Buy A House For No Money Down? Yes, You Can!

By Barry McGuire

Mortgages are now impossible to assume in Alberta without first qualifying for the mortgage. This change of heart on the part of our lending community has taken away one of our favorite strategies. An Agreement for Sale (AFS) is a purchase using a seller financing strategy that allows for an underlying non-assumable mortgage.

 

In the words of an investor who uses Agreements for Sale: “I am closing on my 4^th property using a 5 year AFS (they just renewed for 5 years) that we simply stepped in and took over the expenses.

 

This was truly a big win for all as they had just made the last mortgage payment that they were able to afford. It was a vacant investment property that went south on them. I now have it rented and after mortgage, taxes, and insurance, still have $150.00 left over each month. A FREE house that cash flows!”

 

This way of financing a purchase used to be much better known across Canada. There was a time when banks would not give anyone a mortgage unless they had 50% down! But sellers wanted to sell and buyers wanted to buy, so they got creative. Sellers would often provide the financing, either through a vendor take back mortgage (VTB) or through an AFS.

 

With easier bank financing and CMHC insurance, Agreements for Sale became the forgotten financing tool. Now, with no-qualification assumptions having disappeared, Agreements for Sale are making a comeback. Here’s how it works. The buyer pays a certain amount of the purchase price by cash and the balance owed to the seller is described as the ‘unpaid seller’s equity’.

The AFS document resembles a mortgage. It deals with the interest rate applicable to the unpaid seller’s equity, assignability, insurance, taxes, upkeep and repairs, items of default, remedies, payouts, and renewals, along with numerous other details. It is common for the term of the AFS to match up with the maturity date of an existing mortgage.

 

I can hear the wheels turning. “What’s the big deal? Isn’t this just like a mortgage assumption?” No, it’s not. The difference is that title remains in the seller’s name. The buyer makes payments to the seller as set out in the AFS. If the seller has an existing mortgage he continues to make those mortgage payments just the way he has always made them.

 

If title isn’t in the buyer’s name, how does he protect himself? The buyer registers a caveat against the property at the Land Titles Office. What about an existing mortgagee? They might argue that the AFS is offside their ‘due on sale’ clause. However, because mortgagees are not involved in the AFS process, our experience is that as long as underlying mortgage payments are faithfully made, no existing mortgagee has taken issue with the use of an AFS. It’s not that they couldn’t, they just haven’t. Presumably, on a practical basis, as long as their mortgage payments are being made, mortgagees don’t care.

 

The AFS concept is attractive to investors, sellers, and buyers. This article will focus on why this concept is interesting to investor buyers. Investor buyers used to assume mortgages without having to qualify. Lots of sellers didn’t mind if buyers assumed their mortgages. Often they didn’t mind even if the seller had a CMHC mortgage where after selling, if their buyer defaulted, they were still responsible on the personal covenant in the mortgage. Sellers still let buyers assume in many cases. Now mortgage assumptions are, for all practical purposes, off the table. That still leaves sellers with mortgages who want to sell.

 

Let’s look at some examples:

 

a. The seller has negative equity. They bought at the height of the boom. Prices have fallen. Their high ratio mortgage now has a principal balance larger than the fair market value of the home. They can’t sell it with a realtor because real estate fees will take up $15,000+ that they don’t have. Even if they do sell, chances are their mortgage is closed and paying it out would trigger a large payout penalty. Think of the negotiating possibilities for you as an investor buyer under this scenario.

 

b. The seller has positive equity but not much. His real estate commission and pay out penalties could easily chew up $20,000. If the seller calls you, he might be happy to hear how you can save him money.

 

c. The seller has positive equity but he doesn’t need his money. Most sellers need the money now, but some don’t. You can show the seller how to potentially save thousands of dollars in real estate commission and payout penalties, earn a better return on his equity than he could in the bank and, if the seller is also an investor, to defer profit on his taxable gain.

 

d. The buyer, YOU, now controls the property. This is powerful! With a properly negotiated and drafted real estate purchase contract and AFS, you may be able to:

 

i. assign your interest in the AFS (sell your contract), or;

ii. lease-option the property to a tenant buyer, or;

iii. sell an option without a lease, or;

iv. make a straightforward sale at a profit to another buyer.

 

An AFS can work well for the above examples. Plus, sellers LOVE that title remains in their name.

 

EXAMPLE:

 

Upside: In a recent scenario, a client secured a property from a seller who wanted to move to Hawaii. There was only $5,000 equity in the property and the unpaid seller’s equity equaled the balance of the underlying mortgage. After closing, the excellent tenants produced $175 per month positive cash flow. The AFS and mortgage have recently been renewed for another two-year term to allow further equity appreciation. It looks like the net profit after four years will be in the $55,000 range. Great ROI!

 

Downside: AFS deals generally have higher legal fees, are more difficult to explain and negotiate because of unfamiliarity, and they may require lots of babysitting on your part. Is it worth it? You be the judge.

 

In Alberta, the Agreement for Sale is making a comeback. It is certainly a valid investment strategy which, when properly implemented, can be very profitable.

 

As always, your best result can be expected by thoroughly educating yourself, achieving comprehensive due diligence and finding a motivated seller. If you have any questions or comments then please contact us at RMLO Law LLP. Email b.mcguire@rmlo.com.

 

WARNING: This article is Not Legal Advice. Every one of you will have your own individual circumstances. Call us or consult your own lawyer for specific legal advice.

 

Barry McGuire is a veteran real estate lawyer, investor and best-selling author, based in Edmonton, Alberta. His Focus Series Workshops are well received by his students and his strategies and money saving advice put dollars into the pockets of the investors that use them. You can reach Barry at B.McGuire@rmlo.com.

 

He will be discussing this strategy in more detail, as well as Joint Ventures and Rent to Owns at the May 10^th REIN Workshop in Edmonton. Want more hands on training? Barry will be doing a hands-on interactive three day boot camp on June 20-22. Contact the REIN office for more information at info@reincanada.com or 1-888-824-7346.