Thieves among us

A new form of fraud has emerged in Canada that involves a fraudster relying on a ‘straw buyer’ to purchase a property for the fraudster’s benefit. The fraudster may lure an individual to act as a straw buyer by offering cash compensation and by misrepresenting the liability associated with the transaction. We have also seen a rise in the use of phoney names, identity theft and the misuse of power of attorney documents.

In addition to mortgage fraud, a fraudster purchases property on speculation that its market value will exceed the sale price prior to the date of closing but exploits the straw buyer in order to hedge his personal liability for any loss beyond the deposit if the market value tanks.

Unlike a bona fide speculator, who will still be bound to his purchase agreement and be forced to close and suffer financial loss, a fraudster will walk away from the transaction unscathed, unidentified and thus untouchable. When a straw buyer is used and the transaction falls apart, the seller may have no one to prosecute for the default and no recompense of her damages.

Although real estate agents are required by law and their regulatory bodies to verify the identity of their clients, it is not uncommon for them to neglect this requirement, or to be duped by the fraudster or even be parties to the fraud. Rather than passively relying on others to protect your interests, here are three simple considerations you can use to safeguard against fraud.

1. Be wary of an assignment clause

When a buyer enters into a purchase agreement as a speculator, he will require the inclusion of an assignment clause. An assignment clause provides the buyer with the right to assign the purchase agreement to any third party without the seller’s consent. The speculating buyer may also insist on including a provision in the purchase agreement that entitles the buyer to register title of the property in the name of any person or corporation distinct from the name of the buyer. Although there is nothing inherently wrong with either of these provisions, they should warrant further inquiry as to why they’ve been requested.

2. Require a sufficiently large deposit

From a seller’s perspective, a significantly large deposit is a sign of good faith that the buyer will complete the transaction on the date specified in the contract. A large deposit also assures a seller that the buyer has the financial means to close the transaction or, in the worst case scenario, that her damages will be compensated if the buyer fails to close.

If a buyer is too cash-strapped to come up with 5% of the purchase price for the deposit at the time of signing the purchase agreement, what is the likelihood of him being able to come up with 20% at the time of closing? Alternatively, if a buyer has a lot of skin in the game, he will be more motivated to ensure the transaction closes, even if it requires him accepting a costly borrowing arrangement – or, if he can’t close, cooperating with the seller in order to mitigate her damages and his liability.

How much of a deposit the seller should require is a tough question and will depend in part on where the property is located. Deposits can range from as little as a few hundred dollars to 15% or 20% of the sale price. A cautious seller should require a deposit that is large enough to cover her potential loss if the buyer does not close. A seller’s estimation of damages should include the anticipated decrease in the relisted purchase price, the carrying cost of the property until the relisted sold date, and $10,000 to $15,000 to cover legal fees.

If the buyer breaches a purchase agreement by failing to close, the deposit is not automatically released to the seller. Rather, the buyer and seller must mutually agree how the deposit should be released, or else the seller will require an order from the court to determine distribution. When a seller has unwittingly sold a property to a straw buyer, the complexity, cost and delay associated with obtaining a release of the deposit through court proceedings is exacerbated.

For example, the commencement of a legal proceeding requires the defendant to be personally served with the originating court documents. If the fraudster has used a fake name, or the straw buyer is a nonresident, it may be impossible to serve a buyer if you have insufficient means to ascertain his real information.

3. Know the buyer

In order to ward against straw buyers, always obtain two pieces of photo ID from the buyer, as well as the buyer’s phone number and home address. Know whose bank account the deposit is coming from; if the buyer is not the account holder, make further inquiries. Lastly, require a handwritten signature and ensure that the purchase agreement is witnessed by the buyer’s agent.

There is an emergent trend (at least in Ontario) of relying on electronic signatures on purchase agreements and other real estate documents. It is up to the person relying on the contract to decide if they will accept an electronically signed contract. An electronic signature should only be accepted if:

• The seller can verify and authenticate the signature and clearly identify the person who executed the document
•  An audit trail exists, which would enable an auditor to reconstruct who sent what documents and when
• The seller has easy access to information relevant to the transaction, which would  be required if fraud is suspected
• The metadata or audit trail is preserved and not capable of being deleted

Selling your property is one of the largest transactions you will ever make, and it pays to proactively ensure that your interests are properly protected.

