Writing an offer for an Investment Property, and including the Appropriate Clauses.
When preparing an Agreement of Purchase and Sale on a multi-unit residential building it is critical to know what clauses and conditions to write into the Agreement. These are generally written in the Agreement on a “Schedule” which forms part of the Agreement.
Too many onerous clauses of an inconsequential nature can negatively impact negotiations or kill the transaction. Inappropriate or too few clauses could leave the Buyer or Seller vulnerable to unpleasant consequences.
So what are some of the issues an Agreement should address in a “Schedule A”?
As one would expect, there should be conditions which allow the Buyer time to arrange financing, obtain insurance, and perform a building inspection. But what else is needed?
Obtaining documentation from the Seller (and reviewing and approving it) is essential.
This is needed to determine income and expenses. For example to determine income a prudent Buyer Agent should request from the Seller, signed copies of all leases of tenants.
NOTE I said “signed”, otherwise they are useless. From this the Buyer will learn what the rental income is per apartment, what utilities the tenant pays for, if and how much they pay for parking, etc.
Expense documentation is critical too, both for the Buyer and the lending institution that the Buyer will obtain a mortgage from. The Buyer needs to obtain individual copies of every utility bill for the past 12 months. That’s heat, hydro, water, sewer, etc. If the building costs more than $1 million, then the Buyer needs two full years’ receipts. Also don’t forget to obtain copies of property taxes and insurance.
However there is even more that needs to be addressed in Schedule A.
Ask for a copy of a survey, and SPIS, valid fire retro-fit certificate from the Fire Marshall’s office, engineering reports, copies of all service contracts…written or oral. The Agreement needs to address last month’s rent cheques paid by the tenants to the owner and the interest generated on them.
- What happens if an apartment becomes vacant AFTER the transaction becomes a firm deal but BEFORE the closing date?
- What happens if the bank wants a Phase 1 Environmental Study done?
- How is it addressed in the Agreement that the building meets Compliance? What the heck is Compliance?
There is much more to the Agreement but I think you get the idea.
Then there is the other side of the coin.....over kill.
I have sometimes given my clauses and conditions for purchasing multi unit properties, to agents who have not used them wisely. For example if a duplex is owned and occupied by two family members (which is not uncommon) and they both live in a unit and pay the mortgage or it is owned out right, there may be no rental income.
So in this scenario does it make sense to ask for a Profit and Loss Statement, an eviction notice, asking rents for vacant apartments, tenants arrears lists, last month’s rental cheques, etc. An inexperienced Realtor may go overboard, causing confusion and waste negotiation time with unnecessary clauses and conditions.
The inexperienced Realtor may almost mindlessly add these clauses and conditions thinking they are benefiting the client, when actually the opposite is true.
Albert Einstein had a couple of quotes that partially apply to this topic. They are;
Everything should be made as simple as possible, but not simpler."
"Any intelligent fool can make things bigger, and more complex.. It takes a touch of genius -- and a lot of courage -- to move in the opposite direction."