Bully Offers

The term “bully offer” is now part of everyday language in hot real estate markets. If you’re not familiar with this term and are about to begin searching for property, read on.
Most agents who list properties in hot markets utilize a marketing strategy whereby they hold offers on a listing well after the listing is brought to market. This is called the “bid date”.
Most buyers and agents adhere to this process and submit their offer on the bid date.  A bully offer on the other hand is submitted by a buyer agent well in advance of the offer bid date.  The intent is to potentially circumvent the bid date process and eliminate competition with multiple offers.
Truth is, this strategy is flawed.  If the property has been shown by other agents prior to submission of a bully offer then ethically, a listing agent is bound to notify all agents who have shown their property in advance of presenting any bully offer. If no other offers are submitted, then it becomes the choice of the seller to deal with the bully offer.  If other offers are submitted then all the offers are reviewed at the same time by the seller and therefore the landscape for all buyers is level.
Come back for more next week, if you need help or have any questions email us at chrisandsue@royallepage.ca
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A Final Thought on Investment Properties

apartment-buildingsLast blog we talked about Rental Location and Deferred Maintenance. This week I will explain a little about Market rents, vacancy rates, income and expenses.

Market rents – vacancy rates

With apartment buildings, rents determine value and vacancy rates are often attributed to rents. What do I mean by this? Well, if a building generates an income based upon inflated rents then the value of the property will be artificially high with the risk of higher vacancy rates. Conversely, if a building generates an income based upon low rents, then the building produces less-than-adequate income and the value will be artificially low. You also have to factor in that banks advance mortgage funds based upon an appraisal and that appraisers analyze income and expense data to arrive at fair market value.

Income and Expenses

When you do find a property that meets your criteria, get an operating statement from the seller and also ask for the tenant history. Ask for three years worth of income and expenses. Are the rents at, below or above the market? Canada Mortgage and Housing Corporation publishes housing reports for areas all across the country, which you can purchase. Among other things, these reports identify vacancy rates and average rents for one, two and three bedroom units. Ask your realtor for comparable sales/listings information to help you determine value. Examine the expenses that the property generates very thoroughly. Taxes, insurance and utility figures are easy to verify by getting receipts from the seller. Things that are not so easy to verify are regular maintenance items. Some sellers will have you believe that there is no regular maintenance costs just to bolster their bottom line and get a higher sale price. Do not fall for this. Every building, regardless pf the number of units has regular upkeep. These are a few pointers to help you in your quest for an income-producing apartment building.

I believe as do others, that income-producing real estate is an excellent path to creating wealth. Why? Because someone else is paying your mortgage and you collect the equity down the road when you sell. It is an amazingly simple concept that really works.

Come back for more next week, if you need help or have any questions email us at chrisandsue@royallepage.ca

More on Investment Properties!

property-investment-6I could write a long column about the various types of investment properties but instead I’ll discuss a fairly common and attainable investment for most people – a multiple unit apartment building.  Traditionally, these types of investment properties have fared well in the market compared with commercial, industrial and office buildings. Banks like to finance apartment deals and can be very aggressive with their lending policies because, unlike the other properties, vacancy rates are traditionally low and yields are reasonable. Furthermore, in less-than-robust economic times these properties will stay fairly full while still providing adequate investment yields. As one banker told me, “People have to live somewhere.” Here are some factors to consider when investigating the purchase of an apartment building:

Rental Location

As with most homebuyer, quality tenants look for a location that is accessible to amenities such as transit, schools, work and shopping. Ask yourself what kind of tenant you want to attract and then look for a location to suit.

Deferred maintenance

Astute realtors who understand investment real estate will tell you to never fall in love with bricks and mortar – it is cash flow that counts. This may be acceptable as a general buying principle however when you’ve found a property to buy it is very important to look at the bricks and mortar to ensure that the property has been maintained. What good is a building that provides a decent return if you have to walk in and replace a roof or furnaces or windows or upgrade the electrical? Hire a really good inspector to look at the building. In some cases, you may wish to hire a series of qualified experts. Whatever you do, do not go cheap on a building inspection, it will come back to haunt you. Trust me on this.

Make sure to come back next week for part 2 including Market Rents, Vacancy and Income & Expenses. If you have any questions please email us at chrisandsue@royallepage.ca

 

What is Investment Real Estate?

