Entries from November 2008 ↓

There is news, and then there’s sort-of news. Real news might be that the government is about to fall, new home sales in Toronto last month plunged or that twenty million Americans have mortgages which exceed their home values. Oh yeah, and Mumbai. Real news these days tends to be real depressing.

That may be why there`s so much sort-of news, especially online, where anybody can turn out a spiffy blog with passable gfx and look credible. That’s ok. It’s a free country. But if you were to start a blog and claim Stephen Harper is in control or that the west coast of India is lovely this time of year, few people would believe you, and the consequences would be thin.

However, when it comes to real estate news, it’s a different story. Legions of potential homebuyers and misty-eyed young couples use the web to search out a home and to research current conditions. Often they turn to ‘real estate professionals’ who position themselves as authorities, or the purveyors of credible market information. Big mistake, kids. Almost every realtor out there masquerading as an analyst seems unable to resist the temptation to pump and dump.

And I’m sad to say this. It drags down the entire professional. Maybe there should be something radical – like regulation.

Anyway, here’s a taste of what I mean.

In Vancouver, condo flogger Ken Stef says “Housing prices will not stay low for long!” Hmmm. Based on what? Oh yeah, a story in the Homes Section of the Vancouver Sun by developer Peter Simpson. “Six months ago, people were dancing on the ‘don’t-worry-be-happy’ bandwagon. A couple of those same guys now believe the world is nearing its end,” Stef says, “and have assumed the fetal position in some dark, clammy corner…  The return to a balanced market offers many opportunities to buyers.”

Vancouver. Average home price down $75,359 in six months. Annualized decline, 21.7%. Welcome to a balanced market. Next stop, the Taj Hotel for a quick drink.

(Speaking of Van madness, please see chart, and my note, below.)

In Toronto, condo pumpers Laurin and Natalie Jeffrey boldly headline, “Buyers not deterred by doom and gloom reports.” They point to a fluff piece in the Star which reports 2,100 new homes and condos were sold in the GTA (population 6,000,000) in October. If there is a lesson in all of this, it’s not to get caught up in all the exaggerated doom and gloom,” the Jeffreys exude. “If the circumstances have finally come together and you are in the right position to buy that new home or condo, don’t let it slip away to someone else because you’re psyched out by all the negative headlines or thinking you might get it for less down the road.”

“Unlike the US or Western Canada where prices spiked dramatically, driven by subprime mortgage lending in the US and commodity wealth out west, GTA new home prices have risen gradually, and according to Canada Mortgage and Housing Corp., will rise a further 1.8% in 2009.”

Sure they will. Say, is that the same CMHC which forecast a 6% increase for prices in the GTA in 2008? Amazing how those pointy-headed guys missed the $45,713 average price drop in the last six months, a 25.9% annual decline. And as for new home sales last month, they were down 44% in Toronto. Hey, condo babes, where do I sign? Pant, pant.

Now, I understand fully real estate practitioners are sales people. I also understand most are honest, decent and ethical. And I know this is a bitch of a time in which to make a living on commission. But real estate is a commodity which moves higher and lower in response to a myriad of factors and after more than eight years of up, it’s going to have at least three or four years of down. That doesn’t mean the world stops or that people will cease buying and selling houses.

But it does mean purchasers will be more wary, value-conscious and discerning, while sellers must be realistic, pragmatic and pliant.

It also means realtors who hope to weather this storm must be seen as credible and trustworthy. If they set themselves up with blogs and snazzy web sites full of opinion, at least what they have to say should be believable. This is not a market anybody with a sales license can wish better. Shame on those who lure in buyers with false prophecies or prey on the uninformed with misinformation.

When the buyers return, you won’t.

