I am in a unique position – as well as being the editor and content manager of Real Estate Weekly newspaper and REW.ca, I am also a would-be Vancouver real estate investor.
I am in the fortunate position of having a good down payment from inheritance. And of course, because of my job, I have great contacts to help me land the perfect rental unit and find a great tenant. Otherwise, I am subject to the same highs, lows and vagaries of the property-purchasing process as all our readers.
Here I chronicle my journey and share all the lessons I learn along the way. I promise not to hold anything back, although names will be changed for anonymity!
Last time, I told you that in my hunt for a cash-flowing rental unit in Vancouver (the holy grail), I’d had an offer accepted on a downtown studio. That offer had no subjects – which I knew was a significant risk, but I felt it was a calculated one and besides, it was unavoidable to secure the property.
Still, despite my mortgage broker Kevin’s prior warnings, and my own decent professional knowledge of how it all works, I guess I didn’t quite realize the extent of the risk I was taking. This was a big lesson learned in the process.
As I mentioned in part one, I was already pre-approved for a mortgage, so I was pretty sure I was going to be OK with not having a financing subject on the offer. I knew that the lender would need to appraise that particular property and approve the mortgage based on the appraised price, but I didn’t feel like I had overpaid for it, so I figured that would not be a problem. So, having informed Kevin of my accepted subject-free offer, and of the quick closing date, it was up to him to get the property appraised by the lender (at my cost, of course – around $180) so the mortgage could be approved.
But Kevin was not pleased with me for failing to include a financing subject. He told me that a lot of lenders these days are cautious about the Vancouver market, especially since those lenders tend to be Toronto-based. He also informed me that many are reluctant to lend on a unit that is smaller than 500 square feet in size (this one is a 496-square-foot studio). This was news to me – I knew that below 500 square feet I would need a down payment of more than 30 per cent, but I had 34 per cent so I figured that was all good.
Kevin’s colleague, we’ll call her Jill, who was doing most of the work on my case, could only find one lender that was OK with the size – so we booked the appraisal for a few days later. If that particular lender has any problem with the property, Jill told me, then I could be in real trouble. I’d be on the hook for the purchase but have not enough financing, or none at all. If this appraisal comes back below the agreed purchase price and the lender will only lend me the smaller amount, I will be obliged to come up with the difference – except that all my money is already sunk into the deposit. Worse, if I can’t find that extra money, or the lender for some reason refuses to lend on that unit at all, I could even have to pull out of the purchase. That would mean I would totally lose my whole deposit, which is the entire 34 per cent down payment and every cent of my inheritance (and my ability to retire, ever).
While waiting nervously for the results of the appraisal, I asked around for advice, trying to mitigate the risks of the worst-case scenario. What about assigning the purchase contract to another buyer, if the worst happens? After all, we hear about “shadow flipping” all the time, right? My lawyer and agent both pointed out that with the quick closing date only two weeks away, it was highly unlikely we’d find a new buyer in time. Other lenders, then, perhaps? My agent Bob said that it was possible, that maybe the mortgage broker has a preferred rate with the particular lender they’re talking to, and there could still be other more flexible lenders out there. So we’d have to see.
And a few days later… phew.
Jill emailed to say the lender had come back and, fortunately, appraised the unit at the exact price that I had offered on it. What an incredible relief – and a very sharp lesson learned. (In fact, I even told well-known local journalist Frances Bula about it, and she was intrigued, which may have partly prompted her to write this very interesting Globe and Mail story this week.)
So, with the lender on board, the mortgage documents were signed – and, to add to my good luck, the rate even dropped another 0.1 per cent to 2.59 per cent, and we were in time to take advantage of that. The documents are now with the lawyer and I’ll be signing everything at the end of the week.
Watch this space for how closing and possession goes!