June 8th - 2009

Do your homework ahead of time to protect the deal

Over-leveraged properties can be difficult to sell. If the market won’t support the home’s asking price, it puts the whole transaction in jeopardy – including commission.

Over-leveraged properties can be difficult to sell. If the market won’t support the home’s asking price, it puts the whole transaction in jeopardy – including commission. In today’s economy, with many houses in this situation, REALTORS® need to take extra care to verify the amount of equity available before taking a listing. Buyer representatives should also do their financial homework before presenting an offer.

In an attempt to protect their commission, some members have resorted to creating and adding new clauses to the Agreement of Purchase Sale (APS), which may cause more concerns, especially since the brokerages are not parties to the APS. The APS is not the place to deal with changes to commission or method of payment. In fact, Interpretation 20.1 of Article 20 - RESPECTING CONTRACTUAL RELATIONSHIPS of the REALTOR® Code of Ethics and Standards of Business Practice states: “A REALTOR®, when negotiating on behalf of a Buyer, shall not use the terms of an offer to Purchase to modify the Listing broker's offer of Compensation to co-operating brokers, nor make the submission of an offer to Purchase contingent on the Listing broker's agreement to modify the offer of Compensation.” As well, the MLS® Rules and Regulations of most Ontario real estate boards contain a similar provision.

The best way to ensure there is enough equity in the home to cover your commission is to verify financial details ahead of time. When you meet your sellers, go over their financial position and ask some basic questions and confirm their answers. Here are a few points to raise:

  • How many mortgages/charges/liens do you have?
  • Do you have the last statements?
  • Will you sign these authorizations for me to get more information (such as the OREA Form 261 – Mortgage Verification)?
  • Do you have any judgments filed against you? I will do a search at the Sheriff's office just to make sure.
  • Are there any other encumbrances?
  • If you did some renovations, were the bills paid? I will check some of that with Teranet, as will any buyers.
  • How about municipal taxes and condo fees? Can I see the last bills? What are your utility costs, and are there any rentals? Can I see your last bills?
  • Based on all of that, you could expect to receive the amounts I will show you in my Sellers' Work Sheet as being your net equity. Of course, those numbers will change if your financial position changes, so please keep me informed.
  • Do you have sufficient other readily available funds to deal with any negative position in the equity in your property?

Buyer representatives may also want to insert a clause in the offer to help deal with any shortfall. Here is a typical one:

“The Seller hereby acknowledges that the real property is subject to registered encumbrances that may, given the Seller’s obligation to pay commissions and other related closing costs, exceed the available proceeds of sale from this transaction. This Offer shall, therefore, be conditional upon the Seller obtaining the written approval of all Chargees/Mortgagees and other registered encumbrancers as to the final acceptance of this Offer and their agreement to discharge their encumbrances without payment in the aggregate of more than the available proceeds from this transaction. Unless the Seller gives notice in writing delivered to the Buyer or to the Buyer’s address as hereinafter indicated not later than ______ p.m. on the _______ day of ___________, 20____, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction. This condition is included for the benefit of the Seller and may be waived at the Seller’s sole option by notice in writing to the Buyer within the time period stated herein.”(OREA Standard Clause- Mort-8 Condition – Over-leveraged Property.

In today’s market, overleveraged properties are all too common. Knowledge is your best defence to deal with a shortfall situation before it arises. OREA has several standard forms and clauses pertaining to overleveraged properties as well as power of sale properties. You can also learn about dealing with overleveraged properties in OREA’s continuing education seminar called Power of Sale. For more information visit www.orea.com.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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