Cash Backs and/or Credits on Closing

This refers to those vendor incentives that may be included in the Offer to Purchase such as “complete interior paint work prior to closing to the purchaser’s satisfaction.  If not completed prior to the closing date, the purchaser shall receive a $5,000 credit towards the purchase price on closing”. 

You might have heard of this as a great purchase strategy to try and maximize your borrowing against the value of property and reduce your down payment amount. 

When the work is completed, this clause is fine but in most cases the work doesn’t get completed and you, the purchaser, are expecting a credit on closing.  These used to be perfectly acceptable by lenders but NOT any more unfortunately!   If this is written into the Purchase Agreement and the work is not completed, then the lender views this as a reduction in the property purchase price.  So if the original purchase price was $200,000 with a $5,000 credit, then as far as the lender is concerned if the work is not completed then the “adjusted purchase price” is now $195,000.      They will then only provide an approval based on say 80% of the “adjusted purchase price”.

So if you obtain a mortgage approval based on the actual purchase price, then it could all change just before closing to the new “adjusted purchase price”.    Why?  Well, just before closing, your real estate lawyer will send what we call an “interim report” or “statement of disbursements” to the lender.  If any reduction or “credit on closing” is mentioned in this report, it will be deemed to be a reduction in the purchase price.  This refers to any incentive or credit that the vendor is providing to the purchaser whether it is work completed or a “cash refund”.

The bottom-line is that if the work is not completed, and a credit on the purchase price is disclosed prior to funding, the lender will deem the value of the property to be less and subsequently reduce the purchase price and therefore the mortgage amount accordingly.  This involves completely re-doing and underwriting the deal and will delay closing.

My recommendation: do not use this tactic on the Purchase Agreement or part of the closing process via your real estate lawyer unless you are prepared to have the purchase price and therefore mortgage amount reduced.

Why Invest in Real Estate?

Purchasing and investing in real estate has always been attractive for those that are looking to generate additional income and benefit from the wealth created with increases in property values over time.   Is investing in real estate right for you?

The Attraction

Diversification is key to anyone’s investment portfolio whether you are talking about mutual funds, TFSA’s, stocks, bonds, RESP’s, RRSP’s etc.   Diversification helps balance risk and provides a level of confidence that your investments are still going to be there when you are ready to liquidate them, such as at retirement etc.  Some would consider adding real estate, other than their principal home, to their portfolio to ensure full diversification.

A real estate investor can still use a relatively small amount of down payment or capital to purchase a property, and this can provide an attractive return on investment (or ROI).    This return is generated from a combination of monthly income and property value increases.

The monthly income is generated by taking the rent collected from tenant and then deducting all the expenses.    To ensure that there is a positive cash flow, smart real estate investors work with a mortgage expert and real estate agent that can assist with the analysis. 

Equity is built in the property by way of appreciation of value over time as well as with each mortgage payment. 

With mortgage interest rates at record lows and an abundance of potential tenants in many areas, there is a high demand for real estate investors to take the plunge.

Here’s another way to look at it as well… real estate investment is also beneficial for those who have a hard time saving money, as it can act as a sort of forced savings account. Essentially, as you pay down the principal of a mortgage, you're reducing debt and building equity.  Then, when you go to sell the property, the money you receive back from the sale is considered your “forced savings”.

So What is the Risk?

Like any investment, there is risk and it is possible to lose money in real estate, albeit relatively low.  Real estate has shown to appreciate steadily over the long term, and has for the past 25 years, so the chances of someone losing money on a purchase are pretty slim.  However, keep in mind that doing your due diligence before an actual purchase is key… you must take into consideration certain factors when choosing a property, such as desirability of location and stability of the market in that area. 

Financing Options and How do I get started?

One more attraction is the fact that it really only requires part of your time, is flexible, and the skills can be learned.  The process is relatively easy, and I’ll walk you thru that step by step.  The first step is to build your Real Estate Investment Plan which would include talking about your acquisition and exit strategies.  We will build a Power Team around you that provides you with expert advice and opportunities that you can trust.