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ASKING ABOUT ETHICAL ISSUES

cobando

cobando

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Apr 5, 2009
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Hi,

I know the REIN book did say that it is unethical to tell the banks you`re going to live in the property you`re buying when you`re actually going to rent it out. This is my first property in Coquitlam if ever but I`m having this ethical dilemma.

When I asked my realtor and my mortgage broker about me disclosing it as an investment property, they told me that it`s going to be harder to get approved and I won`t get a better rate. I don`t know if they`re just trying to get me approved or what.

Please help me I just turned 21 and need your advise. My plan is to buy another property after a year or two---Am I better off declaring it as an investment property if this is my plan?



Cathy
 
QUOTE (cobando @ Apr 11 2009, 08:27 PM) Hi,

I know the REIN book did say that it is unethical to tell the banks you`re going to live in the property you`re buying when you`re actually going to rent it out. This is my first property in Coquitlam if ever but I`m having this ethical dilemma.

When I asked my realtor and my mortgage broker about me disclosing it as an investment property, they told me that it`s going to be harder to get approved and I won`t get a better rate. I don`t know if they`re just trying to get me approved or what.

Please help me I just turned 21 and need your advise. My plan is to buy another property after a year or two---Am I better off declaring it as an investment property if this is my plan?



Cathy

Cathy,

If you plan to buy an investment property - declare it as such. Full disclosure is the best way to keep sleeping well at night. I am sure you will get a lot of good advice here on this point...here is my take on it...it may be harder to get approved (not necessarily though) and you may not get the rock bottom rate BUT there is a good reason for it. Lenders are in business of taking calculated risks - the lower the risk for the lender, the better terms you get (lower rate, higher LTV etc). Unfortunatelly, based on statistics rentals are considered somewhat higher risk than loans for owner-occupied properties because of higher rates of default etc. As a result, lenders require commensurate compensation for taking on more risk, hence higher rates, lower LTV etc.

If you misrepresent to the lender by stating that you intend to occupy this property, in essence you fraudulently make the lender take on more risk than they would otherwise, without commensurate compensation. As such, this may lead you into the shady territory of bank fraud and you may end up in a LOT of trouble.

Find a mortgage broker that is experienced in dealing with investors and if you qualify for a mortgage, they will help you get one.

My $0.02
 
QUOTE (cobando @ Apr 11 2009, 05:27 PM) My plan is to buy another property after a year or two---Am I better off declaring it as an investment property if this is my plan?Cathy

Instead of giving the lenders a reason to NOT trust you give them a reason to TRUST you.
Give them all the information they require in advance, just like REIN teaches.
Full disclosure and all documentation.
You are in business and treat it like a business, that means if you want to keep dealing with someone be honest and straightforward.
 
QUOTE (cobando @ Apr 12 2009, 09:27 AM) Hi,

I know the REIN book did say that it is unethical to tell the banks you`re going to live in the property you`re buying when you`re actually going to rent it out. This is my first property in Coquitlam if ever but I`m having this ethical dilemma.

When I asked my realtor and my mortgage broker about me disclosing it as an investment property, they told me that it`s going to be harder to get approved and I won`t get a better rate. I don`t know if they`re just trying to get me approved or what.

Please help me I just turned 21 and need your advise. My plan is to buy another property after a year or two---Am I better off declaring it as an investment property if this is my plan?



Cathy

If you lie about this, you`ll find yourself tangled up further down the line. For example, when you get insurance, will you tell your insurer it`s a rental property? If you don`t,then if you need to claim, and they find out it`s a rental and you didn`t tell them, your insurance would likely be invalid.

Also, when you go to buy your next property, you won`t be able to use your rental income from the first one to help your TDS - the bank will look at your first mortgage as a debt you have to service, but you won`t be able to include the rental income to offset it, so your TDS will be worse and it would likely be harder to get the second mortgage.

Life is simpler in the long run if you tell the truth!!
 
You are young and building the foundation of your future. You want a solid foundation so you can grow and grow and grow.

Learn this business and learn it well. If you can`t get funding for the place as an investment property, you may not be ready to get into this business quite yet. Find out what you need to do to qualify properly. Sometimes people fudge their info because they truly CAN`T afford it and end up way over their heads. It often means the end of their RE investing days.

You may be wise to interview another mortgage broker who understand this.

I wish you all the Best!
 
QUOTE (cobando @ Apr 11 2009, 08:27 PM) Am I better off declaring it as an investment property if this is my plan?
Cathy
Hi Cathy,


Congratulations on taking action and posting this question. As a young investor just starting out, you have the opportunity to avoid the mistakes many of us have made in the past.


My recommendation is to follow all the steps in the REIN books and material. Don`t take any short cuts including the one in your post. As Carla pointed out, get yourself a new Team, a Team that looks out for your best interests (not their own).
 
Cobando - Fire your realtor and mortgage broker immediately and get new ones. Are you a criminal or business owner ?
 
QUOTE (housingrental @ Apr 12 2009, 11:01 AM) Fire your realtor and mortgage broker immediately and get new ones.


I agree, fire them, and make sure they know exactly why you are not working with them anymore.