Source: https://www.canadianrealestatemagazine.ca/expert-advice/thieves-among-us-241805.aspx

Fraser Valley Realtors offers advice for pot growing

Fraser Valley Real Estate Board has launched an online source of information and advice regarding growing cannabis at home.

SafeGrowHome.ca is designed to help homeowners and buyers understand the potential impact of growing pot in a home and has been launched ahead of the expected legalization of cannabis later this year.

“Right now, there is a significant lack of clarity and information surrounding legal growth in the home – especially in regards to what is considered a healthy, safe standard,” said John Barbisan, President of the Board. “Our government needs to ensure that the public is aware of and has access to guidelines, restrictions, and proper processes so that they can make smart decisions when it comes to cannabis.”

Fraser Valley Realtors says there are three things the government should do:

1. Further, define the requirements for growing cannabis safely in homes
2. Create a province-wide system for maintaining and accessing information on the status of illegal grow homes
3. Outline a process whereby unsafe grow homes can be restored to healthy homes

“Growing cannabis in the home will have a considerable impact on homeownership and the real estate landscape. Through more comprehensive support and policies from government, our clients will be able to feel confident that the home they own or want to buy is safe.”

Source: https://www.canadianrealestatemagazine.ca/market-update/fraser-valley-realtors-offers-advice-for-pot-growing-242842.aspx

CIBC study shows property owners can make 50% yield

Renting out an investment property or space in a primary residence can be a headache but also has the potential for high returns according to a new CIBC poll.

It found that Canadian homeowners with a separate rental property can earn an average $2,198 per month, 50% more than their monthly costs; and those renting out space in their main homes can see yields as high as 70%.

More than one in four Canadian homeowners are already landlords (15%) or plan to earn (11%) rental income by letting out space in their primary residence or from a separate rental property.

Almost two-thirds of current landlords own one or more investment properties used exclusively for rental income with $2,189 the average amount they earn in income each month against average expenses of $1,461.

"High housing costs and the growing appetite for additional revenue streams make renting out space a popular choice, especially among younger Canadians," says Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Financial Planning and Advice.

But he added that owners should check the tax implications of renting out property.

"While most homeowners believe the tax benefits alone make an income property a worthwhile investment, it's critical to understand how it fits into your overall financial plan and be mindful of all of the tax implications of going this route so you can make the most of the venture."

Most homeowners see the benefit of being a landlord
The poll found that 72% of all homeowners believe investing in real estate is an excellent way to earn supplemental income and 37% say they'd opt for a home with a source of rental income if buying a home today.

Canadians aged 18-34 are more apt to be landlords than any other age group. Almost half of the millennial homeowners are already landlords (30%) or plan to be (17%), compared to only 29% of homeowners aged 35-54 and 12% of those aged 55+.

"Younger Canadians are more open to sharing their space because they see it as financially advantageous," says Scott McGillivray renowned real estate investor, contractor and television personality. "There's definitely a shift in attitudes and a growing interest in income properties, in part driven by a desire to offset high housing costs, but also because it can be a smart way to create extra income and build wealth."

Overall, more than half of landlords say it’s “worth the headache.”

Source: https://www.canadianrealestatemagazine.ca/market-update/cibc-study-shows-property-owners-can-make-50-yield-242648.aspx

Easing the squeeze

Property ownership in Canada recently became a little more challenging, especially if you want to increase your profitability as an investor. The Bank of Canada has boosted its interest rate twice this year, and recent changes to the Residential Tenancies Act expanded rent control to most private rental units in Ontario. It’s important for property owners to take steps to simultaneously protect their ROI and avoid potential issues with the new regulations.

The new rates and regulations provide the push for us all to do a little housecleaning around our portfolios. Here are three ways you can maximize cash flow, keep your balance sheet in the black in the coming year and stay on the right side of the Landlord and Tenant Board’s watchful eye.

1. Don’t drag your heels

Make sure you’ve prepared all of your rent increases properly and on time (ideally before the end of the year) to counteract any increase in your interest rates on a variable mortgage. Preparing rent notices properly means adhering to the letter of the law, laid out in the Landlord and Tenant Board’s regulations. Fortunately, the board has provided a format to follow in your rent- increase documents and procedures, which you can find at sjto.gov.on.ca/documents/ ltb/Notices of Rent Increase & Instructions/ N1.pdf.

