Financing Realities from Veteran Investors

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At a recent REIN™ workshop, financing experts were asked a variety of questions regarding one of the top obstacles that real estate investors face. Four professionals with foci on mainstream and Multi-Family financing, and private lending were asked to weigh in.

 

Russell Westcott moderates. He is Director of Education and Development for the Real Estate Investment Network and has been a real estate investor for a decade. He focuses on investing in single family homes in Alberta.

Can a lender retract their financing commitment if it has been made to a borrower?

 

Calum Ross was ranked as the top producing mortgage broker in the country by Canadian Mortgage Professional Magazine. He is regularly featured in the media as a mortgage expert including appearances on Canada AM, CTV, City TV and Inside Toronto Real Estate. He is the mortgage columnist for New Homes and Condos magazine and The Condo Guide and is regularly quoted in newspapers such as The National Post, The Globe and Mail and the Toronto Star. He holds both a B.Comm and MBA in finance and recently completed the Comprehensive Leadership Program at Harvard Business School.

Calum Ross: It certainly happened when we had the variable rates go through the roof, if you remember, pricing went through and they were looking for reasons to cancel a deal. So technically speaking, if you’ve met all the conditions, it becomes legally binding on both sides, if you’ve got outstanding conditions they can pull the commitment at almost any time. That’s why its really key when you submit an application, we all talked about this at the back, the number one secret to success, in having a hassle free mortgage financing process, submit every piece of documentation up front. That way when someone tells you you’re approved there are no surprises, when they issue a commitment, completely commit to do the paperwork, get it done right away.

In Canada if an interest rate goes down, you get to get in at the lower rate in almost all cases, the commitment is then binding by the financial institutions, not necessarily binding on you.

Russell Westcott: Here’s a tip that I do: I will demand a written confirmation from the bank that every condition has been satisfied. Because there’s a difference between “Yeah it looks good, you’re good to go” and a document from the bank on their letterhead that says, “All conditions are satisfied”. And I will do that before I remove financing conditions, if I don’t have that, I may have to go back and extend my financing conditions because I will not remove until I have it.

Calum Ross: I think that brings up a really important point here: if it didn’t happen in writing, it never happened. I don’t care, it’s not a conversation. Financing is like legal, unless it’s done in writing, it never happened, it’s just a fictional conversation. Just chalk it up to “Yeah we were chatting”, until the funds are advanced, until it’s done in writing, it’s a fictional conversation. If the person can’t do it in writing, it never happened.

How do banks or lenders view down payment verification that’s coming from a business account? It could be a company, only one director or one shareholder, could be the same person.

Garth Chapman: They’re good as long as you can demonstrate that you have the right to those funds, so you need to be able to demonstrate that you have, within the corporate structure, the right to take the funds out. That sometimes is best supplied by your accountant. And then they’re going to want to see the money actually roll from the company’s account into your account; so there’s two bank statements we’ll need to see and that’s pretty straightforward stuff.

Russell Westcott: Shareholder loan from another corporation?

Garth Chapman: Absolutely — and, again, as long as you’re entitled to the money. Some lenders will be fussy about wanting to see that proof, sometimes even in the articles of incorporation.

Russell Westcott: Is it a problem if it’s the same person, there’s only one person in the corporation, so you give yourself approval?

Garth Chapman: It’s easier if it’s just one shareholder.

How does this work in the multi-family world?

Prior to becoming a full time Multi-Family Investor and teaching hands on experiential classes in the how-to of the world of multi-family investing, Pierre-Paul Turgeon was at the employment of Canada Mortgage and Housing Corporation (CMHC) since 1996. CMHC is a mortgage-default insurance Crown Corporation providing protection to banks against defaults by borrowers. For the last four years, Pierre-Paul was an underwriter of multi-family properties. Prior to that, he was the principal analyst for CMHC’s Default Management and Real Estate department for four years. Pierre-Paul knows first-hand all aspects of owning and operating apartment buildings through his job at CMHC.

Pierre-Paul Turgeon: They are less fussy, but yes I just went through this process this week on the 38 suite building, so the articles of incorporation, corporate account and all that, so you submit all of that upfront.

In my deals I’m always the sole director, I’m the decision maker, but all of that is laid out and given at the same time with proof of the funds in the bank account. Not necessarily when you initiate the file, but not too long after, they want to see proof that you have the money in the bank account. I make sure that everything I provide is current dated and, especially when its proof of payment, that the money is there and I give that at the last minute so they know the funds are there to close.

Russell Westcott: Pierre-Paul they actually like corporate structures in the multi-family world don’t they?

Pierre-Paul Turgeon: Yes and you’ve got to keep it simple because, again, from the banking point of view, and I used to manage defaults as well as CMHC proformas before I was a multi-family underwriter. You keep your organization chart simple in the event of default; they want to be able to realize the security that is a property easily.

