘write the cheque’ is a wonderful thing! You can approach sellers and guarantee them that you can close quickly. For some sellers, getting their money fast is a powerful incentive to sign your contract. You can organize your own Line of Credit with your lender. Typically, if you have good credit you can get an unsecured line of credit up to about $25,000. This varies from lender to lender. If you have equity in properties, you can get a secured Line of Credit. You borrow money under the Line of Credit agreement. The security is a mortgage registered against your property(s). In this Tale, my client had a cooperative sister with a big Line of Credit. Perhaps you have someone in your immediate circle that would fill the same role for you. It could be family or friends. Start looking now so that when an opportunity arises, you can ‘write the cheque’.
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