Often times, we as real estate investors get caught up with the idea of a particular strategy rather than the realistic implementation of that strategy. Unfortunately for me, an Agreements For Sale falls into this category. An Agreement For Sale is a delayed closing of a property where the investor will still gain access to the property while the Agreement for Sale takes place.
The reason that I am sharing this strategy with you is so that you don’t get sucked in to the hype when you hear about it, and pay thousands of dollars to get educated on it like I did. Really you may use this strategy one time in 100 deals or you may never use this strategy in your entire real estate investing career.
Let me give you a little history of where the Agreement for Sale came in. In the 70s and particularily in the 80s you would have interest rates that were in the double digits, as high as 22%. Makes the sub 3% money look extremely good. It would be difficult for new buyers to qualify for these types of interest rates, so sellers would do an agreement for sale in order to help facilitate the close of the property. In the 70’s there were less lenders available who would be willing to do mortgages. The seller would basically give access to the property to the buyer and seller would continue to make mortgage payments, tax payments, and insurance payments but the buyer would pay the seller directly for those costs each month. In Alberta, you do this more easily with what is called a wrap-around mortgage.
Fast forward to an era of low interest rates to time when there just doesn’t seem to be enough properties on the market to satisfy the buyers that are out there, this strategy is not necessarily as useful. Still I know a few investors who have used this strategy – one successfully but mostly it has been used unsuccessfully and I’ll explain why. What happens is that the seller is basically giving you access to the property through a delayed closing in the purchase and sale agreement. You as the buyer have to ensure that the seller continues to make the payments on the mortgage with the money provided, that taxes are continued to be paid, and the insurances continues to be paid, while you are in the property. As the buyer with the Agreement for Sale you might have to contact the tax company, the mortgage company, and the insurance company, to ensure that everything is still being paid. You also have to ensure that when you are ready to buy the property from the seller, taking on yopur own financing from a financial insitution, that the seller is going to be available in order to do it. Hopefully, they have not moved to another province or country.
In order to maintain control of the property some investors do is have the seller sign a Power of Attorney related directly to the house. By doing that, they are able to continue the transaction without the seller. The problem is that there has been a lot of fraud associated with powers of attorney and lawyers are reluctant to close on any transaction with only a power of attorney. (Sample Power of Attorney – Review with Your Own Lawyer is a Condition for the Uee of This Agreement)
In addition, to this the complexity increases if you had to invest money in this property. So let’s say you have to put $20,000 into the property in order to bring it up to the standard that you would want to rent it out. How do you secure that money? You might might also have to do a second mortgage or lien on the property to ensure that you have the proper security. What happens if you have to take the tenants to the Landlord Tenant Board? You need to show ownership interest in the property. Now you need an additional property management agreement that you would use with the seller to show you have the authority to manage the property.
So in order to accomplish this transaction you would need to be agreement for sale, power of attorney, property management agreement, and if you were to invest any money in the property – a mortgage against the property. This adds a lot of different layers of complexity and a lots of different points of failure. It is also why I don’t recommend this strategy for beginners or even those with some expertise. (Sample Residential Mortgage and Property Management Agreement (ON) – Review with Your Own Lawyer is a Condition for the Uee of This Agreement)
But at least you understand the components of how this works and what you need to do if you wanted to do an agreement for sale.