|CMA (Comparative Market Analysis)||Estimating the market value of a property by analyzing recently sold comparable properties.|
|‘As Is’ clause||When a seller wants to sell a property in its present condition and is unwilling to make any repairs.|
|ARV (After Repair Value)||Estimated value of a property after renovation and repair.|
|POA (Power of Attorney)||Giving someone the legal authority to manage your real estate or finances.|
|CCIM (Certified commercial investment member)||Recognised experts in commercial and investment real-estate.|
|CPM (Certified Property Manager)||Recognised experts in property management.|
|JT (Joint Tenancy)||A legal arrangement where two or more persons or entities own an asset and have an equal share in the same.|
|TIC (Tenancy in Common)||A shared ownership structure where two or more people can share equal or unequal ownership of a property.|
|CAC (Central Air-Conditioning)||Indicates that the entire property is air-cooled using a centralized system.|
|CRE (Commercial Real Estate)||Real estate meant for commercial activities and revenue generation.|
|COI (Certificate of Insurance)||A document that acts as proof of an insurance policy and outlines key details of the policy.|
|Cap Rate||Calculation of the rate of return on an investment property based on the income generated by it and current value of the property.|
|LTV (Loan to Value)||Ratio of mortgage amount to the appraised value of the property.|
|GDS (Gross Debt Service)||Proportion of housing expenses to household income.|
|TDS (Total Debt Service)||Proportion of sum of debt and housing expenses to household income.|
|Escrow||A neutral third party holds funds or important documents until all the conditions of the agreement have been met during a real estate transaction.|
|Ontario Agreement of Purchase and Sale||A legally binding document of the real real estate transaction between the buyer and the seller in the province of Ontario.|
|CMHC (Canada Mortgage and Housing Corporation)||Canada’s national housing agency that provides housing support services to homebuyers, governments and the housing industry.|
|CREA (Canadian Real Estate Association)||Canada’s national level association of Real-Estate professionals.|
|MLS (Multiple Listing Service)||Printed or electronic database of properties for sale.|
A comparative market analysis (CMA) can help in estimating the market value of a property and is usually done by local real estate agents. They compare recently sold properties with similar parameters such as neighbourhood, size and age to determine the market value of a particular property.
A CMA is useful to both buyers and sellers. Buyers can make competitive offers based on the CMA, while the sellers can ensure they’re getting the best value for their property. CMA can also help the sellers determine if they could renovate the property to increase its market value. CMA should not be confused with an appraisal as they can only be done by licensed appraisers.
How to do a CMA report in Canada?
As a general practice, when a buyer submits an offer on a property, certain conditions are expected to be met before the sale is finalized. However, having an ‘as is’ clause means that the seller is selling the property in its present condition and is not willing to make any repairs.
Sellers who want to sell quickly or save money usually opt to sell ‘as is’. The buyer will have to pay for any repairs that would be required to be made. These kinds of properties are usually considered high-risk and involve risks such as structural damage, unpaid property taxes or missing appliances.
Selling ‘as is’
A seller is legally required to disclose all issues with the property when selling ‘as is’, including all the required repairs. The seller's attorney can prepare a detailed statement of condition and other disclosure forms based on an inspection done by a professional. The statement of condition should clearly communicate the required repairs. ‘As is’ properties are often bought by flippers or investors and it can be helpful to get a real estate agent on board for the deal as there may be a lot of negotiations and haggling.
Buying ‘as is’
It is important to be cautious while buying an ‘as is’ property. Though such properties often sell at a lower price, they may end up becoming more expensive if they require extensive repair that is not accounted for. It is important to do a thorough inspection of the property to reveal all potential issues. A buyer can negotiate a ‘subject to inspection’ clause in such a deal, in which case the buyer can walk out of the deal if an inspection reveals more issues than disclosed by the seller. The buyers must set aside additional funds for inspections and repairs when buying ‘as is’.
Having a quality team including an experienced real estate agent, home inspector and attorney can help minimize the risk of buying ‘as is’.
After-repair-value indicates how much would be the value of a property after renovations or repair and not in its present condition. This is an estimate which is often used by real estate flippers and investors who buy fixer-uppers and distressed properties, and renovate them before selling them again.
ARV is a way of determining how much can a property be purchased for and how much could it be sold for after repairs thus indicating a tentative profit margin. Based on the ARV calculations an investor can decide if a property is worth investing in ensuring a higher ROI (return on investment). On the other hand, ARV is also useful to lenders (usually hard cash or private lenders) who loan money for renovation of distressed properties.
