What Exactly is a Mortgage Broker and Why Should I Use One?

Are you undecided about using the services of a mortgage broker or skeptical as to what a mortgage broker can do for you? The purpose of this article is to clarify the many advantages and benefits you will receive when using the services provided by mortgage brokers in Canada. I am optimistic that after reading this article Canadians will have a much better understanding about the services provided by a mortgage broker, and will consider using a mortgage broker for their mortgage financing needs.

What exactly is a mortgage broker?

Basically, a mortgage broker is a representative for all of the Canadian lending institutions in Canada. Their function is very similar to that of an insurance broker. A bank representative that works in one particular lending institution is employed by that bank and is aware of every mortgage product that their bank offers. Therefore, when you go into your bank for a mortgage the representative analyzes your situation and chooses the best product their bank offers for your needs. Mortgage brokers act as agents for all Canadian banks, Credit Unions, Trust Companies, finance companies and individual private lenders. Subsequently, when you visit a mortgage broker for mortgage financing they analyze your specific situation and choose the best product from one of the 50 Canadian lending institutions at their disposal.

In Ontario, mortgage brokers are educated professionals who are licensed and regulated by the Financial Services Commission of Ontario (FSCO). FSCO is merely one of the government agencies that monitors the business practices of mortgage brokers, each province has an agency that provides the same service to Canadians. As a result, these agencies certify that Canadians are being given reliable protection, a thorough comprehension of mortgage products, and a standard of service to meet their individual needs.

So, how exactly will you benefit by using a mortgage broker?

Save time: Many people try to shop around their own mortgage by traveling to the 5-6 major Canadian retail banks, which can be very time-consuming. A mortgage broker will meet you where it’s convenient for you and they will shop your mortgage for you saving you a lot of valuable time.

Credit Score: One of the most important considerations for Canadians when shopping around at different banks is their credit score. Each time you go to a bank and apply for a mortgage, they will make a credit inquiry, too many inquiries will negatively affect your credit score. A mortgage broker only requests one credit inquiry and then forwards that to the banks they are shopping.

Save Money: Many people are under the false assumption that it is expensive to use a mortgage broker. In fact, most brokers do not charge any fees because they are paid by the banking institutions for bringing them in business. That’s the best part, you receive unbiased advice about your mortgage and it doesn’t cost you any money.

Best Rates: Using a mortgage broker guarantees you that you will get the best rates available, independent mortgage agents rely on repeat business so they do not play games, they always find their clients the best rates possible. Additionally, as a reward for bringing them millions of dollars per year in business, many banks will offer special rates only available to mortgage brokers for their clients.

Fast Approvals: Usually, a mortgage broker will have your mortgage approved within 24 hours, at the very best interest rates. Even if the retail banks do approve a person’s mortgage fast, it can sometimes take weeks to negotiate them down to their best rate.

Feel At Ease: A mortgage agent will take the time to explain the entire process to the mortgagee, this is especially comforting for first time homebuyers. They will take the time to explain all of the terms and conditions of a mortgage commitment so there are no surprises later. They will usually present more than one option for clients, and be able to explain the differences between each bank, this will help consumers make educated choices about which banks they would rather use.

Where will your next mortgage financing experience be?

Today, it is no longer necessary for Canadians to place their trust blindly in their bank for their mortgages. There is now a vast amount of information available to consumers, with all of the available information it is advantageous for consumers to use the services of a Canadian mortgage broker to help them analyze which products will best suit their needs. Canadians should realize that by using a mortgage broker they are not choosing between a broker and their bank. A mortgage broker can place your mortgage with your bank if that’s what you ultimately decide. What you should ask yourself though is if you are a client at TD Bank do think the bank representative will tell you if Scotia bank has a better interest rate? Your mortgage broker will.

Commercial Property Condition Assessment (PCA)

The purpose of all Commercial Property Condition Assessments (PCAs), ASTM standard E2018, is to make sure that the property and building you believe you are purchasing or leasing is actually the property being received. You will have reached that decision, in part, from the information attained via a professional inspection and Property Condition Report (PCR). Every real estate transaction is different and each transaction has its own unique set of considerations and conditions to validate before finalized. The utilization of professional third party experts in the physical property due diligence process is critical to the overall accuracy and cost efficiency of your property transaction.

The Purchase or Leasing of Commercial real estate, whether it be a basic commercial net lease, a commercial triple net lease, the purchase of a church facility, a retail outlet, or the purchase of a million square foot office/warehouse, the prospective buyer or lessee absolutely must conduct an adequate level of due diligence when investigating the physical quality of the commercial real estate they are investing in.

