Saturday, May 26, 2007
A niche market that never seems to slow down.
Many of us have fond childhood memories of dad loading up the station wagon or van and heading out of town for a long week-end.
For some the destination was a lakeside campsite, but for many it was the summer cottage or cabin by the lake. For others it was a Winter activity that brought with it the long-anticipated excitement of driving up to the favourite mountain and throwing open the doors to a modest old ski lodge that one could call home for the next week or so. But unless one was lucky enough to inherit dad's cabin, the thought of purchasing one piece of recreational paradise can be daunting for most young families.
With prices still on the rise and demand for vacation homes brisk notwithstanding the general slowdown in real estate, there are a few bright lights for homeowners looking to pick up a second home or recreational property.
The Canadian Mortgage And Housing Corporation has instituted recently a new program that will provide Homeowner Mortgage Loan Insurance for borrowers with more than one residential property. This means that Purchasers can now obtain a mortgage insured by the Canadian Mortgage And Housing Corporation on a recreational property with as little as five percent down.
Traditionally getting institutional financing for a vacation property was a challenge, because lenders typically based their lending decisions on the risk of reselling this type of properties. As many second homes are located outside urban centers and, more often than not, in remote rural or coastal areas they might have limited resale potential, which from a mortgaging point of view increased the risk of financing. To mitigate this risk, lenders would require borrowers to put up more money down - as much as thirty-five percent or more, in fact. Even well-known and popular destinations such as Whistler, British Columbia required a minimum of twenty-five percent downpayment.
But lifestyles are changing and these changes affect decisions that real estate consumers make regarding how and where to live. So the Canadian Mortgage And Housing Corporation has made a move to put vacation properties within reach of more people. With a constant and steady increase in demand for this type of properties, the Canadian Mortgage And Housing Corporation has determined that the market is such that it is willing to insure lenders against potential losses. This is welcome news for those who have been longing to get a recreational property but did not want to wait until retirement to come up with the downpayment.
All Canadian Mortgage And Housing Corporation's products are permitted to be used with the Homeowner Mortgage Loan Insurance and since most major institutional lenders already have their own recreational property mortgage products, consumers have the flexibility to choose the type of financing that is right for them.
However, as with most types of financing, there are some key limitations that is important to be clear on. The purpose of the Homeowner Mortgage Loan Insurance is to make it more feasible for consumers to purchase a second home. It is important to distinguish between a second home and a rental property. The Homeowner Mortgage Loan Insurance is not intended to allow an investor to purchase a rental property with five percent down. The guideline states that at initiation the real capital asset that secures a mortgage insured by Canadian Mortgage And Housing Corporation must be intended for occupancy at some point during the calendar year by the borrower or a relative of the borrower on a rent-free basis. If a rental income is anticipated from the property at a future date, it will not be calculated for the purpose of assisting the Purchaser to qualify for the loan.
The location of the property is not restricted to major resorts or popular vacation spots, but there are some general requirements that apply as well. For instance, the recreational property must be suitable for and available for year-round occupancy. Properties that are constructed for seasonal use or have seasonal access are not eligible. As such, vacation cottages located on an island must have year-round bridge or ferry access. And finally, timeshare interests, life leases and properties in rental pools are not eligible.
The Canadian Mortgage And Housing Corporation's website can be found at http://www.cmhc.ca/
Real Estate Chronicle
Labels: REAL ESTATE
Wednesday, May 23, 2007
A Contract To Enter Into A Contract Is Unenforceable
There is no such a thing in Real Estate as agreeing now to agree at a later date.
There is no grey area in Real Estate, which one can find otherwise in commerce and trade. For instance, letter of intents that are widely used prior and during negotiations between corporations or between individuals and corporations have no place whatsoever in the world of real estate, where the only subject matter of trade is the exchange of titled interests in land for money. One cannot stipulate today to contract out in the future and hope the stipulation will be upheld, unless such an agreement is contained in a contract drafted and accepted today and is in the form of an option.
In essence, a stipulation to contract out at a later date is a void contract, meaning that such a stipulation does not exist under the law of real estate because no contract ever existed in the first place. Therefore the parties to the stipulation must be returned to their original bargaining positions as far as it is practically possible. This is also the case in the situation where both parties want the stipulation to continue - an impossibility since no contract exists between them in the present tense.
