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By Brian Madigan

If you are in business you should keep good financial records. It just makes sense, but so many small businesses neglect this tedious and somewhat time-consuming task. Careful records take time. And, if you don’t really have the time yourself then you should retain a bookkeeper and an accountant.

Why? It will simply pay big dividends in the future. I’m not really talking about all the tax deductions that you don’t miss because you have proper receipts, or even the warranty claims that you can present because (again) you have receipts. What I’m talking about is much more significant.

It’s the sale of the business, the accumulated wealth of your lifetime of work. Is there any value to it? What is your business really worth? Who will buy it? And, most importantly, what will they pay for it.

In most industries, there is some kind of a “rule of thumb”. Businesses are worth a certain multiple of their net profits. Oftentimes, this ranges from three to seven times the net profits. But, how are you going to prove your “net profits” if you don’t have good financial records. They need to demonstrate some stability. Basically, that means at least three solid years. Also, they should illustrate increasing profits. The more you pay in income tax the better. If you’re generating profits and paying income tax and GST, then this must be a worthwhile business.

The Real Estate and Business Brokers Act calls for the production of financial statements in all cases. However, there is a specific exception under the Act. If the purchaser agrees, the vendor can simply provide a list of assets (equipment and chattels) included, and another that sets out what is excluded, as well as particulars of the possession or occupation of the business premises. Far too many vendors take advantage of this opportunity. The problem is that they often only receive a tenth of the true value of the businesses (or even less).

If you are planning to sell your business in the next three years, the first item on the agenda should be to retain an accountant. The second item should be to drive the net profits as high as possible and in fact pay a significant amount of income tax.

A business generating $100,000/year in profits from an industry that sells for seven times earnings would be worth $700,000. Without proper financial records, this same business will likely sell for less than one year’s profits or the value of its assets (chattels and equipment). The difference is substantial in all cases. Purchasers will pay for good businesses with well-documented financial statements.

So, keep excellent records, if not for yourself, for your purchaser!

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

When it comes to conveyancing practice, the solicitor’s opinion is the gold standard, not a title insurance policy.

Let’s have a look at the policy and determine where it fits in.

First, it is an insurance policy. Historically, insurance has been against the law because it is akin to gambling, or drawing lots. Many ancient societies, and many modern ones too have made gambling a crime.

In the 17th century, the basic principles of insurance were accepted. In fact, they generally seemed to be beneficial to society. If someone’s house burnt down, the cost of replacement was borne by the neighbours. The neighbours arrived to put out the fire, probably too late, cleared the debris the following day, and housed the victims until their house could be rebuilt. Pools of capital were formed to help, in the case of need. Gradually, this organized pool of capital funds led to insurance companies.

Insurance contracts were developed, and there had to be a specific exemption from the existing statutes governing crimes and gaming.

Remember that gaming was gambling, “playing the odds” as it were, which had led to fraud over the centuries. Trickery and slight of hand were illegal, as were bets and taking odds. Consequently, even in the modern society of 17th century England, insurance companies had a great deal of difficulty being accepted as legitimate. As part of their marketing, advertising and promotion campaign for “acceptability” they would often host or sponsor local fire brigades, the forerunners of fire departments. In effect, charity and altruism were the cover for their otherwise illegal activities. In some cases, that’s still true today!

So, what is a title insurance policy? It is a not really a guarantee of title, which it is often thought to be. It is a simple insurance contract. If something goes wrong, the company will help with the loss. They don’t say, there will be no loss, they only say that they will help you out if there is one.

If you are looking for a guarantee, then look to the solicitor’s opinion. That’s basically as close as you’re going to get.

Let’s look at the issue of unpaid taxes, unpaid utilities and unpaid executions.

A lawyer will conduct a search in respect to these items. There will be a clear answer, one way or the other. They are paid, or they’re not paid. It is a simple matter, and a fact that can be determined.

A title insurance company on the other hand will “play the odds”. Most of the time, the taxes are paid, there are no utility arrears and there are no executions effecting the title. Looking at the particular transaction at hand they see that:

1) the vendor said there were no such arrears, and

2) the vendor agreed to pay, should there be any such arrears.

So, they “take a chance”. They say that they will assume the risk when it comes to taxes, utilities and executions. However, the buyer will have to buy a policy and pay the premium.

In order to induce the buyer to opt for this “solution”, the insurer will state that no taxes need be checked, no utilities need be checked and no executions need be checked.

This results in a saving of fees paid to the municipality, the utility companies and the Sheriff to check their records. It also results in a saving of legal fees that would otherwise have been charged.