The guidelines with respect to the amounts and timing of those increases are strictly enforced, so educate yourself thoroughly.

2. Find a better rate

Shop your mortgage around to other lenders to see if you can find a significantly better rate. If you’ve been running with variable-rate mortgages for the past few years, it might be worth it to pay the three-month penalty and switch lenders if it can get your rates significantly lower. I can think of two specific scenarios where this might be the case.

First, if your mortgage will be coming due within the next six to 12 months, it’s time to start preparing for renegotiation anyway. By doing so now, you can lock in at current rates before they rise even further, which most experts feel is inevitable. Just be wary of a massive jump in either rates or payments with the new mortgage you’ll be negotiating.

Note that the interest penalty for breaking a fixed-rate mortgage can be huge. It’s usually a fairly complicated calculation based on interest differential, but essentially you’re liable for the full amount of interest that the lender would have received from you over the full term of the mortgage, even if you decide to pay it off now and move to another lender. That can be an expensive proposition if your mortgage still has three to five years left to run on your current term, so be sure to sit down with an experienced financial analyst to run the numbers accurately before you make a move.

The other scenario where it might be worth switching to another lender is when you’re dealing with a variable-rate mortgage. After all, the rate on a typical five year variable rate mortgage has already jumped twice in the past year alone, so this seems like the ideal time to make the switch to a fixed rate mortgage, especially if you have the advantage of a minor three-month interest penalty for renegotiating the agreement.

Even better, locking in a fixed-rate mortgage with the same lender shouldn’t incur any interest-rate penalties whatsoever, and it’s usually easy to do with just a phone call or email to your current account representative. That’s an easy way to set yourself up for success in the face of climbing interest rates without making big changes in your current financial arrangements.

Before you make a move, be sure to get the full details on your term, renewal dates, penalties and provisions, and then calculate the bottom-line effects that a rate change will have on your specific mortgage. I wish there were a simple, one size-fits-all formula to figure this out, but every case is different. With sky-high property values in some parts of the country, though, a small move can make a big difference to your bottom line.

3. Re-evaluate

If a property is already tight when it comes to profitability and cash flow, you might want to consider liquidating it. If the numbers aren’t working now, things are bound to get even more problematic as rates increase.

What would you get for the property if you sold it now? If you reinvested the money in a more positive cash-flowing asset, how much better off would you be? Of course, there will be costs involved with selling the property (potentially including commissions, transfers and taxes, etc.), but if you can create a more stable investment with a higher cash flow and a higher return, it could be well worth it to make the change sooner rather than later.

All things considered, the recent interest rate increases make this coming season a good time to re-evaluate your overall portfolio. It’s your opportunity to weed out the non-performers, get some liquid assets on your side and reinvest those assets to create better deals to maximize your returns – especially if we’re talking about assets you acquired early on in your investment career, when you might have been happy to work with a smaller margin or tighter cash flow. Now could be the time to clean those out and raise your game.

The trend in Canadian real estate appears to be increasing regulations. As an investor, rather than sitting back and watching your returns dissolve, it’s your duty to find the opportunities hidden in the challenges. That’s the only way to secure the returns and peace of mind that got you investing in the first place.

Source: https://www.canadianrealestatemagazine.ca/expert-advice/easing-the-squeeze-240263.aspx

Multifamily permits hit a record $3 billion

The latest stats on Canadian building permits confirm the leading role being played by the multifamily sector.

Residential permits issued by municipalities had a total value of $5.4 billion in March, up 2.3% month-over-month.

The multifamily sector showed “a notable increase” Statistics Canada says, with a 12.2% increase to a record $3.0 billion. The single-family sector was down 7.9% to $2.4 billion.

The rise for multifamily intentions was driven by apartment buildings and was driven by Quebec and British Columbia. Rowhouses also saw a strong gain.

Ontario posted the largest decline in single-family permits, down 13.7% or $153.1 million. In the Toronto CMA, the decline was 27.6% or $302.3 million, the second consecutive monthly decline.

Overall, eight provinces posted declining residential permit figures, with the strong performance of Quebec (+$378.8 million) and BC (+$179.5 million) boosting the national total.

