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There are three groups of questions to consider before approaching a lender for a particular property.

Financial Requirement Questions

-Are reserve build-ups required, such as in the case of the cost of replacement appliances for a multi-family property?

The lender may expect you to have a reserve fund equivalent to a certain amount in order to sell you the property.

-What extra fees will be charged in addition to the sale of the property, such as legal fees?

These are extra fees that the institution has track of and expects to incur. There are other extraneous fees that are not their responsibility that you should also be aware of.

-Does the lender require a guarantee besides the property itself, or “recourse”?

Lender’s Documentation Requirements

-What proof does the lender need of your tenant’s financial strengths, such as credit reports?
-Does the lender need the usual forms (building condition inspections, environmental reports, etc.) filled out in a certain way that they specify?

Some larger lenders will have templates for certain forms that you need to use in order to apply for funding at their institutions.

-Will the lender allow prepayment, and if so, what kind of penalty will they charge?
-Will the terms of the loan put restrictions on your ability to sell the property?
-Do you have the right to renew or renegotiate the mortgage?

Lender’s Financial Status

-Does the lender have the money to fund the purchase?

Try negotiating the mortgage at a more favourable rate if they have more requests for loans than money available.

Get answers from at least three different lenders to these questions and pick the one that you are most comfortable with. These are just a selection of the questions to lenders that we suggest asking in our book, Commercial Real Estate Investment in Canada (www.realestatementor.ca).

A tenant who enters into a sub-lease arrangement is acting as the landlord for another tenant who pays them rentals, while the primary tenant is still responsible for the lease to the original landlord. Sub-leases are generally unattractive to the original landlord since they do not have direct control over the activity of the sub-tenant.

They can be particularly unattractive in a property that can command a higher rental fee than the original one. In order to protect against such an eventuality, a contract written to the advantage of the Landlord should read “if the rental for the sub-lease is more than what the Tenant is paying, the excess shall be paid to the Landlord.”

Often a sub-lease arrangement will be considered if the original tenant needs to move for various reasons. If the reason is an economical one, the landlord can offer to buy out the tenant for less than the remaining lease is worth in order to avoid a sub-tenancy. Sometimes, the Landlord decides to refuse his consent to the sub-lease. He can do it the “cute” way, which consists in delaying and requesting document after document, so that the potential sub-tenant gets tired and fed up, and walks away. He can be justified in refusing if the Tenant is objectionable from a financial, ethical, or type of business viewpoint. In such a case, the Commercial Tenancies Act of Ontario is more on the side of the tenant than the landlord, in that a landlord must demonstrate solid grounds for withholding consent to a sub-lease.

“Sophisticated”, but ethically loose, tenants who foresee a possible need to dump a lease can use what is called the “roll-and-dump” method. In this scenario, the tenant assigns the lease to a corporation that is a subsidiary of the parent company. Most leases permit such assignments. This is the “roll” part of the operation.

The next part, the “dump”, allows the sale of shares in the lease-holding corporation to another business, whereby the new business effectively becomes a sub-tenant. You can see where this method may be used to get out of a lease. When having a real estate contract drawn up, make sure that your lawyer builds in measures against such a strategy, such as a refusal to assign the lease to any company but the original company that signed the lease.

There are several things that you need to take note of when examining a property, particularly if you are looking at a number of properties. A thorough list will help you determine all of your upfront costs, rather than getting hit with bills that you didn’t think you had right out of the gate.

The first is information about the land. You need to note dimensions, area, access, services, and the environmental condition of the property. Some items, such as access and environmental condition, may not be mentioned in any literature about the property, but can be a vital factor in your purchase decision. You don’t want to find out after the sale that you got such a great deal because your property was situated on polluted land.

The second set of items to consider are aspects of the building itself. Dimensions, area, type of construction, number of stories, number and type of units, area of units and work needed are all very important to note. It is also important to note whether or not a multi-family building will require a fire retrofit.