So you don’t want to go through a bunch of shareholders, the decision maker has to be easy, like one or two people, if you have too many they’re going to object to that, usually I’d say about 4 or 5 or something like that, right Dale? So they’ll object to that because its going to be too complicated to take the property back, getting too many signatures; so keep your structure simple.

Garth Chapman: Just a quick thing on down payments, this is the area that is most completely reviewed by lenders these days. There’s a lot of pressure in insuring the down payment funds are truly your money, so it is the thing that is going to be the most checked, its where most deals fall apart. So one of the things we do in our office is make sure that we got that way up front, before we get too far down the road.

Calum Ross: And also in regards to these documents, is that keep in mind that a corporation is a separate legal entity, so when you’ve got a corporation its essentially almost like another you it’s a second you if you will. So just like you it needs to file tax returns and it needs to keep its meeting minutes in order.

When a lender sees meeting minutes that are not in order their concerns are that there’s been some change to the meeting minutes that says “Hey by the way you’re no longer authorized to take money out of that”. So if you don’t have a wheel house to keep those minutes current, get an accountant, get a lawyer, get a mortgage person, get someone who does it for you, because if its not current the old agreement and whatever you put in it is useless.

Russell Westcott:
Dale, do you care if it comes from a business account or not?

 

Dale Koeller began working with Calvert Home Mortgage Investment Corporation (CHMIC) after graduating from the University of Calgary with a Bachelor of Arts in Communications. As Calvert’s Vice President and Senior Underwriter, Dale is the primary generator, analyzer and producer of mortgages for Calvert. He is responsible for meeting clients, interviewing, performing due diligence, supervising and developing property appraisals, analyzing market information and ensuring a high quality and standard of mortgage investments for CHMIC. Dale leads a team of three full time underwriters. Dale is a member of the Canadian Association of Accredited Mortgage Professionals and the Alberta Mortgage Broker Association.

Dale Koeller: I’m not too fussy, in the private world, we’re not too fussy about checking where the money comes from; it’s got to be there on closing, that’s the most important part. We are going to take a more common sense approach to it, but we’ve got to understand its there and my company’s point of view really is if we’re setting this deal up for failure, then we’re wasting our time right from the beginning, so lets make sure its going to work right away.

And just a note back to corporate structures, Pierre-Paul mentioned in his presentation that you need to have guarantees in place for a corporate structure and so be prepared to have your full net worth statement available in those situations.

A person is investing in an area and values have come down and they’re almost down to a point where values are equal to the mortgages amounts. Renewal time is coming up and they there is a concern whether the bank will still renew the mortgages if the values are below what the mortgage balance is?

Calum Ross: In almost all case, yes, orphan loans are what they’re called; they’re a common situation in the US, orphan loans in Canada rarely happen. In practice most mortgages in Canada are basically renewed with no additional paperwork, even if they’re in a negative position. If you’re not paying the mortgage, that’s a different situation; provided you pay it they’ll almost always renew it, it’s very rare that you have orphan loans.

It would only happen if they stop lending a particular type of product and that’s something they have to give you a lot of written notice on. It’s different based on where the property is, what the province provincial guidance is and also that notice period depends on whether or not it’s a bank, which is regulated by the bank act, or a credit union, or mono-line lender.

Russell Westcott: There were a few lenders that actually, time came for renewals and they said, “We’re out of business, we’re not renewing , you better make arrangements”.

Dale Koeller: And we did see some people in exactly that situation, just to put another spin on this and make you think about some opportunities here; when the mortgage is insured, usually by CMHC, the lender’s really not too concerned about the value of the property, even on a switch or transfer. So, if you have a mortgage that’s insured and its maturing and you are maybe not overly happy with that lender and you want to do a switch and transfer that mortgage to another lender, the value is much less important than you would think it is.

And frankly, we now are even able to, and have recently done some deals on owner occupied homes that later became rentals. So they were 5% down insured mortgages; whereby, now the value of the property is barely above the value of the mortgage; we’ve got lenders that will do those on a transfer basis and take those loans over when the loan to value is as high as 90%, on a rental.

Russell Westcott: So the insurance will stick with the life of that mortgage, will it not?

Dale Koeller: Absolutely.

Russell Westcott: So that’s actually a really good insurance policy, actually you think about it the CMHC insurance is insurance for the bank, its not insurance for you, so that actually gives them more comfort to want to transfer that mortgage or take that mortgage on.

Dale Koeller: Exactly, so when you think about, for example, what Calum said earlier about the 3.79 rate, if you’ve got anything at 3.69 or 3.79 and you’ve got a little time left on it; its time to take a good hard look at do you want to break that contract? You can do that, just as I said, if you had a house that was a rental that you bought at 5% down, because you could do that 3 or 4 years ago.

Or it was a home that was converted to a rental, you don’t like the rate, you want to break the contract early, it’s not renewing for another couple of years; we can do that, even if its at 95% loan to value and get you the better rate. You’ve just got to pay the penalty out of your own cash.

Next month, stay tuned for part two.

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