By James Knull
The market for basement suited houses in Alberta just got a little more complicated. There’s always been a grey area between legal and illegal suites when listing these houses, however, the way REALTORs® are going to advertise these types of property are going to be changing dramatically. This is going to affect the relative values of illegal and legal suites as well as the strategy investors need to choose going forward.
An illegal suite is basically one that doesn’t have a permit from the city. If the city finds out you have an illegal suite, you have two options moving forward. Firstly, you can decommission (i.e. remove) the suite which will lower the property’s value and therefore decrease, if not eliminate, any positive cashflow. Your other option is to get the necessary permits, thus increasing the property’s value. Either way, you need to know what type of property you have in order to decide what strategy you will implement. The unfortunate reality is that not a lot of realtors fully understand the different between illegal and legal suites which has led to a serious grey area.
For the past few years, REALTORs® have been advertising illegal suites in several improper ways. They have been calling them “in-law suites”, “grandmother suites”, “maid suites”, or even worse, have referred to illegal suites as legal. When REALTORs® load a listing into MLS, they have several options to choose from to describe the level of basement development including “finished”, “unfinished”, “partially finished” and of course, “suite”. Right now, REALTORs® will note the basement has a “suite” and then call it whatever they like.
Recently, a case occurred in Calgary where there was a huge liability issue involving an illegal basement suite. A lawsuit followed and the claimant sued everyone they could get their hands on, including the selling agent with the argument claimed that an illegal suite was in fact legal, misleading the buyer. This case drew major attention to advertising of suites in general and the liabilities REALTORs® could be exposed to. The real estate council identified a major issue here and has tweaked the rules for REALTORs® advertising suites.
Basically, if the suite isn’t 100% permitted and legal, REALTORs® are now strongly discouraged to advertise the house as having a “suite” of any sort. They’re not allowed to mention revenue potential for an illegal suite in any way whatsoever. They’re discouraged from using the “suite” option in the drop down basement menu. The best loophole that the MLX department could offer was stating in the text of the listing “separate entrance and separate kitchen present in house”. The entire industry is now erring hugely on the side of caution here and most sensible REALTORs® are going to proceed cautiously so that they don’t take on extra risk and liability with illegal suites.
Let’s get to the point, what does this mean for investors? If you’re looking to buy an illegal suite, it’s going to get much harder to find them, especially considering REALTORs® are going to stop listing “suite” in the basement drop down search menu. There will be significantly fewer suited houses showing up in a typical search. Currently, there are only about 100 houses on MLS listed as having a basement suite whereas last summer at this time there was closer to 160. The result is that the value of having that legal permit is going to continue to increase.
To stay ahead of the curve, you are going to want to work towards legalizing your currently illegal suites if you have any intention of selling them going forward. If you’re an investor who values investing in turnkey, low hassle properties, then you’re going to want to focus on purchasing legal suites. Finally, if you’re the type of investor who likes to add value, then finding an illegal suite and legalizing it could add a lot of value to a property. Finding those “diamonds in the rough” just got a lot harder as I described, which means that if you’re willing to do the work the find them, you can profit from your efforts.
Overall, suited houses still make a lot of sense as an addition to your portfolio. The rules are changing and there’s opportunity to stay ahead of the curve.
James Knull started his career in Real Estate investing in suited houses using the REIN system as his roadmap and continues to build his portfolio today. James now invests in Multifamily and is a REIN Diamond member and was awarded Player of the Year in 2014. James’ passion for investing led him to become a Realtor with Remax Real Estate in Edmonton. He specializes in investor clients and has worked for REIN members from BC all the way to Quebec to buy all kinds of properties in Edmonton. James has a keen eye for the different perspectives in a real estate deal and gives a great overview of every situation. He can be reached at 780-695-3214 (Office); 780-340-1340 (Direct).