So, you’ve found the house, the numbers make sense, what do you do now?
Hopefully you’ve been approved for a mortgage already, but if you’re like me 4 years ago and just spent all your time on MLS staring at pretty houses, you need to take a step back and get a bank to approve you. This requires you to submit a bunch of paperwork on your end, and then there’s the lender approval process on their end, so I would allow at least 2 weeks just to get approved for a mortgage. (If you do wait until you have an accepted offer on a house before you seek out loan approval, that’s okay, but this needs to be the first thing you start working on once you have that accepted offer in place).
Stick to your guns (i.e., numbers)
Let’s assume you’ve been approved for a mortgage, you found your duplex/triplex/house with a basement suite, you’ve run the numbers and you’re happy with them. What now? You make an offer, silly! Talk to your realtor about what kind of offer makes sense in this situation, but also make an offer that YOU’RE comfortable with. I’ve had many different realtors over the years and some will push you to pay a higher price in order to secure your bid. Remember what I said in my second blogpost, “Don’t fall in love with the property, fall in love with the numbers”. If you’re being pressured to pay more than what makes sense for you and your budget, don’t do it. There will always be more houses.
Negotiating a price
Let’s say the house you want is a $350,000 house that’s been sitting on the market for a while and maybe needs some work. If this is the case, you can probably offer $10,000 - $20,000 less than asking price as an initial offer and go from there. If instead you’re in a hot market and things are selling in a day or two with multiple offers, hopefully you ran your numbers at full asking price, or maybe even higher. I’ve dealt in both hot and cool markets and it’s a very different offer situation. I’ve paid $20,000 over asking and $20,000 under asking, but in both cases expected this going into it. For that reason, it helps to know your real estate market before running numbers so that you can get a more accurate sense of what you might be able to buy something for. When in doubt, just use the full asking price as the purchase price when you run your numbers.
Conditions of Purchase and Sale
You’re writing up an offer and your realtor wants to know what conditions you want to set for the sale. Well, this is ultimately up to you but the two main conditions are financing and inspection.
If you’ve already got your financing in order then you don’t necessarily need to include this condition, but oftentimes I do anyway just as an added ‘way out’ if there is something about the deal that I’m not comfortable with. If you really want a property however, or are in a hot market, I would suggest not including this condition if you’ve been pre-approved for financing. Having less conditions of the offer is more appealing to the seller and may sway them to choose your offer over a competing offer, even if you offer less money than someone else. Another condition that can sway a deal is closing date. If I really want a property, like really REALLY badly, I will offer a very quick closing. Usually once a seller puts a property on the market they want to offload it as fast as possible. So, if you can take it off their hands in 2 weeks rather than 2 months, that’s less mortgage they have to pay and usually shows that you’re serious about wanting the property. In this situation with a quick closing date, make sure you have your ducks in a row and create a list of “to-do” items (see example later in the blogpost) to keep yourself on track.
One condition I rarely forego is the inspection, especially if it’s a multi-unit property I'm buying. Unless you’re extremely knowledgeable on structural, electrical, and plumbing issues of a house, I would always recommend spending the $500 on an inspection. It may seem like a lot of money at the time, but often you’ll make this money back (plus more!) by either avoiding buying a piece of crap, or if things come up in the inspection that you want addressed by the seller, you can re-negotiate your offer and either ask them to deal with the issue, or, ask for more money off the price in order to account for those issues. (And sometimes, re-negotiating backfires and you lose out on a great house… see my previous post for this story)
I know I just said, “never forego the inspection” but there are cases when I have waived an inspection. This case is condo units. In my opinion, there isn’t much to inspect with a condo, because your inspector is likely not going to climb over the entire building and look at everything. He will likely just inspect the interior, and that’s something you can do yourself. If the previous owners have taken good care of the condo, there shouldn’t be much wrong with it. What you instead want to do for a condo is ask for the depreciation report. Any well-run condo building will have a strata council (condo council) who meet regularly to discuss the issues with the building. They’ll also order a depreciation report to be done every few years. The depreciation report is long, but it includes a ton of useful information. While it can be overwhelming to read through a dense, 15-page document, this could save you plenty of headache in the future. It took me reading through 5-10 reports to really get a grasp on the important information to look for.
“So, what should I look for in a depreciation report?”
If you’ve got an accepted offer and therefore only have 1 depreciation report to look over, I would spend some time reading through everything and really trying to understand it. If you’re having a tough time understanding it, reach out to your realtor to ask for their help. I did this the first few times I looked through reports, and also used my mom (thanks mama!) to help me understand them. However, if you’re interested in multiple condo units and want to quickly glance over a report to figure out whether the condo unit is worth putting an offer on, I would focus on 2 things: the financials (i.e., balance sheet with income and expenses of the building, how much is in the contingency fund, etc.), and whether there are any special assessments coming up in the near future. A special assessment on a condo building is sort of akin to the larger capital expenditures you’d have to save for with a multi-family or single-family home. For example, new roof, windows, electrical, plumbing, redoing the driveway, etc. If the condo board is good, they’ll have a plan in place to account for these large items, and will allocate a certain amount of your monthly condo fee towards these big items. Sometimes however, what happens is the majority of the money they collect goes toward the daily maintenance items (i.e., lawn care, elevator maintenance, common area carpet cleaning, etc), and not enough is allocated for the bigger items. Or they simply don’t have a proper plan in place to increase the condo fee on a yearly basis as the building gets older so that when these items come up, they’re ready for them. See the example below for 2 recommended saving strategies that the depreciation report outlined for my council:
What you really want to avoid is:
A) A condo building that doesn’t have a condo council or has never done a depreciation report
B) A condo council that has a small contingency fund with large items forecast needing to be replaced in the near future. See an example below of estimated costs and year of replacement for some larger items in my building:
Have you ever noticed a bunch of units come up for sale in the same condo building all at once? When this happens, chances could be that these special assessments are fast approaching and people are trying to sell their units before they get stuck paying them (Hello, 2023). And you definitely don’t want to be the fresh new condo owner who gets landed with the hefty special assessment bill.