Further to the post above, I was contacted by Vancouver realtor Paul Boenisch, who had this to say: “I wanted to offer some Vancouver numbers for your blog (which I read daily). $745,778 for Nov v. $825,206 for Oct. That’s -9.63% I guess we would round that up to a 10% monthly drop. Wow. The average sfh price in Vancouver is now down 19% since its peak at the end of Feb 08. From a high of 920k to 745k.” And (above) you can see from Paul’s web site a nice little summary of why Van prices have a long ways yet to fall, as supply overwhelms demand in a way unseen for many years.

Now, I don’t know Paul, but I did stroll around for a while on his site and was impressed. He’s taken the time to understand what consumers think about the market, and give them objective information. Nice change from realtors treating protential homebuyers as marks and idiots. Note to his competitors: This is the future of real estate, guys. – Garth

Hello Garth,
It has occured to me that in the 8 months since I’ve read your book, been religiously reading greaterfool.ca and occasionally tuned in to garth.ca, you have never challenged the cartel that is MLS.  In my opinion, there is no greater waste of resource and robber of equity than Realtors.  You could argue that the on-going crash is a huge equity killer, but realtors have been robbing people of 5-7% of their homes’ selling price since forever, regardless of whether the market is up or down.  It could be justified if they were charge 1 to 1.5% as they do in the U.K.

In the article, as you do in all other postings, and your book, you offer no alternative but to use a realtor.  You never mention selling privately or ways to negotiate a reduction of the commission.  In a market where no one is buying, if you as a buyer approach an agent who hasn’t made a sale in a while, you could negotiate that if he makes a commission of x, he owes you y% for dealing with him.  If he balks, move on to the next sucker.
Example:
- buy a 200k house
- commission of 6%
- 3% to the selling agent or $6000 for ‘representing your interests’
You could negotiate that he gives you back 50%, representing $3000.  Is there a law that realtors can’t give kickbacks to clients under such an agreement?  Has anyone ever done this? What’s your take?
René in Québec City

Of course the realtors have a monopoly with MLS, but that’s a separate issue from the commission individual agents or brokers charge. Actually, MLS works just fine. It creates a broad marketplace allowing you to compare listings, and it gives sellers maximum exposure to a great number of people. With the advent of online house-hunting, it’s turned into the No. 1 tool for sales leads in the country. The only complaint I have is that FSBOs can’t list on MLS – something they should he able to do by paying a fee. As for commission, you can negotiate any damn fee you want, and there are lots of agents around who will charge you half of the rest of them. With regard to your idea of stealing back 3% of the purchase price of a home from the seller in a down market, I hope you rot.

Garth,
I am in the midst of a rental housing search in Toronto. I used to think that landlords based rents on market forces — the overall supply-demand equation, the condition of the unit, amenities, proximity to public transit, etc. But after trudging through a whole bunch of condos, duplexes and houses for rent, I’ve noticed that some prospective landlords have set rents way off the scale — far above what the unit, building, and location would warrant.

The funny thing is that almost all of these prospective landlords seem to be in their 30s. I can only conclude that what we’re seeing is a wave of new and maybe reluctant landlords who bought at the height of the market, have outgrown their space or realized that they can’t afford to live there, and are seeking to cover their own inflated mortgage payments.

You touch on this briefly in Greater Fool but it might make a good topic for a blog post. How has the rental housing market been distorted by “new landlords” who are setting rents based solely on their monthly mortgage payments?
Jordan

Good observation. There are scads of accidental landlords in the market now, who are greedy little twits trying to transfer their buying mistakes onto tenants. They bought to flip, got caught in the grinder, and now have to rent out their boo-boos to cover operating costs. Being GLTs, they try first to unload all of their overhead on renters, until smart guys like you come along. This is especially the case in Toronto right now, where more than 30% of all the buyers of 50,000+ condos were speculators. In any case, it doesn’t matter. Just offer what you can afford or believe is fair. In this market you should also ask for free months, free parking and a paint job. It’s a renter’s market, dude.

Hi Mr Turner,
I have followed your work for a number of years and appreciate very much all the sage information that you have made available.Presently I am living in Halifax and own some income property.