This principle was recently reaffirmed in the Supreme Court of British Columbia in a case involving a private transaction between a prospective Purchaser and a prospective Seller. In this case there was a document executed between the parties, which clearly set out the legal description of the real property to be exchanged as well as the purchase price - CAD 580,000. The document also set out that there would be a deposit of $10,000 held by the purchaser's lawyer in trust, that the deposit would be applied towards the purchase price and that it would be returned to the purchaser if the sale failed to complete.
Although on a cursory examination this document closely resembled a Contract Of Purchase And Sale there was, however, a fundamental element entirely missing: the date of completion. As no completion date had yet been agreed upon, a paragraph was inserted in its lieu that read as follows:
"The Contract of Purchase and Sale of the Property will be prepared by the Purchaser's lawyers with terms & conditions, and the date of completion of the Property to be agreed by the Vendor and the Purchaser".
Later on a completion date was actually agreed upon by the parties, stipulated to be March 3, 2005. On February 24, the solicitor for the Purchaser forwarded to the solicitor for the Vendor the necessary documents to complete the transfer. However, on March 3, 2005, the completion date set out in the document, the vendor declined to complete, on the grounds that there was only an agreement to agree in the future to the purchase and sale of the subject property.
The Court agreed with the Vendor. In reaching his conclusion, the Trial Judge opined as follows:
"Here the wording of the executed document is clear. The parties have said that a contract will be prepared with terms and conditions to be agreed by the vendor and the purchaser. "To be agreed" means some further agreement is necessary in the future. [...] this is a circumstance where "the execution of the further contract is a condition or term of the bargain".
In other words, where the parties have stated that the terms and conditions are to be agreed, it cannot be said that the document is the mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through.
The deposit was ordered reimbursed to the Purchaser forthwith.
Labels: REAL ESTATE
Friday, May 11, 2007
Hazardous Trees And The Duty To Inspect
A recent Court case based on the Common Law concept of private nuisance clarifies the duty of real property owners to have trees on their properties routinely inspected.
Trees can be a nuisance.
Common Law recognizes two types of nuisance: public nuisance and private nuisance. A public nuisance is defined as an unlawful act or omission, which endangers the safety or comfort of the public. Examples of public nuisance include obstructing a highway, keeping a common gaming house or selling unwholesome provisions. On the other hand, there are two types of private nuisance. The first involves any wrongful disturbance of an easement or other right in respect of land. The second, by far the most common, involves the act of wrongfully causing or allowing the escape of injurious things onto another person's land such as, for example, water, smoke, smells, fumes, gas, noise, heat, electricity, vibrations, animals and vegetation.
A shade tree that is an object of beauty to the owner of the property upon which the tree stands, may be nothing but a nuisance to the next door neighbour. The neighbour may have to contend with falling leaves, overhanging branches, roots that extend into his drains or the wind-driven fall of the tree onto his property. Since the planting and growth of a tree is a natural use of one's property, the question revolves around the type of remedies that are available to the adjoining neighbour to combat these nuisances. Negligence may come to the neighbour's aid, but the law of nuisance is the principal remedy. Nuisance in this sense refers to a use of one's property, which causes material discomfort and annoyance for the ordinary purposes of life, to a neighbour or to his property.
The most troublesome source of damage is the tree that falls onto the neighbour's home. In one case a windstorm which evidence indicated could occur once every two years, broke off the top portion of a tree approximately thirty-five feet above the ground, which fell on the roof of the adjoining home. While the break occurred because of advanced internal decay and ant-tunnelling, there was no reason for the tree owner to know that the tree was decayed or dangerous and should have been cut down. There was evidence that the neighbour enjoyed the shade provided by the tree which was very close to the property line, and that the neighbourhood in which the two properties were located was well treed and homes were normally built among the trees.
The Judge decided that there was no liability because the growing of the tree was a natural use of the property.
A recent decision, however, examines a different question: whether Common Law imposes a duty on property owners to have trees on their land routinely inspected by an expert to determine whether any of them constitute hazards. This particular action was based on damages as a result of a tree falling on a wharf. The tree was approximately 125 to 150 years old, approximately 180ft. long and approximately 4ft. in diameter. The tree fell because it suffered from a disease, which causes root and trunk rot. There was no wind or other external force that caused the tree to fall. The defendant did not know that the tree was a hazard or that it was under distress of any sort. He also did not have the expertise to recognize a tree that was in distress. He was able to see the top of the tree from his home because eagles perched on it. He did not think that the tree was lacking in foliage.