You need to know not only the physical characteristics of the real estate and buildings being acquired, but the approximate condition and age, to assess the good with the bad, such that you can adequately balance the risks and rewards being offered in conjunction with your real estate deal. The single most important part of the real estate transaction process, aside from the purchase price and profitability balance, is a well-documented review of the actual physical condition of the real property. Otherwise, you could find yourself the not so proud owner of a commercial property that, doesn’t suit your needs, costs more than you can afford in upkeep, or the ultimate remorse for investors – capital expenditures are being sunk into a property on a regular basis that someone else is utilizing and making money off of, and you are not. Suddenly, that long term lease with a solid anchor doesn’t seem so attractive anymore.

The process of commercial real estate inspection begins before the offer to purchase real estate is drafted or signed, by visiting the site and discussing the physical condition of the property with the Owner and real estate brokers. This process should be considered invaluable to establishing relationships required to obtain the information that will be necessary to concrete your due diligence with a Commercial Property Condition Assessment (PCA).

During negotiations and drafting of the real estate sales/lease contract it is important to recognize seller or lessor reluctance to points such as the existence and availability of important documents such as warranties, maintenance contracts, architectural and engineering plans and/or local municipality reviews and inspections. Negative reaction to the request for release of these documents by seller or lessor can imply possible deferred maintenance and/or inattention related to property and building condition(s) and inspection issues.

Once the commercial real estate sales contract is signed the due diligence period begins, focus on maximizing efficiency of time and cost and prioritizing concerns to start checking off the costly big ticket items from the top down. Assuming adequate documentation is furnished by the seller for review, adequate time should be allotted to verify the information provided. Additional effort and monies that that will need to be spent to make up a shortcoming of available documentation through extra property condition assessment and additional field inspections and/or experts should be considered essential and figured into the cost of the property transaction. Ask the seller for all documents and contacts the seller received during his due diligence process when he purchased the property to speed up fact finding.

Review of existing property documents where available may include:

Accessibility surveys, Architectural Building plans, Certificates of Occupancy, Citations from Authorities Having Jurisdiction, Emergency evacuation plans, Environmental studies, Electrical System Construction plans, Fire-detection test and maintenance records, Fire-door inspection reports, Fire-Protection System Construction plans, Fire and Restoration records, Maintenance records, Mechanical System, Construction plans, Violation Notices from Authorities Having Jurisdiction, Construction Permits, Plumbing System Construction plans, Previous inspection reports, Roofing System Construction plans and Warranties, Safety inspection records, Seller condition disclosures, Sprinkler System Test Records, Systems and Material Warranties, Current tenant information, Current policy of title insurance, Notices of any environmental conditions, Notices of any new or special assessments or taxes, Copies of all current bills for the property, Service contracts, Evidence of current zoning, As-built plans and specifications, All construction related documents including warranties, All past and present uses of the property, Third party reports or inspections, Any surveys of the land and improvements in seller’s possession.

One of the best tools available to the commercial property due diligence team is the interview process which can unlock a plethora of potentially useful information regarding the subject property.

Interview of any available key personnel with specific knowledge of the property conditions may include:

Owner, Tenants, Maintenance Foreman, Contracted maintenance services personnel or other contracted companies that routinely work on the property and/or building.

Property Inspection, Real Estate Inspection, Building Inspection, Due Diligence Survey, as they may be labeled in the due diligence report is essential to ensure sufficiency of construction considering the intended use of the occupants and the surrounding geography and climate. The furnishing of any available plans and specifications should be helpful here, but will not end the investigation. A current commercial property condition assessment should be done by a qualified third party inspection company experienced in the type of property to be inspected. A previously performed property condition assessment or inspection is nearly always furnished for the use of a single party in a single transaction and is protected under law and not reusable nor transferable to any other party. The focus of the inspection should be primarily on site condition and building components such as the site drainage, parking, building structure, mechanical and electrical systems and general accessibility and usability of the property. Various climates and geographical regions will require more specific inspection knowledge, thus hiring a local inspector is always a good idea if possible, in lieu of hiring a company out of Wisconsin to perform due diligence on a California high-rise building on a fault line.

Site Survey and Walk-Through to Observe Existing Conditions may include:

Grounds and Topography, Parking, Paving, Access, Building Exterior and Façade, Building Interior, Roofing systems, Structural systems, Mechanical systems, Electrical Systems, Plumbing systems, Fire-protection systems, Vertical transportation systems, and any number of other specialty systems.

The 2010 Americans with Disabilities Act is the current guideline for accessibility standards nationwide and is a federal law, hence non-negotiable and to an extent, yes, it’s retro-active even for older commercial and public buildings. Many states also have additional and/or more stringent or specific accessibility standards as well. Most professional property condition assessment and inspection companies can also perform both abbreviated and complete accessibility surveys as part of a real estate transaction.