Non-residential permits up 4.5%
The value of permits issued for non-residential structures was $3.0 billion in March, up 4.5% from February (which had posted a 6.4% decline).

The commercial sector gained 10% to $1.7 billion while the institutional component was down 12.7% to $647.7 million with lower intentions for hospitals affecting the nationwide trend.

For CRE it was the industrial component that saw the largest gain (11.6% to $666.5 million) with primary industry buildings including farm buildings and greenhouses leading.

The total value of residential and non-residential permits issued was up 3.1% to $8.4 billion in March, following a 2.8% decline in February

Source: https://www.canadianrealestatemagazine.ca/market-update/multifamily-permits-hit-a-record-3-billion-242303.aspx

Ontario's millennials mostly feel home ownership is unattainable

The results of a new study conducted by Nanos Research Corporation for the Ontario Real Estate Association (OREA) showed that despite the provincial government’s plan to help make residential properties more affordable, 68.5% of young Ontarians agree or somewhat agree that homeownership remains unaffordable in their neighbourhood.

OREA stated that the research underlines the importance of affordable homeownership among voters who will participate in June’s provincial election this June. Fully 7 in 10 Ontarian millennials agree or somewhat agree that they are more likely to vote for a political party that is committed to helping them own homes.

“The dream of homeownership is slipping away for an entire generation of young people,” OREA CEO Tim Hudak said. “Nearly half of Ontarians between the ages of 25 and 34 are still living at home with their parents. These are people who’ve done everything right – gone to school, worked hard, paid down their student loans – yet they’re struggling to take that next step in life to own a home. We need action to address this problem.”

78% of Ontario’s millennials agree or somewhat agree that the government needs to do more to help young people overcome the housing affordability hurdles. Saving enough for the down payment is the most significant obstacle to owning a home for 41% of young Ontarians, followed by getting a mortgage approved at 22%.

Moreover, the problem extends beyond the young generation. 58.7% of non-millennials in the province agree or somewhat agree that homeownership is unaffordable in their neighbourhoods.

“To date, most government action has been around higher taxes or making a mortgage more expensive - none of this is helping people get into the housing market,” Hudak explained. “It is time to take a different path. Keeping home ownership within reach comes down to increasing housing supply in Ontario, particularly ‘missing middle’ housing, like townhomes and mid-rises, and providing first time home buyers with some relief like increasing the first-home buyer tax rebate and helping with down payments.”

Source: https://www.canadianrealestatemagazine.ca/news/ontarios-millennials-mostly-feel-home-ownership-is-unattainable-242068.aspx

Canadian homebuyers aren't deterred by rising rates

The spring homebuying season is underway and the intentions of potential homebuyers remains strong.

But a new report says that although buyers are not put off by rising interest rates, most are not taking recent mortgage regulation changes into account when calculating how much they can afford.

The BMO Spring Housing Report reveals that 23% of respondents are planning to buy a primary residence in the next year with an average price of $474,000 nationwide; $580K in Toronto and $603K in Vancouver.

There is no doubt in homebuyers’ minds that interest rates will continue higher (76%) but 53% said they are not stress-testing their mortgages to ensure long-term affordability; although those in Ontario and BC are more likely to do so (53% and 51% respectively).

"For the first time in years, interest rates are beginning to rise – making it increasingly important for Canadians looking to buy a home to stress-test their mortgage against a higher rate to ensure they can afford it over the long term," said Martin Nel, Head, Personal Banking, BMO Bank of Montreal.

He added that mortgage professionals can help buyers navigate the regulations to ensure their budget is accurate.

Mortgage preferences tend to be based on rates

The report also shows that Canadians are generally in favour of fixed rate mortgages – 69% have one – but around half of respondents said their choice is based on rates available when they apply.

"It's encouraging to see that Canadians are thoughtful about weighing their mortgage options based on rate, but it's equally important that they consider how their choice will affect their day-to-day finances," said Mr. Nel. "For example, a customer who likes the certainty of knowing exactly how much of their monthly payment is going to principal versus interest may not be the best fit for a variable mortgage even at a lower starting rate."

Source: https://www.canadianrealestatemagazine.ca/market-update/canadian-homebuyers-arent-deterred-by-rising-rates-241953.aspx