The loan value is determined using the ARV and not the present value of the property. The improvements can be cosmetic - such as bathroom or kitchen remodel, structural - such as installing a new roof or repairing a structural damage, and holding costs- such as electricity and property taxes.
How is ARV Calculated?
ARV of your property can be calculated in three steps -
For example, a recently renovated house of comparable standard in your neighborhood with an area of 2000 square feet sold for $600,000. The PSF rate of this house would be $600,000 ÷ 2000 = $300. Now assuming that your property is 1800 square feet in area, your ARV would be 1800 x $300 = $540,000.
70% Rule in Real Estate Investing
Property resellers, investors and flippers often use this formula as a ruler of thumb while buying properties to resell. According to this rule the maximum bid on a property should not exceed 70% of the ARV - estimated cost of renovation. For example, if the estimated ARV of a property is $1,000,000 and the estimated renovation cost is $100,000 then -
Maximum bid = (0.7 x ARV) - Estimated Renovation Cost
= (0.7 x$1,000,000) - $100,000
Renovation estimates can be tricky and are subject to overrun if more damage is revealed once the renovations begin. For example, a flipper estimated the cost for a bathroom renovation based only on replacing tiles and bathroom fitting but when the renovation starts, it is revealed that the plumbing lines need to be replaced as well. This would affect the renovation cost of the property and might leave you with more expenses than you calculated initially and may incur potential loss.
At the same time, expenditure on renovation should take into account the buyer's mindset too. A buyer may not see value in a particular repair or renovation such as expensive tiles or bathroom fittings and might not be willing to pay more for the same. Additionally, external variable factors such as the housing market, labour costs and material costs may affect the actual value of the property and can vary throughout the course of the renovation.
By signing a legal document called the power of attorney, you can give authority to another trustworthy person(s) to manage your property or money on your behalf. The person you appoint does not have to be a lawyer and is called your attorney.
It is required that a person be ‘mentally capable’ at the time of signing a POA for it to be valid. It should be noted that POA names, laws, requirements and definitions vary across provinces and territories in Canada. In real estate, your attorney can manage buying or selling of real estate in your name, pay bills on your behalf and even collect money owed to you, unless restricted to do so. Your attorney does not become the owner of your property and can only manage it on your behalf.
There are two types of POA commonly used in matters of real estate:
General Power of attorney:
Signing this would give your attorney managing authority over all or part of your finances and property only while you are mentally capable of managing your own affairs and becomes invalid if you become mentally incapable. The definition of mental capability varies across provinces. This type of authority can also be limited to a particular task such as selling a house or could be given to the attorney for a specific time period.
Continuing power of attorney:
This is a legal document that allows your attorney to continue managing your finances and property even if you become mentally incapable to do so. It can start as soon as you sign it, or sometimes if specified in the document, it may come into effect when you become mentally incapable.
CCIMs are recognised experts of the commercial and investment real estate industry. CCIM is considered a prestigious designation awarded by the CCIM Institute. Commercial real estate professionals such as brokers, appraisers, attorneys, commercial lenders, investment advisors, developers, bankers, property managers, asset managers and other allied professionals can become designated CCIMs after completing a required coursework and passing an exam. This designation is recognized in over 35 countries across the globe including Canada and the USA.
CCIMs possess in-depth knowledge of the ethics and negotiations involved in investing in the commercial real estate industry and can help their clients make informed decisions. Investors can expect to alleviate risks and close more deals by working with a CCIM.
CPM is a globally recognised designation awarded to experts in the field of property management by the Institute of Real Estate Management (IREM) after they have completed the requirements of the certificate.
A property manager takes care of responsibilities such as rent collection and deposit, property maintenance, showing and leasing vacant units, and budget keeping while ensuring that landlord-tenant rules and regulations are being followed. Owners who invest in multiple properties or live in a different city usually hire property managers to manage their real estate.
To be designated as a CPM, a property manager who is able to demonstrate a satisfactory level of real world experience should enroll as a CPM candidate with the IREM and undertake 8 courses over a time period of 12-18 months. After completing all the courses the candidate needs to pass a two part final assessment and complete graduation requirements to finally be approved as a CPM.
A legal arrangement where two or more persons or entities own an asset and have an equal share in the same is called a joint tenancy. This is an equal partnership where all the partners have equal rights over the property.