What is investment property? You could argue that all real estate is an investment. Whether it’s your principal residence, apartment building or vacant land you own, real estate has historically appreciated over time and provided relatively decent returns. It’s also a pretty safe investment. An income producing property is just what the title describes: real estate that produces an income.  Whether it’s an apartment building, a strip plaza, an office building or just a rental house, I have found that a buyer’s willingness to sign an offer generally comes down to two things: return on investment and risk tolerance. These two principles are directly related. As an investor with a low risk tolerance and the desire to buy a relatively carefree investment will generally accept less of a return on his money. But the investor who is willing to accept more risk will generally be compensated with a greater reward in the long run. Here’s a simple example: There are two strip plazas for sale. They are essentially the same except that one is completely leased and generates a return of eight precent while the other is only 70 percent leased but has the potential to provide an 18 percent return when fully occupied. Purchasing the first deal is a no-brainer. Do your due diligence, put your cash down, and collect your eight percent. The second deal is more complicated. In this deal you are absorbing vacancies, which obviously means the property generates less income and could potentially be more difficult to finance. A likely result is that you will have to put more of your own cash in to the deal from the start. And, in addition to absorbing the vacancies, you will have to factor in leasing commissions and other carrying costs until the balance of the property gets leased up

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Come back for more next week, if you need help or have any questions email us at chrisandsue@royallepage.ca

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A Peak Into Retail Leasing

There are three basic commercial lease categories – retail, office, and industrial – each with their own special circumstances. For this blog I will briefly discuss the retail lease. Retail leasing is mainly driven by location. Several key elements in establishing or growing a business include having a good business plan, proper budget, financing, lay out and space design, leasehold improvements regiments, traffic counts, parking, and proximity to other amenities. Ultimately, your decision to locate in a specific spot boils down to location and whether it can foster success.

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Here are some tips to consider when investigating a location for your business:

  • Look into lease rates for similar properties within the same general trading location. This data will prove very valuable in negotiating with any landlord. Ask your realtor for comparable lease rates
  • Research what allowances the landlord is prepared to offer to “induce” you to sign a lease. A couple of examples of inducements would be to negotiate a rent-free period to cover some of your costs in building out (or converting) the space for your business use. In some cases landlords will offer cash inducements for leaseholds. For example, if you spent $5000 in flooring to upgrade the space, it would not be unreasonable to negotiate for a cash allowance to cover part or all of the cost
  • Hire a professional to help you find a location and negotiate a lease. Look for an experienced agent who regularly practices commercial leasing. As a smart person once said, “The only thing more expensive that hiring a professional is hiring an amateur”
  • Finally insist that any Offer to Lease you sign contains a condition allowing your lawyers to review the terms in the landlords lease.

These are just some tips to get the process started. Do some of your own research, hire a good lawyer, and contact a knowledgeable commercial realtor. With all the right pieces in place your life will be a lot easier and your business will have a greater chance of prospering.

Come back for more next week, if you need help or have any questions email us at chrisandsue@royallepage.ca

An Introduction To Commercial Leasing: Commercial Leasing Made Easy

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Commercial Leasing can be complex and difficult to explain without going into great detail. A commercial lease is a binding contract between a tenant and a landlord. The terms negotiated today will bind both parties for the entire lease term – be it one year or ten years. Commercial leases are not standard. A lease can differ quite dramatically from one property owner to the next. More sophisticated landlords, like mall owners for example, utilize longer and more complicated leases. Owners of smaller buildings are often the opposite, preferring to keep the paperwork simple. There are different leases for different types of business uses. For example, retail leases will incorporate different language than industrial leases and an office lease will utilize specific clauses that would not pertain to a retail user.  Most commercial leasing is divided into two componentsnet rent and additional rent (or T.M.I.). Net rent is the basic price per square foot that is paid to the landlord for the premises. Additional rent is paid to cover the landlords operating costs for the premises and can include realty taxes, building insurance, maintenance of the property, common area utilities, a lease administration fee, etc. Unlike residential leases, commercial leases are mainly carefree to the landlord. In other words, commercial tenants pay for virtually all costs the landlord incurs in the operating and maintain the property and these expenses are apportioned to each tenant on a per square foot basis.

 

More on Commercial Leasing next week, if you need help or have any questions email us at chrisandsue@royallepage.ca