The solicitor’s opinion provides the true and correct answer. The insurance is just a “guess”. If the insurance company guesses incorrectly, then it will pay. If it turns out that there are arrears of taxes, utilities or an unpaid execution, then they can still insist that the vendor pay. The insurer has the right of subrogation and will sue the vendor if necessary.

Now, the real problems arise when it comes to title, searching title, easements, encroachments, restrictive covenants, title defects, and the extent of title as determined by a survey.

Again, we have the same fairly cavalier approach by the title insurance companies. The insurance principle is based upon spreading known, measurable and predictable risks among a great many people. Quantity is of course more important than quality. High volumes lower overall risks. High volumes lower premiums.

No one here is seeking excellence. There is no reward for being correct or accurate. The reward will only exist with the “law of large numbers”. If you do enough deals, and given that most will take place without problems, the few problems that do arise can be paid out of the savings by participating in the gamble in the first place.

However, if you are a developer, you need the correct, accurate answer. You’re not looking for guesswork. You’re not trying to save little bits of money at the front end. Also, there’s an upper end limit on the title policy claim.

If you are a developer and you find out you can’t build a 50 storey condo, and you thought you could, you’re going to be very upset.

In these cases, spend a little extra money upfront. You don’t need to gamble. Go for the gold standard and obtain a solicitor’s opinion!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

A spokesman for the former anchor Lou Dobbs said he may run against Senator Robert Menendez of New Jersey.

By Brian Madigan LL.B.

There’s no point waiting for tomorrow if your assets are going up and those of your spouse are going down.

Have a look at the recent article published in the Toronto Star by Katie Daubs (www.thestar.com/printarticle/728452).

Here’s a quick summary:

• Growing tired of your spouse, but worried about an expensive divorce settlement? Act now, while the economy is still in the dumps

• Economists say Canada is set for growth in the coming year – so lose your soulmate before your portfolio rebounds all the way back

• asset value is determined the date your marriage breaks down, not the date your divorce is finalized

• every day your RRSPs increase is another dollar you’re going to have to share, until you give notice you want out of your marriage

• the other spouse may be taking advantage of the law

• If the date of the marriage breakdown is contested (and it often is), it could mean thousands of dollars for the other party

The Ontario Court of Appeal has recently ruled judges can take dramatic changes into account when determining equalization payments, if the difference is “unconscionable.”

I was quoted in the article:

If you’re inspired by the settlement, take note: some people, including real estate agent and former lawyer Brian Madigan, find the whole idea a “little abhorrent.”

“You mean, I have to phone my real estate agent to find if the timing is right?” the realtor said. “Like, ‘Oh my god the real estate market is going to go up in the spring, and February is the end of RRSP season, I should lock in the savings?’ “

Obviously, this could start a cottage industry for real estate valuations.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

To the Editor:.

By Brian Madigan LL.B.

The Province of Ontario has introduced legislation to combine the eight percent Provincial Sales Tax with the five percent federal Goods and Services Tax, creating a 13 percent Harmonized Sales Tax (HST).

It is proposed that the HST will come into force July 1, 2010.

Purchasers of real estate will face additional taxation, including:

• taxes upon certain services including moving costs, legal fees, home inspection fees, mortgage insurance premiums, title insurance, and real estate commissions (all of which were previously exempt under the PST; and,

• additional taxes upon the purchase price of newly constructed homes.

Application to Residential Properties

• HST will not apply on the purchase price of re-sale homes.

• HST would apply to newly constructed homes.

• a rebate is proposed so that new homes across all price ranges would receive a 75 per cent rebate of the provincial portion of the single sales tax on the first $400,000.

For an $800,000 new home, this would be an additional $40,000, and for a million dollar home, this would be and additional $56,000. That’s a significant new tax.

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

By Brian Madigan LL.B.

You might think that the Province of Ontario would do its best to uphold the rights of its most vulnerable citizens, but it doesn’t.

Through the Ontario Lottery and Gaming Corporation (OLG), the Province insists upon the completion of a skill testing question. Apparently, or so their thinking goes, this will change a game of chance to a game of skill. We all know that’s just “silly”.

But, generally we are prepared to go along with this “fiction” for the sake of placating the anachronistic thinking of a few.

However, not everyone is capable of answering the skill-testing question. I’m sure you know many people, who are otherwise eligible. They are citizens, taxpayers and adults. It’s not just the mentally challenged.

However, they may be from other countries, they may not speak English well, they may not be able to undertake what may be described as simple math. Others for one reason or another have never attended school, have never learned mathematics and do not have the ability to communicate.

Are all these people to be denied their right to win?