The owners in this kind of a structure have a ‘right to survivorship’ which means, if one of the owners dies, their share is passed on to all the other surviving joint owners equally. This implies that an owner’s share cannot be passed on to their heirs. In a joint tenancy, partners cannot sell their share individually and the arrangement stays until all the joint owners agree to sell the property. This arrangement can save money and time spent on a probate-process when a partner dies. The most common example is a property bought by a husband and wife together, wherein if one dies, the other becomes the outright owner of the property.
Like Joint Tenancy, TIC is also a shared ownership structure where two or more people share the ownership of a property or a parcel of land. However, in this structure, it is not necessary for all co-owners to have an equal share.
In this arrangement, an individual is free to sell or pass on their share to another person without the need for approval from their partners. Similarly, one can buy a share in a TIC or exchange TIC shares (subject to some CRA rules) whenever they want. In this arrangement, when one of the shareholders dies, their share is passed on to their beneficiary or heir, determined by their will or government rules, and not to the other partners. The number of tenants in a TIC can change over time. For example, a property is co-owned by two people - Karen has 60% ownership of the property and John has the rest of 40%. In her will, Karen decides to pass on equal parts of her share to her children Eva and Tom upon her death. In such a case, when Karen dies, Eva and Tom would both receive 30% of the share in the property. The property would then have 3 co-owners - John, Eva and Tom.
CAC is a term often used in real estate listings on MLS websites. CAC stands for Central air-conditioning and means that the entire property is air-cooled using a centralized system. This essentially means that the air is cooled in a central location and distributed to different parts of the home. In condo listings, this term often appears under the condo fees section wherein one can find out if the electricity consumed for air conditioning is included in the condo fees or not.
Properties that are meant for commercial activities and income generation come under the domain of CRE. These properties can potentially generate profit for the investors in the form of rental income and capital gain. Any property that you can lease out, or hold and sell may be categorized as CRE. Commercial real estate may include the following:
Investing in commercial real estate often requires a large upfront capital investment. At the same time, managing a real estate portfolio can be time-consuming and complex. It is ideal for an investor to have knowledge of the markets before opting to directly invest in real estate. Instead of investing in directly, investors can choose to invest in an REIT (Real-Estate Investment Trust). REITs are traded on stock exchanges and have many variations such as stocks, ETFs and mutual funds. This way, investors can invest in real estate without having to buy a property and the rental income is paid out to them as dividends.
A COI is a document issued by an insurance company or an insurance broker that acts as a proof of an insurance policy and outlines the conditions of the policy. It contains details of the policy holder, the type of coverage, the policy effect date and other key information about the policy.
In commercial real estate, owners, tenants and real-estate agents are to have an insurance policy to protect in the event of an accident or property damage. Real estate management companies require their tenants and vendors to enlist the company as an additional insured to protect them from risk and liability as a consequence of the actions of the policy holder.
In the commercial real estate industry, capitalization rates, commonly referred to as cap rates, indicate the rate of returns on a real estate investment property. Investors use cap rate to evaluate properties for their profitability and potential returns before investing in them. Cap rates are expressed in percentages and are calculated on the basis of net operating income (NOI) and the current market value of a property.
Here, the NOI is the property’s annual income minus the annual expenses. The annual income can include rental income, parking income, vending machines, laundry services and other such incomes. The annual expenses may include maintenance costs, property management, taxes, utilities and insurance fees.
A higher cap rate indicates higher return potential but also involves higher risk. A lower cap rate indicates lower return potential and involves lower risk. However, properties with a lower cap rate are usually stable properties in higher demand areas. A cap rate in the range of 4% - 12% is considered to be good. Some key factors that can influence cap rate are - type of property, its location, the size of the market, stability of the asset, growth potential of property and economic conditions.
Simply put, LTV is the ratio of the loan you take to buy a property to the value of the property. It is used for mortgages to determine the ratio of mortgage amount to the appraised value of the home to be financed. Financial institutions and lenders use this ratio to assess lending risk before approving mortgages. The higher the LTV ratio, higher the risk.
This ratio is expressed as a percentage and is calculated using the formula:
For example, the appraised value of the home you are purchasing is $600,000 and you have $150,000 to put down as down payment. The mortgage amount would thus be $450,000. The LTV ratio would be $450,000/$600,000 = 75%.
This ratio can also determine if you need to have mortgage insurance. In most cases, if the LTV ratio is more than 80%, you may have to pay for mortgage insurance. Over time, LTV decreases as you pay off your mortgages and as the value of your home appreciates.
GDS is a debt service ratio that measures the proportion of your housing expenses to your income. This ratio is calculated on the basis of your monthly mortgage payments, property taxes, heating costs, condo fees and other utilities.