Do not ever lie about this, as it will catch up to you as previously mentioned.
 
As I was looking through the previous replies, my thought was, "It is time to get a new Realtor and mortgage broker." Their advice could lead you to incredibly difficult legal problems. As one who has had legal difficulties (not real estate related) of my own, trust me, you DO NOT want to go there.

All the above answers have given you the correct advice. Complete the deal, but be honest about your intentions. Then run from those two people as fast as you can. They do not have your best interests at heart.
 
I am in the same situation with my mortgage broker. I live at home so this would be my first resisdence. I may plan to live in it for the summer then convert it to a rental property in the fall. How does this sort of situation work? Cheers
 
What is your true ultimate intention? You say you MAY live in it, but only for a few months, and then rent it.

What would you say if you were in the lender`s shoes? If I were a lender I would say that you intend to use it as a rental property.
 
Dan is right on here - it is about your intention. You know what is right. It is leaking out clearly from your posts. You know what to do.
 
Hi everyone,

I appreciate all your replies. You`re right I`d rather sleep better at night. I will definitely look for a new mortgage broker who understands my goals. If you know any REIN mortgage broker in Vancouver who`s done the 110% rule give me a shout.

Thanks again! I feel a lot better



Cheers,

Cathy
 
Hi Cathy,

We live and invest in Ontario, but our mortgage broker is in BC. People often raise their eyebrows, but we use him because he is a REIN member and understands investing. He will help you make decisions with the bigger picture in mind.

Check out his REIN Space profile: RobMacdonaldCMT
Or his website www.robmacdonald.ca

You will get a lot of "interesting" advice in this business. Whatever decisions you make, you alone have to stand behind it. A realtor or broker who tell you to lie will not be there if you get into trouble. You are on your own, so make decisions you can stand solid on your own.

Cheers!
 
There is an old saying... Truth hurts. It is true. It will be harder to get your mortgage and it may even cost you more, but it is the right thing to do. This is more than an ethical question. It is a legal question and the answer is simple if you say it is your personal residence and it is not, you have committed mortgage fraud, and your realtor and your mortgage broker are parties to your criminal act. If you do this and you do get caught it will follow you for a very long time. You would likely not be prosecuted by the law but your name will be remembered forever by the lender. Also most mortgages now are being back insured thru CMHC. So they too would know about your fraud and remember you an future deals. The way to make it as a real estate investor is to be upfront and straight with everyone you deal with and demand the same from every one as well. Replace your advisors that are councelling you to lie. You will not become wealthy on this one deal you want to be able to invest for years to come. And the greatest measure of all is can you face the reflection in the mirror if you lied to your business partners(lenders).
 
QUOTE (cobando @ Apr 11 2009, 08:27 PM) When I asked my realtor and my mortgage broker about me disclosing it as an investment property, they told me that it`s going to be harder to get approved and I won`t get a better rate. I don`t know if they`re just trying to get me approved or what.

Hi Cathy;

Fire both your realtor and your mortgage broker immediately if they are giving you that advice. You are not dealing with professionals. How are they protecting your interests as buyer in the sale and purchase agreement? There would be no mention of tenants, fire code, zoning compliace etc.

If you are doing things through CMHC or GE, both lending groups have been known to actually knock on the door of suspected "rental" mortgages done under the guise of owner occupation. Note that in Ontario, your lawyer signs an affidavit saying what mortgage funds are being used for (i.e. investment property). Note, as well, that if the bank sends an appraiser, you will also be smoked if your sale and purchase agreement is written as single family residential and they see a triplex.

Our banks have rules for a reason. If they didn`t, we would have something similar to the sub-prime crisis in the US. I bought my first property in my late 20`s. I had a good job and still couldn`t get financing. I used my father as a co-borrower.

Full disclosure is the golden rule.

Mike
 
Part of the issue here is that you`re being lied to by your mortgage broker and your realtor. It may be more difficult to qualify, but you are headed down a very slippery slope if you misrepresent a mortgage application. You could end up with future difficulty qualifying for property, getting properties insured etc.

The key point here is to disclose all the information to the mortgage broker and realtor. Do not sign an affadavit that this is your residence if it`s not. Not only are you putting your reputation at risk, but the mortgage broker is risking his license. Personally, my license is my livelihood, and I would not jeopardize it at any cost.

Work with a broker that can assist you in creating an action plan to achieve your long term goals. It might be more difficult but it is the right way.
 
The truth shall set you free. (John 8:32)

Why lie if you can get better results by stating the truth.

Consider that at least 20 FBI investigations are currently ongoing in the US on sub-prime related mortgage issues where borrowers or mortgage brokers or lenders knowingly lent money to people where they knew they lied !

The proceeds from your real estate venture are best enjoyed outside the prison system !
 
QUOTE (thomasbeyer2000 @ Apr 14 2009, 12:42 AM) The proceeds from your real estate venture are best enjoyed outside the prison system !

Thomas, that has to be the line of the thread!! As funny as it sounds it is the honest truth and a point welll made.. 
 
CHMC fees of 3.15% for a home and 6.9% for a rental (95% LTV and 35yr). It`s hard to make some worthwhile using NPV with these figures.
 
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