Entries from October 2011 ↓

So far this year I’ve purchased two properties, sold two, listed one and am working on a new deal. This useless information is offered as proof I have no hate-on for real estate. In fact, like you, I’m smitten. I know what lust is when I stand in front of a portico. My loins dance as I run my fingers across a mortar joint binding together the sensuous imperfections of century-old bricks. I’m a building junkie. A hot listing quickens the pulse. Closing day’s climactic.

In past months I’ve mentioned a few of my real estate trysts, only to have critics howl over my hypocrisy. How can you buy, they cry, when you forecast more troubled times to come for housing? If real estate faces a major correction, why not wait? And aren’t you the guy who’s always telling people to stop being juiced for glass countertops, and rent?

Easy answer. Buy what you can afford. Buy where there’s value. Buy smart. Then you can get as horny as you want.

There are many techniques for making this happen. Here, in no special order, are ten of then.

Seek old, tired listings.
Find out what the DOM is for every property you research. The greater the number of days on the market, the better. The vendor will be motivated and his agent hungry to facilitate a deal. If you run around chasing new listings, you’ll pay too much. Guaranteed. Leave that silliness for the virgins.

Look for price reductions.
That’s not exactly the duh statement it appears to be. One the biggest mistakes greedy sellers make is asking too much for their property, often egged on by a dumbass agent who wanted the listing. But a too-high price means no quick sale, leading to a price cut. If not timed right, this can result in a stale listing, necessitating more cuts. After a few months and numerous slashes, the property has the odour of death on it. Perfect for vultching.

Take your time.
Now, go slow. Meticulously research the property, its sales history, comparables and the people who own it. Let it be known you’re interested, may come up with an offer, but on your own terms and in your own time. Now you’re in control and the vendor knows it. This is a necessary precursor to domination.

Explain your offer, clearly.
When the time comes, and once you have built a relationship with the seller or the listing agent (preferably both), try talking through the offer before you present it. Explain clearly why the property is worth only what you are considering offering. Let them howl and flummox a bit, but without a formal offer in front of them. They’ll get over the emotion, and when your paper does arrive a day or two later, the results could amaze.

Don’t be afraid to walk.
Ever. If the seller signs back your low-ball (but clearly explained) offer, there’s no need to counter-sign. Just let the thing expire. The vendor will be surprised, if not shocked, and immediately feel remorse at having lost the deal. Give it a week. Do it again.

.
Make it easy to say yes.
The offer should be exceptionally clean. Other than beating him down on price, give the seller every reason possible to agree to the haircut. Find out what’s important to him – the most convenient closing date, for example, or the ability to stay on for a few months after the deal’s done. Be considerate and kind on all aspects other than the dollars. And no conditions. No financing or home inspection (get it done in advance at your own expense). Offer to help them move.

Close fast.
After sitting on the market for months, most sellers just want to get the hell out. Offer to close as soon as possible – like two weeks (ensure you have an experienced real estate lawyer lined up). And dangle a substantial deposit in their faces – at least 10% of the purchase price, instead of the usual 5%. This often has a monumental emotional impact.

Use cash.
Always indicate to the seller, and early on in the process, that your offer will be a ‘cash deal’. In reality, all transactions are cash unless the owner’s agreed to a VTB (vendor take-back mortgage). But this imparts the message that you are a buyer of substance with no need to prearrange a mortgage, sell another house, or stiff your parents. Remember, sellers want clean, simple, fast and decisive.

Have your own agent.
The listing agent works for the seller. Even if you enter into a relationship with that person (dual agency) you are now working with someone whose first loyalty was elsewhere. Personally I’d never buy a home without my own representation – an experienced person who will help argue for my point of view and provide the necessary buffer and foil. BTW, this person will end up being paid by the seller. What’s not to love?

