I’ve said it before and I’ll no doubt say it again. The Ancient Romans may not have been thinking about real estate when they coined the term “caveat emptor” (buyer beware), but if the sandal fits . . .
A $3-million class action launched by Ottawa condo owners (reported last week by the CBC) got me thinking about the many ways inexperienced or exuberant investors can get into trouble if they rush to buy.
Let’s start with the condo market.
The condo craze has gripped many urban centres across Canada over the past decade. It can be a great opportunity for the savvy investor, but the devil is always in the details. Take that Ottawa lawsuit as an example.
In this case, the points of contention are relatively minor – buyers claim they were duped by the builder into signing up for long-term rental contracts on forced-air heating systems. They also assert the builder reneged on an agreement to provide storage lockers in the building.
But for a value-conscious investor, these are the kinds of things that can nickel and dime the profit out of an investment.
Don’t be rushed
So, take your time. Read through that sheaf of papers that’s being thrust into your hand before signing. Ask questions about things you don’t understand. If you aren’t content with the answer, wait and seek other advice.
Maybe that advice should come from a real estate lawyer or an expert such as myself. Either way, taking a chance and signing anyway can leave you on the hook down the road. It’s either “pay me now, or pay me later.” Later usually costs more.
And if you have buyer’s remorse, remember some jurisdictions, Ontario among them, protect consumers with a 10-day cooling off period – you can back out of any transaction without penalty. The clock starts ticking from the moment you have received the fully signed purchase and sale agreement and the disclosure statement.
Think ahead and look around
For first-time investors, it’s important to always remember that this form of investment carries risk, just like any other. There is no guarantee of an appreciation in value or of what the resale price may be at a certain date. That’s why it is so critical to work the numbers at the outset and ensure the fundamentals are sound.
Don’t overpay for the asset.
Just like looking at the past performance of a stock, see what the fair market value is for that type of property in that market. See what development is planned for the foreseeable future and what impact this could have property values.
Industrial development next door will not be kind to your resale value, but a station on a new rapid transit line, or a new employer, will be.
Healthy reserve fund should cover future capital costs
If it’s a condo situation, make certain the corporation has a healthy reserve fund to cover future capital costs. Investigate to see if a costly repair is looming, such as repairs to a parking garage. Nothing cuts into your ROI faster than a special levy on owners to cover a fat repair bill.
If it’s a new building, confirm with the builder the nature of the reserve fund study it has in place and how it was researched – make sure it isn’t based on guesswork.
And with most real estate investments, the longer you hold, the greater the likelihood of a greater return. But this again is contingent on the property and its neighbourhood remaining attractive to tenants.
Know when it’s time to reinvest in the property and when to get out. Again, seek out professional advice and do your homework.
Be wary of land use restrictions
Consider too, what other factors could negatively impact the value of your investment. Take land use restrictions. These can be imposed by any level of government, or an environmental or conservation organization through government policy. There may be other unique circumstances such as an Aboriginal land claim.
Land use restrictions change all the time. Because they are imposed as a policy, it is possible to lobby for that policy to be changed. But this can entail significant time and legal costs, with no guarantee of success.
The best defence is a thorough process of due diligence at the time of purchase with a title search, formal survey or even an environmental assessment. Perhaps five per cent of properties are likely to have a circumstance that could, or have, resulted in a restriction that affects their use and value.
It may change the dynamics of a negotiation – that purchase price for five acres of land may now have to be reduced to reflect only three acres are in fact usable.
Consider what might make insurers nervous
And then there is your friendly, neighbourhood insurance company.
Insurers make a big deal in their marketing about being there when you need them most. But they have thin margins and little appetite for heightened risk. Anything from a risk of flooding, to vandalism or an old oil furnace with a rusty tank can drive up the cost of insurance or even lead an insurer to refuse coverage.
Some of these risks can be addressed with repairs and upgrades. Others, such as buying on a flood plain where claims have been on the rise due to changing weather patterns, can’t be. Again, do your homework to understand the impact of these risk factors on the cost of ownership and resale value.
The decision to purchase your home is often driven by emotion. The decision to invest in real estate should never be.
To discuss this or any other valuation topic in the context of your property, please contact me at firstname.lastname@example.org. I am also interested in your feedback and suggestions for future articles.