You wouldn’t need to be a real estate agent in Canada – or work in any profession related to housing for that matter – to know that ever-greater numbers of Canadians are struggling to afford housing that works for their family’s needs and / or allows them to be within a reasonable distance of their place of employment. The long and short of this is that demand far outstrips supply for housing in many parts of the country, and especially in major metro areas.
For realtors, fewer qualified buyers may be a source of frustration for homeowners with their properties on the market. But for realtors, the problem becomes one where fewer prospective buyers means fewer prospective clients. For a realtor who’s well established in the business that may not be so problematic, but for a newer realtor it will be. That’s why our online real estate lead generation system here at Real Estate Leads is such an excellent choice for men and women who are new to the profession.
Back to topic, however, there is a growing trend in Ontario where homebuyers are teaming up with other trustworthy homebuyers to consolidate their purchasing power and buy a home together, and the Provincial government is putting measures in place to assist with it
Ontario Conservatives’ 16-page Co-Ownership Guide
December 11 of 2019 saw this guide released, and it promotes co-ownership and co-habitation as ways to improve affordability, maximize available space available in larger houses and heritage properties, and establish a more community-oriented environment. All of his may be very admirable in its ideals, but it’s clear that the majority of people who will enter into this type of home-buying arrangement will be doing so with an eye to watching the value of the home increase before the sale of it puts both buying parties in more of a position to buy a property on their own.
This is something that realtors can – and perhaps should – discuss with their clients, but if you’re going to do so you’ll be advised to do so responsibly and also make them aware of the many challenges this type of home purchasing arrangement may present.
Home ownership is difficult as is, and co-ownership will create scenarios were – among other things – knowledge of what is a shotgun clause is (read on) going to become must-know information. We will agree that the Province’s Co-Ownership guide does have good intentions, and also fills in common knowledge gaps very well.
It defines a number of useful terms and touches briefly on what a co-ownership agreement should include, but there is no mention of conflict resolution or the severe financial pitfalls involved. And it certainly should go without saying that if a homeowner is to purchase a home this way, there is most certainly a lot of risk of their being victims of these pitfalls.
Implications for Investors
It’s also true that investors considering the co-ownership of a property must make certain their intentions and goals are aligned with the others and unlikely to change. Cash flow investors, speculators and those more interested in long-term equity are going to be inclined to view the ideal use of a property differently. Long story short, investors must agree entirely on what that property will be used for, and especially any timelines that will be attached to it.
Consider as well that unforeseen changes in attitude and situation should be taken into consideration too. Are both open to short-term rentals of the property to maximize revenue? If the market dips and one partner is better prepared to weather than period of uncertainty, what power of influence does the other buyer have in suggesting the sale of the property?
The Shotgun Clause
A shotgun clause is a legal statue where the co-owner of he property has the opportunity to either exit the agreement or consolidate ownership. They are able to do this by setting a price for their share of the property. If the other owner is unable or unwilling to meet the suggested price, the clause then allows the co-purchaser to purchase the disputed share at an originally-set price.
A worst-case scenario would be one where one of the co-owners is facing financial stress and has little cash in hand, and this allows the other owner to take advantage by setting a low price for the distressed co-owner’s 50% share of the property. They would do so knowing full well that the other buyer won’t be able to mee that price and then their share will then be available for a very low price.
Interestingly, there’s no mention of a shotgun clause anywhere in Ontario’s new Co-Ownership Guide. There should be, and if you’re a realtor counselling clients then this is something that you must make them aware of, and make them VERY aware of.
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