Are you Buying Real Estate or an Investment?
As we all know with the stock market there are numerous investments one can make apart from owning shares of the underlying company – e.g. mutual funds, hedge funds, indexes, and so forth. The same is also true of real estate.
Typically real estate ownership takes two forms – fee simple (direct ownership) or a lease. Where real estate can get complicated is where a shared interest in land is involved. A typical example of a shared interest in land would be a residential condominium where a number of people own individual units in the building which they live in and share common property such as a swimming pool available to all owners in the building.
It is also possible to invest in an entity such as a company or limited partnership that acquires interests in real estate to re-sell or rent; in other cases companies specialized in lending on the security of real estate.
Apart from buying an interest in land (real estate) or shares of units of a company or partnership (investment or security) a third category known as time share is also possible. A time share is essentially a contact to use real estate not unlike a lease but does not convey ownership. One can look at a time share of recreational property, for example, as a pre-paid vacation plan.
British Columbia has quite good consumer protection legislation that puts the onus on persons selling real estate or investments to provide adequate disclosure to the purchaser so the purchaser knows what they are buying and what risks are associated with the purchase. Often a purchaser may be shown a glossy brochure of a building – or an actual building – but not be clear on what their ownership rights are.
At a high level the British Columbia legislation provides protection to purchasers purchasing a shared interest in land that is under construction. The concern is to ensure that the building is actually completed on time and that the developer can transfer the portion of the building being purchased free of financial encumbrances. Generally speaking the developer is required to prepare a disclosure statement and have purchase money held in trust by a lawyer that will be returned to the buyer is the transaction does not complete for any reason (e.g. project not completed on time, developer goes bankrupt, etc.).
Having the purchase proceeds held in trust and returned if the transaction does not complete is a fundamental difference between a real estate purchase and a non-real estate purchase. If a person buys an investment – then generally the money is not held in trust and can be used by the developer right away. Where people sometimes get confused (or possibly mislead) is where they are purchasing an investment in an entity that is involved with real estate and where there is a desire on the part of the purchaser to purchase underlying real estate.
This is fine is the purchaser understands the risk and can afford the loss of their investment if for some reason the developer encounters financial difficulty. This is not fine if the purchaser does not understand the risk and cannot afford the loss of their investment (such as a down payment on a primary residence).
Accordingly, it is very important particularly where buying a shared interest in land to understand the organizational structure and the risks. With real estate the purchaser’s lawyer is charged with the task of ensuring that prior encumbrances are discharged and clear title is transferred.
Unfortunately, there have been several large real estate projects in Victoria in recent years which contained a “hybrid” of investment/purchase options where the underlying entity failed. A person who bought or had agreed to acquire a direct interest in real estate would likely be protected in those instances – but would not be protected if their contract was to purchase an investment that may be convertible into real estate at some later time. Have any proposed contracts for a shared interest in land vetted by your advisor.