Single home prices are dropping but income property asking prices have not. In your opinion do you think it is wise for me to wait for better deals over the next few years as none of the asking prices today make any sense. At the current prices (if I paid them) the only return to me if 100 % rented would be (at best) a break even with no operating income for me at all each month.

The reason I would even consider doing it is that decent income properties do not come along very often but I am concerned that they will drop in value over the next several years due to this recesion that is well underway. I cannot afford to get stuck with another property that possibly loses money each month. Your brief thoughts would be appreciated.
Regards, John

My thoughts are why the heck would you ever want to buy an income property in a place where market rents are so low you can’t make money, and at a time when a capital gain is impossible? Besides, you’ll just end up fixing toilets at midnight and having people skip rent, without the ability to throw their sorry asses out in the snow. Trust me, there are easier ways to make money. Only get tenants if you have no friends.

Hello Garth,
Ten years ago plus, I had enrolled in your investment advice and used it when you were offering it online, so I respect your knowledge and information. Now I am coming to you for some up to date knowledge, as the world’s economies are in turmoil.

As economies around the world tank and bounce… what can a person do in Canada, to mainly preserve capital? Having absolutely no debt, what instruments should we as Canadians be putting our money into..

Are Canada Savings Bonds somewhere to put capital for preservation…in case our bank(s) tank. Are different currencies somewhere to put money?
Thanks, Ben in Edmonton

Hey, Ben, money is safe in the form of money. Stop screwing around with it. Next question…

Hi Garth,
First, thank you for The Greater Fool.  It has given me a great deal of ammo when speaking to my new in-laws and my wife about buying a house.  Both, of course, dislike the notion of us continuing to rent. While my investment advisor’s advice hasn’t held true (undoubtedly, she has a stake in me “buying and holding”), your prognostications in the book not only make sense on a gut level, but logically too, and are clearly playing themselves out in headlines each day.

I’ve been watching the mutual funds with my down-payment dive into the toilet, I’m debating selling them now, so that I know that I have something, or holding on for the ride.  I thought I’d stick with the “Garth Turner brand” and buy another one of your books.  Would The Little Book of Financial Wisdom be the right choice or is it now too dated?   I know you’re very busy and if you don’t have time to respond, please accept my sincerest thanks for the great book and for helping me secure my financial future.
Corey in Toronto

All my books are timeless, of course, but that one was written shortly after Nine Eleven, and the world has changed a tad. I’d suggest you wait for the next one, “After the Crash” which I found out today will be off the press in the second week of January. As for selling your mutual funds, are you on drugs? That is absolutely the worst thing you could do, as the markets have lost half their value and are surely closer to the bottom than the top. That means hang on, girl. While this week’s advance looks like a bear market rally, to be followed by some more disgusting drops, the stock market will anticipate a better economy six or eight months before it happens, and up to a year before real estate stabilizes. So, you will have lots of time to regain fund values, and still score on a house.

Hi Garth
I read your column every day and was hoping you could offer me some advice. My husband and I are becoming increasingly worried about our economic future. We presently own 4 properties, the home we presently live in which was mine before we married, our dream home which is presently being rented, my husband’s home prior to our getting married which is now rented, and a downtown condo which is also rented (it was meant to be an investment property and something we hoped to make use of down the road) When we married 5 years ago we moved into my home which is in Pickering and then we found our dream home in Ajax. It has a beautiful setting on the water and because homes on this street rarely come up for purchase we entered into a bidding war and eventually bought it with zero down but with the equity from  our other homes. We had intended to sell our two homes and move into it but I became pregnant. We were thrilled as I had only months earlier miscarried and had been told that it would be very unlikely that I could become pregnant again. We decided that as much as we loved the home that we had just purchased that the baby came first and we didn’t want the stress at that time of having to sell 2 homes and make the move while I was pregnant. We also decided that because our present location, being much closer to the city, my job and daycare, that we would postpone the move for a couple of years, hopefully build more equity in our home and make the move then. Our intention was to move in the spring of 2009 or the very latest spring 2010 so my son could start school in his new community and it would be less stressful on him. We never expected the market to turn as it has. My question is now what do you think we should do. We presently to not have a contract with our tenants but we have an understanding that they can stay until next May. Do you think we should put our present home in Pickering ( which at the height of the market we probably could have gotten close to $500,000) on the market this coming spring or do you think prices may rebound in 2010 and we should wait until then? Any advice you could offer us I would much appreciate.
Thank you, Camille