Basic abbreviated and full compliance Accessibility surveys may include:

Abbreviated survey looking only for basic ADA Accessibility components visible during the walk-through and documented according to the ASTM abbreviated survey form and checklist gives a quick check as to the general status of compliance. Full compliance survey involves physical measurements of distances, slopes, and push/pull forces required within the accessibility standards to allow for a certain level of physically disabled person to be able to successfully navigate a property, site, and building.

Environmental Due Diligence known as Environmental Site Assessment (ESA) is the most utilized Environmental Inspection Report. The typical level of report preferred by lenders to demonstrate adequate due diligence is called a Limited Phase I Environmental Transaction Screening ASTM standard E1528. This explores the past use of the property and the surrounding properties to identify any potential onsite or adjacent environmental problems or future liabilities. These reports normally require a significant monetary investment and take a number of weeks to complete so they should be done as soon as you have determined you will be moving forward with your due diligence. The purpose of this inspection is to determine if the property contains any hazardous materials or poses a threat in any way to its surroundings. This could be caused by underground storage tanks located on the property or runoff from the property into the water table or any other number of hazards listed by the Environmental Protection Agency. While the report is expensive, the cost of cleaning up an environmental hazard can be astronomical. While not every deal will require you to obtain a Phase I Environment Site Assessment, many lenders will require it as part of their loan guidelines. In case of a fairly new development with a clean environmental record and no neighbors of an industrial nature, a simpler less expensive and much quicker Environmental Transaction Screening ASTM standard E1528 may satisfy lender and legal requirements.

Any basic environmental due diligence report may include:

Research of historical site usage, aerial photography records, property transaction records, construction records, building records, EPA mapping data, local municipality topography mapping, and a through site walk-through to visually identify potential environmental issue indicators.

The information contained herein is purely professional opinion and provided for general real estate inspection reference only and is not intended in any way to be a definitive guide, nor a guarantee of past, present, or future legal or state or federal requirements, nor a measure of performance of any professional services company. Best of luck to you in all of your future property, real estate, and building dealings!

Commercial Property Investment Mistakes and How to Avoid Them

You’ve probably heard about the commercial real estate bubble, here’s the ugly truth that lenders and other insiders don’t want you to know. Despite all the hype, not every commercial property is in trouble. The key for you as an investor is to avoid certain pitfalls and learn from other investor’s mistakes.

Before the economic and credit boom that has led into the recent downturn, conventional lenders capped loan amounts at 65 percent of the value of the property. This means that your $10 million commercial property would qualify for a maximum loan of $6.5 million. The current problems with commercial property investments started when hedge funds and private equity lenders began offering much higher loan to value ratios, meaning they would lend against your investment property with as much as 80 percent of the value of the real estate.

Mistakes Made by Commercial Investors

Some investors decided to refinance their $10 million commercial property for $8 million and get $1.5 million out tax-free! What seemed like a great deal at the time has come back to ruin the typical commercial property investment. The problem was that these loans needed to be refinanced after five years. Owners who pulled money out of their investments like this began down a path that has led to the troubles we are seeing now.

Fast forward from then to now and you’ll see that the entire economic climate has changed. Most sources of financing for commercial real estate have dried up. Owners with a property that needs to be refinanced are finding that unless the LTV ratio is 65% or less and the property is performing perfectly, it’s almost impossible to get refinancing for their commercial property investment.

You can’t tap into those hedge funds and private equity firms because many of them have gone out of business. So you are left with two options:

1) Create a workout with the existing lender where they refrain from foreclosing against your property in exchange for a slight increase in the interest rate, or other benefit that you can give the lender. In some cases the benefit to the lender is that they don’t need to take your property back. The truth is that the lender really doesn’t want to take back your property if they can avoid it.

2) Bring other investors into your deal by offering them a decent rate of return on their investment along with giving them a chunk of your equity. Make sure to contact a commercial property investment attorney who can help make sure that you meet all of the SEC guidelines if this is the path that you choose to go down.

What Makes a Safe Commercial Property Investment

The problem with many owners of commercial properties today is that they got into a deal with a bigger loan than they should have. Now, these commercial property owners can’t ride out the recession because the loans are coming due and they’re short, or worse, upside-down.

Investment rule #1

-Leave the equity in your property.

· Successful property owners don’t pull out their equity at the top of an up cycle; they leave the equity in their commercial property investment so they can ride out the downturns. The “commercial meltdown” doesn’t apply to property owners who left their equity untouched. While it’s true that the commercial property values have come down from a high peak. The typical commercial real estate investment is far more valuable today than it was 10 or 15 years ago.

Investment rule #2

-Stick with conventional lenders.

· By taking a short term hard money loan commercial owners placed themselves at the mercy of the fickle market. A conventional lender would not have financed more than 65 percent of the property value, allowing the owner with a cushion against fluctuating property values.

When structured correctly, your real estate investment may not provide you with an overabundance of excitement, but during times like these, a stable, performing real estate investment is just fine.