Seek a down market.
As I have pointed out too many times, the housing correction’s in full swing in many parts of the country and spreading like a virus in others. If you’re waiting for a 25% reduction in North Toronto or West Van, settle in for a long one. But if you covet the Okanagan or Annapolis Valleys, for example, the moment of capitulation may have arrived. There are listings so old they now need surgery, and sellers who’ll get excited just to see you.

So. Take your time. Be thorough and gentle. Persuade. Make it easy to say yes. Be firm at the right moment. Close with conviction.

As in love, how hard is that?

When my old man was a high school principal he bought a house for two times his annual salary, but we still had a boarder living with us. That was okay. She was cute. Solidly middle class, we also had two cars. A new Buick and a beater VW bug. Interesting that the house was more affordable than the Buick – a mortgage could be amortized over 25 years and the purchase price was reasonable, but a car loan was short and with painful payments, and the wheels cost 30% of household income.

Today the same house costs seven times what a principal makes in the GTA; the most unaffordable point in history. Cars, in comparison, are cheap, with a minivan selling for 20% of the same salary. We still buy houses with long mortgages, but today we rent our rides.

The above should tell us a few things. Houses are artificially expensive. Cars are a bargain. School administrators (at $128,000) make too much. Elephantine debt is a way of life. And families can only get ahead if houses keep rising in value. Which won’t happen.

This raises an interesting question of why more people don’t lease houses and buy cars, if it seems clear both will be depreciating.

After all, how many more signals do we need? Austerity is now sweeping the planet, promising slower growth, less government spending and downward pressure on wages and prices. Commodities, especially copper (off 30% since August) are telling us to expect a swampy economy for some time to come. Already real estate values from poor Victoria to the withering fringe of the GTA, are retreating. It’s only human emotion and an endless appetite for debt – not a growing economy and rising wages – which keep housing aloft in places like Vancouver, Skatch and 416. But not for long.

So there is, say the research guys at Macquarie Research, more than a valid case for leasing real estate. To quote:

The cost of owning a home not only exceeds the cost of renting but is near alltime highs. With interest rates more or less at record lows this is somewhat surprising. In addition, the Bank of Canada reports that debt-to-income of Canadian households is 147%, an all-time high and above the ratio in the US—and just slightly below the ratio in the UK. Consequently, it is not too hard to imagine the Canadian housing market making a serious correction if interest rates start to rise. Moreover, we think that depressed home prices south of the border make high consumer debt levels and low affordability in Canada that much worse.

Of course, even if rates don’t jump, the amount of new debt people can absorb is not endless. And smart folks understand that when you can rent a new condo in Toronto for $2 a foot instead of spending $500 a foot to buy it, leasing could be a genius move – especially with 38,000 more units coming to market.

Is there an argument for sustained and continuous advances in the value of real estate, yielding capital gains and making all this leverage worth the risk? Hmm. Let’s take a short stroll into the west side neighbourhood of Vancouver, arguably the hottest housing market in the entire country through 2011. Over the past couple of months I’ve referenced the efforts of one blog dog to sell a fat lot with a tear-down house (the kind of property HAM loves). He started at $2.5 million (normal for the hood), then chopped that by half a mill after a few showings, but no offers. The latest news: now even the showings have stopped.

“Things have slowed to a crawl here. The last sale in the area was on Sept 6th. I plan on waiting it out and not chasing the market down further. It would be different if there was any movement near us – but there is no activity to chase. So the windfall which had appeared to be arriving on a jet plane, and then sent a telegram saying it was going to have to take the train is now apparently not even coming by bus but rather steamship….”

“No activity to chase.” In the heart of the bubble. This is why average prices – based on sales, not crickets – tell us nothing about true market conditions.

Some days ago I argued that the stats Canadians are being given by real estate boards, marketers like Re/Max and the Canadian Real Estate Association are meaningless and misleading. They record past sales which in many cases resulted from offers accepted months previously. These numbers are lagging indicators, not leading ones. They offer no map ahead. To suggest so is disingenuous.

Personally I’d rather invest in where we’re going, than where we’ve been. This week its initials are N.S.