When Do We Start Working On Your File
Our team is available at any time to answer any of your questions or concerns. Many of your questions will be answered by the material on our website. We actually start working on your file once we have received mortgage instructions from your lender and real estate instructions from the realtor and all conditions are removed. Sometimes, clients will ask us to start working on their documents prior to all three occurrences as they can see the closing date is fast approaching.
Far too often this results in extra work and increased costs. If we prepare the mortgage documents prior to receiving final mortgage instructions and the final instructions differ slightly from the initial documents, we will have to prepare all the documents a second time. If the terms of the Real Estate Puchase Contract (REPC) are changed just before real estate instructions are sent out by the realtor and we have already prepared some of the documents, we will charge extra fees as we will have to prepare all the documents a second time. Make sure you leave enough time between finalizing your REPC and your mortgage and the actual completion date so we can finish our work.
Real Estate Purchase Contract
Turning to the Real Estate Purchase Contract (REPC), make sure you understand what it says and the timelines involved. Are there any outstanding conditions such as a house inspection or mortgage approval? We are reluctant to start working on your file if there are any outstanding conditions. If these conditions are not removed, the deal will terminate. If we have started working on the file, you will then receive an invoice from our office for a deal that does not happen.
Disclosure by the Seller
Please note that while the seller is obligated to provide certain disclosures, this obligation is limited. The obligation of the seller is to disclose hidden or latent defects known to them. These are defects that you could not discover through an ordinary inspection. This would include blocked sewer lines or cracked basement foundations that are hidden behind basement walls. There is no obligation to disclose defects or deficiencies that are visible and simply not noticed by you. A house inspector can discover items you might miss. Also, there is no obligation to disclose building code deficiencies. More importantly, there is no obligation for the seller to remedy any building code deficiencies.
Deficiencies, Repairs, Holdbacks & All That Stuff
The inspection showed repairs are necessary to the furnace or hot water tank. Or perhaps the Real Property Report shows a deck with a height above ground of more than 0.61 metres (24 inches) with no railings, contrary to the building code. The seller agrees to provide you with a $1,000 credit on closing so you can make the repairs yourself and ensure they are done properly and add any extra enhancements you desire. This credit actually reduces the purchase price by $1,000. Your lender must be notified of this change in the purchase price. This could reduce the amount of your mortgage. If you are using a 90% mortgage, the amount of the mortgage will be reduced by $900. You will only be left with $100 to complete $1,000 worth of repairs. Instead, you decide to have the seller complete these repairs. Since the seller is leaving the property, the seller has no incentive to ensure the repairs are done to any particular level of professionalism. Also, the seller is in a rush to get the repairs done before the closing date. This leaves no room for you to add any enhancements to the repair service. Some people attempt to solve this by having a holdback that will only be released upon satisfactory completion of the agreed repairs. Unfortunately, there can be substantial differences of opinion as to the definition of adequate work. Holdbacks work best when there is a black and white issue with no question of quality or level of service.
So how can you make sure the required repairs are done to your level of satisfaction without “reducing the purchase price” which leads to a reduction in your mortgage? Our preferred alternative is to have the lawyer pay the agreed amount directly to a third party. For example, the $1,000 required for furnace repairs will be paid directly to the furnace repair company of your choice on closing. Or, the $1,000 is paid directly to the building contractor or lumber supply company on closing.
During the course of a real estate negotiation, you may hear someone suggest using a holdback to resolve an issue between the parties. One example is where a deficiency is noted during a home inspection. The buyer may ask the seller to make the appropriate repairs. However, to ensure the seller is sufficiently motivated to make such repairs, the buyer may propose holding back a portion of the sale proceeds until the repair is completed. In general, we recommend avoiding such holdback arrangements. Although they are intended to resolve a situation, they may in fact complicate the real estate transaction. The complication arises out of the following.
- The seller will want to make any repairs at the lowest cost and with the least amount of effort as possible.