From a practical point of view, the only way the defendant could have known about the hazardous tree would have been to have his property inspected by an expert. No experts had inspected the property prior to the accident. In fact, the tree grew at the top of a steep, forested slope and, while it was clearly visible from the neighbour's house, the defendant was unaware of the condition of the tree also because it was difficult to access.
On crashing down on the wharf, the fallen tree caused CAD $35,000 in damages and the waterfront owner lost his dock.
There was a difference of opinion between the expert witnesses called by each party as to whether the amount of foliage, the discoloured and raised bark and a ten-degree lean towards the dock were evidence enough of a hazardous tree. However, they did agree that only an expert would have been able to determine that the tree was diseased.
On examining the case law brought forth by the lawyers, the Judge found no duty on the part of property owners of relatively inaccessible, densely forested land to hire experts to routinely inspect trees. In fact, the Judge commented as follows:
"In my view the law does not impose on landowners in British Columbia a duty to hire an expert to routinely inspect their forested land. Reasonableness requires that the landowners pay attention to trees that line busy roads, or are adjacent to homes or areas where there is frequent human traffic. Reasonableness also requires some action to be taken if signs of decay become visible to the ordinary person from a routinely accessible vantage point. It is not reasonable to require landowners to retain an inspector to scale steep slopes and wade through dense underbrush in order to locate signs of decay."
Whereas the instant case was therefore dismissed, the Judge further commented that landowners "[...] who live next to busy roads or homes or areas used by the public, and who have reasonable access to the trees on their properties, have a duty at Law to inspect those trees for signs of disease that justify obtaining expert advice".
Real Estate Chronicle
Labels: REAL ESTATE
Thursday, May 03, 2007
Real Estate, Wealth Accumulation And The Rise Of Prosperity
When house values increase - especially as dramatically as in recent years - people feel freer to spend from the wealth they have, or the wealth they perceive they have. They may decide to buy a bigger car, to eat out more often, to indulge in electronics or fashionable items, all of which is in most cases financed by their equity. And, strangely enough, people spend their hypothetical riches faster when their houses go up in value than when their stocks do, because they believe that housing gains are more stable.
In response to this greater affluence, the general trend of people is to increase their spending. Conversely, when housing values diminish people cut back spending in a similar way. The general consensus is that a $100 drop in wealth, over time, reduces spending by about $5.00 per year. This suggests, therefore, that weakening housing prices have a mild effect on consumer spending, to the tune of an approximate annualized rate of spending reduction of five percent.
This makes sense, in that economic theory tends to support the fact that rational consumers ought to adjust their long-term spending in response to changes in their wealth, not the ease in which they can tap it. But there is another element equally important to be factored into the determination of the level of prosperity: how well debtors manage their debt. For instance, the Mortgage Bankers Association (MBA) reports that seasonally adjusted index of mortgage application activity, which includes both refinance and purchase loans, increased 3.6 percent to 575.6 for the week ended December 29, 2006. The index stood at 555.8 the previous week, which was its lowest level since early August. Demand for home refinancing loans also strengthened as the MBA's seasonally adjusted index of refinancing applications increased 2.2 percent to 1,640.4. In 2005 the index stood at 1,363.2.
This evidence would suggest that consumers are using more of their home equity to pay off other borrowings such as credit card debts, in light also of the fact that mortgage debt in both the United States and Canada carries considerable tax advantages. This is another indication that, contrary to the forecast of some analysts, consumers manage their debts prudently, not recklessly.
The equilibrium in the issue as to whether consumers ought to treat their housing wealth as a nest egg or as a credit card - that is whether they should save rather than spend - is to be found in the ratio of spending to personal income. Surveys have shown that this ratio has peaked at more than fifty percent in 2005, meaning that people spent more than fifty percent of their disposable income using mortgage-equity withdrawal. This in turn would indicate that a slowing of mortgage-equity withdrawal could drag down spending faster than anticipated. The stakes here are high, because the behaviour of consumers will largely determine whether North-American economies will tumble into a recession or will merely slow down. This is so because in North America housing wealth has a bigger influence on consumption than other financial assets such as stocks and bonds.
Which in turn means, once again, that the level of prosperity is affected by the degree of spending proximately derived from the real capital wealth of consumers.
Labels: REAL ESTATE ECONOMICS