Let’s get with it, and drop this foolhardy notion that the simple math calculation saves everyone’s morality. Extend the opportunity to all without discrimination!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Lou Dobbs is scheduled to appear as a guest on Monday night’s edition of “The O’Reilly Factor” on Fox News, Variety reported.

By Brian Madigan LL.B.

Here is the “ORES REAL ESTATE INDEX” which tracks the average resale prices of single family homes and condominiums in the Greater Toronto Area (GTA). It also tracks certain benchmark comparisons such as the price of oil and gold, as well as the Consumer Price Index.

In addition, the stock market indices for Toronto, and the three largest US markets are also compared.

For ease of comparison, everything we look at is worth 100 points on the Index as of 1 January 2005. That time period compares favourably with the four year average used as a standard benchmark comparison in the mutual fund industry. Actually, it runs for 57 months or four years and nine months.

As of 31 October 2009, [the last two months] and (the highs):

Real Estate

131.08…..[125.91/120.05] (131.08) GTA single family homes (average prices)
126.68…..[126.21/125.74] (126.68) All condos in GTA (average prices)
132.27…..[131.70/131.14] (132.27) Downtown Toronto Central Condos
120.85…..[120.36/119.99] (120.85) East condos
120.72…..[119.17/130.60 ] (120.72) North condos
129.69…..[129.17/128.65] (129.69) West condos

Other market comparisons

243.13…..[232.79/223.38] (243.13) gold (price per ounce)
175.25…..[160.28/159.17] (320.88) oil (price per barrel)
131.08…..[125.91/120.05] (131.08) ORES Index single family homes
118.54…..[123.80/118.08] (158.90) TSX index
108.92…..[108.92/108.92] (109.31) CPI index
99.16…….[102.91/97.41] (130.99) NASDAQ index
92.59……..[90.65/88.76] (132.47) Dow Jones index
87.72…….[89.49/86.40] (131.16) S&P Index

Using the Index

Just a quick note on reading the information. Have a look at the ORES Index for Real Estate (single family homes). As of the end of September, the index stood at 131.08. That’s a 31.08% increase in 58 months. That means the increase is 0.5358% monthly, or it could also be expressed as 6.430% annually. The performance here is shown without annual compounding for the sake of simplicity.

The same index was 125.91 at the end of September and 120.05 at the end of August. The next number, in square brackets is the all-time high since 1 January 2005. That number is 131.08, so the October figure is in fact the all time high.

The other statistics are reported in a similar fashion for the ease of comparison.

Observations (on the Index)

As we use index, there are several notable comments:

• Commodity prices are just commodity prices

• There is no other “extra return” for commodities

• The same is true for the CPI

• The CPI is a benchmark to see whether you are keeping pace with inflation, that number is 108.92

• For a realistic performance goal, you should aim for CPI plus 3.5% annually

• Stocks provide dividends in cash or extra stock. This return is additional to that shown in the stock market indices

• The stock market Indexes only measure the survivors. So, this year both GM and Chrysler would have been dropped due to the bankruptcies

• If you held GM and Chrysler, you lost everything, but two new companies moved in to replace them in the Indexes

• Real estate offers a return in terms of occupancy. You can rent out the property and receive income, or occupy the property and enjoy it yourself

• Actually, I should have mentioned that if you held gold bullion, you could sit in a room, count it, and enjoy that experience too. I’m not quite sure how to measure that. You’ll have to ask King Midas or Goldfinger!

Comparative Observations Using the New Index

• Gold was the best performer

• Oil was the most volatile, (yes it dropped in half)

• Real estate was the most stable, with single family homes outperforming condos

• Downtown condos are beginning to return some performance, but they are substantially off their earlier highs achieved just before the commencement of this Index

• Our own stock market posted reasonable gains, and is close to single family homes

• Two of the three US stock market indicators show negative numbers, with the NASDAQ just returning to positive territory

Conclusion

For steady, predictable, measured gains pick real estate. It’s a solid performer with lower risk (less volatility) and generally moving in a positive direction.

And remember, when it comes to real estate, it’s never “wiped out” completely, like GM or Chrysler stock. So, unless you’re sitting on the edge of a tsunami, you’ll still own something when the storm is over.

For a benchmark of success, there’s 1,000 years of history to point to a rate of return in real estate being about the equivalent of 5% per annum, simple interest (non-compounded). That means that real estate doubles in value every 20 years. There are a lot of companies (now bankrupt) that would have been happy with that return.

Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Royal LePage Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com

Lou Dobbs calls himself Mr. Independent, but he is closer in style and method to the right-wing ranters who mold the facts to shape the argument.