Danger signs that a property will exhibit if it is a bad investment are:

• Being next to hydro lines, freeways, or railroad tracks
• Risk of flooding due to poor drainage or vicinity to waterways
• Bad neighborhood
• High property taxes
• Failing foundations or other severe structural issues
• No parking or not enough parking for the intended use

Be sure to ask the Real Estate agent during the visit if there are any items that were not on your checklist or in the literature that you need to know about. Agents can have quite a few listings and may not have listed absolutely everything they could have about the property . This simple question will usually lead to about twenty minutes worth of valuable information that you need to know, so be sure to ask it above any others.

These are all just suggestions based on a general investment property purchase. You will want to come up with your own personalized checklist prior to the purchase of any real estate that will include all of the factors that you are personally looking for as well as those suggested above.

Checklists for several types of buildings (industrial, office, retail, and multi-family) can be found in the book Commercial Real Estate Investing in Canada, available for purchase on this site.

In a market where real estate prices are getting lower everywhere, how do you identify a real bargain?

Seller Is Motivated

Seller motivation, or “panic selling” is usually the best hallmark of a bargain property during a recession. The more anxious a seller is to unload the property, the more flexible he will be. The flip side to this is that the seller may be motivated to unload the property due to a problem of some kind, so be twice as careful to inspect such a property thoroughly prior to purchasing it, preferably assisted by an expert Realtor or a consultant.

Wait Until the Frost Sets In

If a property has been on the market for several months, waiting an extra few months until the winter comes won’t hurt. Sellers will be less likely to fight a lower offer in the winter due to stress from both the season and the carrying costs incurred.

Check Price Against The New Market Conditions

The knee-jerk reaction when a buyer sees a property for sale at less than its market value would have been a year ago is to buy it. Make sure that it is still a bargain by doing your homework. Check what similar properties have sold for in the last few months in the same area. This will tell you if the property is actually a bargain or if the price is just reflective of the current market climate.

The Dirtier the Better

If a building isn’t clean, many buyers will be turned off. Watch out for properties that are simply not clean, or only need cosmetic work, but don’t require major renovations. If you don’t have time to do the work yourself, there are lots of companies that will come in and clean it up for you for less than you might think.

It is important to keep a level head when dealing with any financial transaction in the middle of a recession. Investors buy when they feel a property is a bargain; a savvy investor will do his or her homework first.

Closed Mortgage

A closed mortgage is also referred to as a locked mortgage, and cannot be repaid before its term has expired. While repayment of the principal on a closed mortgage may be negotiated with the lender, the lender is less likely to agree to early repayment if current market interest rates are in their favour rather than yours. Typically you will have to pay a repayment penalty if current market interest rates are lower than the original interest rate on the mortgage.

Residential closed mortgages often allow for up to 20% of the principal of the loan to be repaid without penalties.

This allows for the occasional balloon payment that the average mortgagee can make through inheritance or bonuses, negating the need for an open mortgage to be negotiated in the average residential mortgage situation.

Open Mortgage

An open mortgage can be repaid at any time before its expiry date. Some open mortgages contain bonuses for early repayment and some contain penalties for not repaying the mortgage early.

Institutional lenders typically like to avoid open mortgages because they match the mortgage term with money that investors deposit with them.

Which One is Best for Me?

An open mortgage is often advantageous to you as the mortgagee. It provides added flexibility, which can be convenient in many situations, such as if you have a pay structure that includes large bonuses or commission payments of any kind. If an open mortgage is more convenient for you because of the timing and amounts of your income, you should really consider it rather than paying penalties on a closed mortgage. Your prepayment penalties on a closed mortgage may be higher than the increased interest rates that you will pay on an open mortgage.

A salaried individual who receives occasional bonus payments is generally better off with a closed mortgage, since they will be paying less in the way of interest rates than they will be on an open mortgage. New buyers will frequently ask about open mortgages and will turn them down once they understand the mechanics behind them.