Real Estate Talk:
Income property / 3

A look at the promise to purchase conditions: the first visit

By Joseph Marovitch

Updated November 21, 2024

You are a buyer and you found an income property of six units or more in a good location with a cap rate of 5.2, in what appears to be good condition from either a drive-by viewing or pictures you received.

Either on Centris or by calling the vendor or the vendor’s broker, you discover that a visit cannot be arranged, the tenants disturbed and documents made available unless the vendor accepts your conditional promise to purchase. Why would the vendor go to the effort if the price is not within the asking range?

Now you are thinking, wait a second, how can I provide an offer if I have not seen the building or examined the expenses and leases? As mentioned in the last article, the purchase price of an income property is based on the rate of return or capitalization rate as well as the location and the condition of the property. The purchase price is not based on comparable properties or city evaluations, it is based on the income stream.

The purchase price of an income property is based on the rate of return or capitalization rate, as well as the location and the condition of the property.

If the vendor has provided accurate information regarding all these factors then the buyer must verify the information with proof that will justify the asking price. This is where the conditions of the offer come into play.

Four major conditions allow the buyer to verify the information:

1. First visit
2. Review of expenses, leases and any other financial documentation
3. Inspection
4. Financing

The order of the conditions is important. Conditions 1 and 2 cost the buyer nothing but time. Conditions 4 and 5 require capital expense and time.

If conditions 1, 2 or 3 do not satisfy the buyer, the buyer can either cancel the offer, renegotiate the purchase price, or purchase “as is.”

If, in the condition of financing, the financial institution the buyer is borrowing from refuses to lend the money for any number of reasons, then the offer can be cancelled as well.

‘The first condition placed in the promise to purchase is a first visit to verify what the listing or other information appears to state.’

Condition 1: First visit

The buyer, upon viewing pictures or driving by the building, determines that the property appears to be clean and well-maintained. Note that when a vendor or broker is selling a property, they will attempt to make the property as sellable as possible by placing the best pictures in the listing and/or cleaning the property so it will show well. Therefore, the first condition placed in the promise to purchase is a first visit to verify what the listing or other information appears to state.

The first visit is arranged between the buyer and the vendor, usually within three to five days of an accepted promise to purchase. On a first visit, the buyer will view the basement, boiler room, two or three apartments and the roof, to verify the condition of these areas. The buyer will also look for graffiti on the interior or exterior walls, the condition of the balconies and exterior brickwork, and take notice of tenants if they are coming and going. The buyer will also note the property’s proximity to other property such as train tracks, city waterworks, towers and any other structure or establishment that may not appear in the pictures but may affect the value of the building.

‘The first visit is arranged between the buyer and the vendor, usually within three to five days of an accepted promise to purchase.’

Should the buyer not be satisfied with the first visit, the buyer would provide a written document to the vendor indicating that they no longer wish to proceed with the offer.

Should the buyer be satisfied with the first visit then the buyer would proceed to condition two, the inspection.

Note that in purchasing an income property of five units or less, such as a duplex or triplex, the same conditions apply, however, you do not usually have to have an accepted promise to purchase to visit the property.

Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.

State of the market

According to a recent article in Bloomberg, written by Leah Zlatkin, mortgage brokers, using
data from the Canadian Real Estate Association (CREA), indicate that demand has increased due to lower interest rates and that the market is intensifying.

According to CREA, sales across Canada have increased by 7.7% in November. With further anticipated rate decreases, CREA suggests the market will heat up even more. It is also stated that many buyers have mortgage pre-approvals and are just waiting to jump into the market as soon as the next rate cut is applied. It is further suggested that now is the time to buy before the market turns in favour of sellers and property prices increase.

‘Now is a good time to buy as rates and inflation are low but do not be fooled by rosy pictures of the future market. The world order is now changing and no one can predict the future market, they can only guess.’

What is not mentioned or suggested by CREA or mortgage brokers is what effect the new U.S. administration’s increased tariffs on Canadian imports and U.S. exports will have on the Canadian economy, such as increased inflation and possible interest rate hikes as of January 2025. Also not discussed is the effect escalating war in the Middle East and Europe may also have, such as slowing the supply chain which, in turn, increases the cost of goods and services thus increasing inflation and interest rates.

Yes, now is a good time to buy as rates and inflation are low but do not be fooled by rosy pictures of the future market. The world order is now changing and no one can predict the future market, they can only guess. There is a chance based on what we have been told by the new U.S. President that, as of January 2025, the market will worsen and cause carrying costs to increase and values to drop, or there is a change of heart, in which case rates will continue to drop and property values rise.

Have a great week!

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Feature image: Andrew Burlone

Other articles by Joseph Marovitch