This ratio is one of the measures used by lenders to determine if a borrower would be able to afford a mortgage. The maximum GDS limit recommended by CMHC (Canada Mortgage and Housing Corporation) is 39%. A GDS above this limit is indicative of your housing expenses being unaffordable or unsustainable in the longer term. Ways to lower your GDS include finding a cheaper home or finding ways to increase your income.
To calculate GDS ratio, you need to calculate your monthly mortgage payments, property taxes and CMHC insurance premiums. Then add these expenses along with all utility costs and divide the total with your household’s gross monthly income (before taxes and deductions).
TDS is also a debt service ratio similar to GDS but also takes into account debt payments along with housing costs. These debt payments include credit card payments, line of credits, car loan or lease payments, student loans, child support or alimony, and any other debt payments.
This is also one of the financial metrics used by lenders to assess loan applications and is one of the key components analyzed in a mortgage loan underwriting process along with GDS and credit scores. The recommended limit for TDS recommended by CMHC is 44%. To calculate your TDS ratio, you need to add all your monthly debt payments to your monthly housing costs and divide the total with your household’s gross monthly income (before taxes and deductions).
During a real-estate transaction, a neutral third party holds funds or important documents until all the conditions of the agreement have been met and the transaction is completed. An escrow is meant to protect the interest of both the buyer and the seller during the homebuying process. A real estate sale involves transfer of title from the seller to the buyer. An escrow guarantees the seller that the buyer is serious about buying their property and has the funds to do so. At the same time, it protects the buyers against fraud in cases where the seller doesn't hold any claim to a title they are selling. When a buyer makes an offer that is accepted by the seller, the buyer makes an ‘earnest deposit’ to show their seriousness to buy. An escrow account holds the buyer’s deposit until closing and it is rolled into the down payment once the deal is closed. At closing, a title transfer occurs between the seller and the buyer.
There is another type of escrow account that homeowners can use to pay their mortgage insurance and property taxes. Your lender may ask you to use an escrow account to deposit money that they can pull out to pay for expenses on your behalf.
In the province of Ontario, an agreement of purchase and sale is a legally binding document of the real real estate transaction between the buyer and the seller. This document is essentially the offer document submitted by the buyer to the seller, which when signed by all parties becomes a legal contract. Similar contracts exist in other provinces under different names.
The most common format of an agreement of purchase and sale is the OREA (Ontario Real Estate Association)’s form 100. The document contains date of offer, date of closing, legal names of the buyer and the seller, property details like the address, frontage and legal description, irrevocable date, title search date, chattels and fixtures not included in the sale, rental items not included in sale, HST details, and conditions of sale such as inspection and financing.
It is essential for the legal description of the property in the document to be accurate. The agreement should be carefully drafted and must detail out all the conditions of the sale leaving no scope for interpretation.
Established in 1946, CMHC is Canada’s national housing agency that provides housing support services to homebuyers, governments and the housing industry through various funding programs, initiatives and research. CMHC is a crown corporation headed by a board that reports to the Federal housing minister.
CMHC aims at making housing affordable for all Canadians and one of the most important services it provides is the CMHC mortgage loan insurance. If a buyer wants to buy a home with less than 20% down payment, they need to have mortgage loan insurance that would protect the lender in case of defaulted payments. This insurance allows homebuyers to get a mortgage of upto 95% of the purchase price of a home. The lender has to pay a premium on the loan insurance, which they typically pass on to the borrower.
CREA is Canada’s national level association of real estate professionals. CREA has more than 150,000 members including real estate agents, brokers and salespersons.
The term REALTOR® is trademarked by CREA in Canada and to use this title one needs to be a direct member of the association or, depending on the province, be a member of both local real estate board and CREA. CREA represents its members before the federal government, provides them quality technology products such as WEBforms®, REALTOR.ca and REALTOR.ca DDF®, sets national standards for ethics, and produces economic information and analysis.
MLS is a printed or electronic database of properties for sale that is compiled by cooperating with real estate brokers. This allows brokers to see properties listed by one another and in turn helps find sellers or buyers for their clients. It can be imagined as a marketplace for properties.
The concept of MLS is based on mutual understanding between real estate agents to help each other sell their inventories. There are multiple MLS systems available to real estate agents and brokers, which they can access by paying a fee. In most cases, the public is also able to view the listed properties for free, the private information about the seller is however kept hidden for safety. Using an MLS system, one can find details of properties such as location, address, size, age and other finer details. It helps real estate agents and buyers look up ‘for sale’ properties and compare them. At the same time, sellers can get information about the pricing of properties comparable to theirs.