- Once repairs are made, there may be a dispute between the buyer and seller with respect to whether or not the repairs were made to the standard contemplated by the parties at the time the contract was signed.
- If the parties cannot agree on whether or not a repair has or has not been made, they will expend additional time, energy, and money arguing over what may have been a relatively minor issue to begin with.
- The wording of holdback clauses is tricky. Extra wording is required to cover all the different outcomes such as a failure to complete the repairs before the completion date and the consequences of this.
Holdbacks can be problematic. There can often be disagreements as to whether a holdback is warranted and on what terms and conditions. If there are holdbacks contemplated in your case, please ensure you understand the details and if there are any questions, either contact us directly or have your realtor talk to us so that we have a complete understanding of the issues.
If you are considering seeking compensating from the seller for repairs identified during a home inspection, or for any other reason, here are some suggestions to more effectively deal with the situation.
- Simply reduce the purchase price. By doing so, you will minimize the potential for delays in completing your purchase.
- If you insist on a cash-back arrangement, we suggest the contract contain provisions which require that the cash-back amount be held in a lawyer’s trust account with such funds being released only upon receipt of invoices evidencing that the repairs for which the cash was held back have been completed. Additionally, all payments from the lawyer’s trust account should be made directly to the contractor performing the work to mitigate any lender concerns that a buyer is obtaining a cash kickback to which they should not be entitled.
- Rather than a cash-back, have the amount in question paid directly to a renovation company, supplier or contractor.
If a deficiency is noted which requires repair, it is far simpler to negotiate a reduction in the purchase price or provide payment to a third party and make the the repairs yourself. Please note, this can lead to complications for you such as a reduction in your mortgage eligibility. This avoids disputes with respect to whether or not a repair has been adequately completed and gives you full control over the manner in which a repair is completed.
Changing the Purchase Price
Be aware of unintentionally changing the purchase price. This can happen in several different ways. For example, if the seller agrees to provide a “credit of $1,000.00” to repair some deficiency discovered by the home inspector, this is a change in the purchase price. The price has now been reduced by $1,000.00. If we are acting for your lender (and most times we are), we must notify your lender of this reduction in the purchase price. That may trigger the lender to reduce the amount of your mortgage. If your mortgage involves mortgage insurance, the mortgage insurance premium can increase which can also reduce the amount of mortgage money available. For example, if you are obtaining a 95% mortgage and the seller gave you a credit of $1,000, the amount of your mortgage must be reduced by $950. Three consequences can arise:
- The cash required from you to close the deal is essentially the same even though the total price has been reduced.
- If we have already prepared the mortgage and must prepare a new one, there will be additional legal fees.
- These changes, if done at the last minute, can delay completion of the purchase.
Your Real Estate Purchase Contract may have conditions attached such as financing or inspection. This allows you an opportunity to make sure your mortgage approval is in place or have a professional inspect the property before making your final decision to purchase. You must follow up on these conditions. You cannot use these conditions as a reason to cancel the purchase unless you have taken all the steps necessary to complete the condition and the cancellation relates to that particular condition. For example, if you find another house that you like better, you cannot withdraw your application for mortgage funding on the original home and then cancel the purchase on the grounds that you failed to meet the financing condition. Similarly, if you fail to remove the condition regarding inspection, there must be a substantial deficiency shown on the inspection report. You cannot rely on some minor concern simply because you have had second thoughts about purchasing this particular property.
We must verify your identity before we can complete your purchase. This requires the production of at least one valid non-expired government issued photo identification and a second piece of identification bearing the same name. Obviously, the two most popular choices for picture identification are a driver’s license or a passport. If you do not have either, you can obtain a Provincial Identification Card from any registry office. This card looks the same as a driver’s license except it has a different background color and uses the words “Identification Card”. The second piece of identification can be another piece of government issued identification or in most cases a major credit card. If you do not have these forms of identification, please contact us to determine what identification you do have that may be acceptable. The identification required from you is based on Lender requirements and the Law Society of Alberta.