Well, that’s going to be one expensive baby, isn’t it? You have already messed up your financial life, so asking me for advice at this point is not too helpful. But I have to ask – how does hiring a realtor to sell houses while you’re pregnant create stress? Isn’t there way more stress now knowing you own three too many houses at a time when both prices and rents are plunging? Your plan of waiting to sell so you could ‘build more equity’ did not exactly work out too well. My advice to grow up and realize how screwed you could be. Get all four houses on the market now. And suck on a pickle.

I’m often asked by people who like to prey on others how to buy real estate in a falling market, like this one. The danger of doing so is that you buy before the bottom arrives, and take a capital gains hit. The advantage is you hold absolutely all the cards, and can strike a great deal while the victim-seller is writhing in pain and begging for mercy. That’s the fun part.

So, don’t ask me if it’s time to buy yet, because you won’t like the answer. But if you want some tips on being a vulture, for when the moment’s right, then clip this and stick it on the fridge. (By the way, this is another preview of my coming book.)

* Offer what you want to pay, not what the vendor is asking to be paid. With so many properties listed, and so little sales activity, every offer has to be taken seriously. Only by writing up an offer on your own terms, at your own price, will you get a sign-back showing the true level of desperation you’re dealing with.

* Always submit the offer with a deposit cheque, which is like putting a shiny lure on the end of your fishing line. However, the offer must stipulate the cheque is not cashable until a firm and binding agreement is reached. So, it means nothing, while having a powerful psychological impact.

* Throw in as many conditions as you want. This will create an offer that is completely tailored to your needs and wants while providing elements you can remove in order to gain things you truly want. So, for example, make the offer conditional on the vendors paying all your closing costs, including land transfer tax. While you never expect that to happen, you can remove it during negotiations in order to get what you do want and expect, which is a bargain price.

* Ditto for conditions giving you time to arrange financing or even to sell another property – they are both traditional deal-breakers, and the vendor’s agent will know that immediately. So, by reluctantly removing them you move far closer to getting that price.

* Best, however, to insist on a home inspection. This condition should give you five business days to complete the process, and is normally done at the purchaser’s expense. The reason you want this is because almost all properties need some kind of work done in order to make them perfect, and when you get the inspector’s report you have leverage to help you drive down the price. Simply get an estimate of the cost of the repairs and ask for the deal to be rewritten with a price reduced by that amount. Since the vendor knows the condition is entirely for your benefit and the deal will die unless you sign a waiver, well, guess what? Vulture.

* And remember that the closing date is also an important poker chip to play. Have your agent find out what the vendor wants, and then use that to help leverage the price down. Additionally, you can throw any assets you see around the property into your offer – power tools, appliances, lawn tractor, Harley-Davidson, whatever. The more you put in, the more clutter there is for the vendor to wade through, and the better chance you have of securing the best deal.

* Speaking of which, why not make two offers at the same time on two competing properties, and then let that fact be known (through your agent) to the vendor? That will add even more pressure to the poor guy, as he tries to figure out what he must do to save the deal, and give you what you want. This may be cruel and unusual, but just consider it payback for all those multiple-offer situations greedy vendors placed buyers in during the bubble years.

* And, of course, you can make a low-ball offer, get a sign-back, and then just let it die. Wait a week and go back in with another one, for the same low price. Odds are you will not get the same response this time. The stressed-out vendor may hate you, but he’ll close.