So, how can you avoid these unexpected large payments?
Look over those depreciation reports early. If you do notice big work coming up but you still really want to buy the unit, maybe you can use this information as leverage to get more money off of the purchase price. If you don’t understand the depreciation report and the financials, ask for help. This is important research for you to do and it could save you thousands of dollars in the long run.
Other things to include in the contract of purchase and sale:
Usually your realtor will do this for you, but just in case they don’t (or just in case you do a private deal without a realtor!) you’ll want to write in things like appliances, especially if you’re looking to buy a multi-unit that has multiple fridges, stoves, dishwashers, and washer/dryer units. Even second hand, these items will really add up if you’re having to buy them for multiple units.
I don’t know if you’ve ever had to buy blinds or curtains and rods for your new house, but if you have, you know this is a heck of a lot of money to do properly. Plus, the added time to install the blinds and rods is always longer than you bargain for. For that reason, I always include window dressings as something I want to keep when I am buying a house, even if they aren’t the nicest. At least you’ll be providing your tenant with some form of privacy rather than naked windows. If your tenants really hate the dressings, they can change them out themselves. But I guarantee if you leave your tenants with nothing, you’ll hear from them to get something to cover the windows.
“Clean House Clause”
I learned this one the hard way. That kind of hard way that costs you $2,500 in junk removal and an extra week of really hard labour you weren’t expecting. Basically, what happened was the house we bought (featured in last week’s blog) was previously owned by a family of hoarders. And when we went on possession day to check out the house, a day we had been anxiously waiting for months, we came to find that the family… had not even started packing.
Not. One. Thing.
They had somehow thought the possession day was the next day, so we gave them that extra day to move out. But we were also on a tight schedule and had everything in our moving truck ready to go, and no time to waste. However, if you’ve ever tried to pack and move all of your stuff in one day (not to mention clean the house after you’re done packing), you can imagine how emptying 3 suites in 1 day went. Safe to say, it was awful. Most of the larger furniture was gone but there were still rooms filled with books, old magazines, papers, garbage, rotting food in the fridge, ZERO cleaning had been done, and in fact there was actual rat poop throughout the entire basement suite. PLUS this fun trick where I thought the walls were brown, but actually when you took the old photos off of the wall you saw they were supposed to be white. That’s what years of chain-smoking cigarettes indoors will get you – brown walls that take weeks upon weeks to clean. So, this is the long, round-a-bout, gross way to tell you to put the “clean house clause” in your contract of purchase and sale. This is what I have lovingly called it, but basically you write something along the lines of “if your stuff is not gone and this house is not cleaned we will be holding back $5,000 of the purchase price”. Money is a great motivator to get people packing and cleaning.
So, where should I start?
Circling back to the beginning, a really good place to start after you’ve got that accepted offer, is to build out a timeline. In your contract of purchase and sale you’ll have the date your deposit is due, the dates when you’ll need to have financing, inspection, and insurance done, closing date and possession date, so write those down first and then move backwards. What do you need to get done before all of those dates? Here’s an example below of a recent accepted offer I had and the table that our business partners did up for us to mutually work off of:
Buying a house is a lot of work, and there are lots of steps in the process that can feel overwhelming, especially if you’re a first-time buyer, and especially if you’re buying a multi-unit home. I’ve gotten to the point of accepted offers MANY times, but I would say only about one-quarter of them (or less) actually translate into a finalized deal. Why? Well, there are still so many boxes to be ticked after that accepted offer that could make or break the deal. That’s why it’s important to be organized, diligent, and satisfied with all of the information you receive after the accepted offer. You want to feel like you got exactly the deal you wanted, like you left no stone unturned and know everything you should know about the house/condo unit. A big make-or-break item for me (and where the deal has fallen through multiple times) is confirmation of rent (rent rolls + leases) and proof of expenses. More times than not, the reported income and expenses in the listing ad do NOT match up to the actual income or expenses. Moreover, if I think the current rents are too low and I want to increase them to fair market value, I want to make sure the present tenants are on periodic leases so that I can get new tenants in there at the end of their term who will pay more (note: rental rules vary by province so make sure you're versed on the rules in your particular province).
Regarding the importance of an inspection, I’ve run into the situation where the sellers might have said it’s a ‘new roof’ in the ad, but what does 'new' actually mean to them? Is it 10 years old? 15 years old? These are all things you’ll want to get covered in the inspection. Other costly items can be old oil tanks, old furnaces, foundation issues, old plumbing and electrical, single pane windows, and more. So, take the time to do your homework, this is one of those times in your life when you shouldn’t skimp out or get lazy.
“But what if I buy a multi-unit house and the units are vacant with no tenants?”
One good thing about this situation is you get to find and sign your own tenants. One stressful thing about this situation is that you don't have guaranteed rent when you buy. This situation has happened to me a bunch actually, and it’s where you’ll have to start making educated guesses of what each of the units will rent for. That’s why it’s good to know your rental area, if you can. In my last post, I talked about using resources like Kijiji and Rentometer to estimate rental income, but there’s an even more accurate way you can secure real rental income.
You’ll have to stay tuned for next week’s post where Stella and I show how to hack your way to guaranteed rent.