Tuesday, December 10, 2013

Power of Sale - Basics of Buying a 'POS' Commercial Property (Ontario, Canada Only)

In recent years, Ontario has generally seen an increase in this type of property sale - that is a sale based on a mortgage default. Although they can be an excellent opportunity under the right circumstances (aka – “great deal”), you should proceed with ‘eyes wide open’ as you negotiate a purchase agreement.   
First let’s consider what you will be accepting/assuming in buying the property:
·         Buyer accepts it in AS IS condition (with no representations/warranties)
·         Buyer assumes all municipal violations (work orders/deficiency notices)
·         Discharge of previous mortgages not required by the Seller
·         Buyer has the RIGHT TO REDEEM right up until closing
·         Fixtures/Chattels accepted in AS IS WHERE IS condition
·         No representations on ownership of Fixtures/Chattels
·         Tenants on the property and the status of their leases/occupancy rights
·         Limited documented history on the property (ie. HVAC system, roof etc.)
All of it needs to be considered in your evaluating the risk in acquiring the property. But there are certain measures, which can you can take to better protect yourself as you attempt to negotiate a purchase.
·         Insert a Building Inspection condition to review/examine the property
·         Order a title search to examine any title issues & request any municipal violations as part of that review (do it within the conditional period)
·         Insert a mortgage condition, if financing’s needed, with a tight timeline
·         Request access to any tenants, to determine their viability and assure them of your status as ‘future landlord’
Realistically some or all of the above, can be problematic in trying to strike a deal - especially if it is an active/highly competitive property. But if presented reasonably within the offer  - and include tight conditional timelines, quick closing dates, substantial deposits, and the financial resolution the Seller is looking for – it can be accomplished. We like to say - a short conditional Due Diligence period, is better than not at all!
Again, review your Purchase Agreement with your lawyer and make sure you understand the implications of the POS Schedule attached to it. In addition, seek out Experienced Commercial Brokers in your area, who have an established record on the ‘Buy Side’ of POS properties.

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