Monday, February 24, 2014

New Series - Agency (Both as Buyer and Seller)

In every market, agents will offer to work on your behalf as a Buyer’s Agent (BA).  The principal of being a Buyer Agent, revolves around the concept of the Agent, REPRESENTING YOUR INTERESTS. In the commercial market, their role and level of service (A.K.A.- expertise) are significant if you are to successfully Buy or Lease a property. 

A true BA agreement is a written contract, between yourself and the agent. It is typically exclusive (meaning you’re committed to the agent), runs for a set time period, includes a brief description of the property sought (ie. search area, building size), and sets out how fees are to be paid. Contracts will vary depending on your jurisdiction, but should include the above points – and of course, can be customized if necessary depending on your specific arrangement.

One of the most common ways a BA agreement is amended, is with respect to the payment of fees. Typically an agreement will set out what the fee amount is and that it may be paid by the Seller -  but if there is a deficiency for any reason, this obligation would fall back to the client (Buyer). This is a pure out-of-pocket expense to any Buyer, in addition to all other closing costs, and one they may not wish to face. The fee provision in the agreement then may be amended such that, the agent must receive full compensation from the Seller and that any deficiency will not be the responsibility of the Buyer. Keep in mind that typically on MLS listings, there is a provision for a selling broker share on the commission being paid – meaning it should not be an issue on an MLS generated sale.   

Other exceptions might include:

·         Can the Buyer buy out of the search area, without affecting the BA agreement

·         Can the agreement only apply to MLS properties (and not Private Sales)

·         Removal of a holdover clause applying at the expiration of the contract period
    (meaning – no obligation after contract expires)

Are non-exclusive agreements available and can they suit your purposes? Perhaps – but
in most competitive markets probably will not serve you well.  Most successful agents will not work in this capacity, and are unlikely to devote the time and energy if you are not fully committed to the relationship.

Even in its simplest form a BA agreement is a contract and must be viewed as such. Best
practice here is to have your lawyer review the agreement before signing it.

Next up – how to find the right Buyer Agent candidate(s) in your market.

Wednesday, January 29, 2014

Final Thoughts on Power of Sales – Providing Private Financing

As noted in an earlier blog, there may be opportunities within your market to provide the financing required for investors to purchase POS  properties. Often times, financing is hard to come by and the projected returns (ROI) can be very attractive as a result.

As with every investment, the key to providing private financing is doing a proper risk assessment. Closely examine the basics of the deal, with particular consideration to the following:

·        Suitable loan to value ratio

·        Cash flow which supports the debt obligations

·        Or – credible business plan with owner-occupant

·        Viable buyer covenant (aka – credit rating/financial standing)

·        Quality/value/liquidity of the real estate

·        No surprise issues – ie. environmental, zoning/municipal

·        Secondary Financing – will there be any (behind a Private First)

If the deal meets the above criteria or most of it, then it’s time to assess what sort of return is required to move forward. Typically, it will be higher – possibly 3-4-5% higher than conventional commercial financing – creating a high return investment. In the right circumstances and on the right properties, providing private financing can be very profitable.

In the broker world, we often see where a prospective Buyer investigates the purchase of a commercial property, doing considerable due diligence – only to take a pass on the investment as an owner.  To then take a look at it as a private mortgagee for a subsequent buyer, may make sense and might just be the better investment with respect to the property.

Again, private mortgages aren’t for everyone, but if you target POS properties as part of your investment strategy, it’s just another way to play that market.  In today’s ultra low interest rate environment, it might just help provide the type of yields you are seeking.  Next up… a new series of topics starting in February.

Tuesday, January 7, 2014

Power of Sale Properties - Most Common Myths (Ontario, Canada)

1.     THE SELLER (LENDER) ONLY NEEDS TO RECOVER THE MORTAGE BALANCE OUTSTANDING. Myth – As the Lender (who commences the POS proceeding) needs to make best efforts to realize fair market value.

2.     SELLER  WILL OFTEN TAKE THE FIRST OFFER SUBMITTED. Myth – Institutional lenders will often require an advanced marketing period (prior to considering offers) to ensure adequate exposure to the market. This not only creates a higher likelihood of multiple offers, but shows best efforts to broadly expose the property.

3.     SELLERS RARELY NEGOTIATE. Myth – Again, in making best efforts to obtain market value, sellers often will negotiate hard and for better terms (aka) to realize a market supported sale. Infact, most institutional lenders will likely have a full appraisal report on file which they will be relying on.

4.     SELLERS OFTEN WILL PROVIDE NEW FINANCING. Myth – Most institutional lenders avoid this facet of re-selling the property, given the conflicts of interest which it creates. Not to say it never happens, but inquire early on to see if it is even possible.

5.     SELLERS HAVE AN OBLIGATION TO REMOVE ALL TITLE PROBLEMS – Myth – You are dealing with an ‘as is’ with ‘no reps/warranties’ sale in most cases and can because of this inherit title problems which you will need to deal with. Get your lawyer involved on the purchase early in the process, to make sure you deal with any title/ownership issues which exist.

6.     SELLERS WILL NOT ACCEPT CONDITIONAL OFFERS. Myth – Maybe/maybe not, it will more likely depend on the competitive environment of the property and your particular market.  As much as ‘non conditional’ offers may be more common on residential properties, they are not as common place on commercial properties and generally lenders understand this. Best practice, is tight timelines and very specifically drafted clauses which clearly address the reason(s) for the conditions.           
Although not necessarily a comprehensive list, these would be the most common myths that we see in the market.  As always, seek out the assistance of experienced commercial brokers when dealing with Power of Sale properties.