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Erinomics

BEWARE OF DOG modified

“Thought you might like this,” George wrote me. “Kind of unbelievable – a 19% return on investment? Actually, it IS unbelievable.”

Yawn. Another Toronto condo developer trying to move product to virgin landlords by claiming it’s a fabulous investment. This time the project is Garrison Point, a five-tower mass wedged between two sets of railway tracks overlooking the scenic Gardiner Expressway on the western flank of godless Toronto. Thirty-storey Tower One is now being flogged, with 300 boxes selling from $275,000 (496 square feet with a fabulous view of train wheels) to $1 million.

Just another few hundred condos added to the 105,000 currently being built or sold in the GTA, where cranes blot out the sun. Just another developer luring the young and the innocent, this time with a year’s free condo fees and guaranteed rent for newbie investors. The marketing is clearly aimed at Gen Yers and Millennials, like so many. But this development is special. It has Erin.

ERIN  Erin Bury, says the Garrison Point blog she contributes to, “is a first-time home buyer and the Managing Director at 88 Creative. Find her at @erinbury on Twitter.” She’s also young and attractive. And smart. Erin writes a monthly column for the Financial Post and comments on techy stuff for CTV. She’s appeared (says her bio) in the New York Times, Forbes, CNN and Canadian Business. She was named one of Marketing Mag’s top 30 Under 30 whizkids. And she’s the team leader at this leading edge marketing company, housed in a loft full of beams and Apples.

In short, one helluva endorser – a generational leader and role model to all those pathetic Millennials still living in their mom’s basement. And Erin, amazingly enough, has just bought a unit in Garrison Point! So it must be cool.

“As a Gen Y first-time purchaser,” Erin writes, “I want to take you through my journey from perennial renter to new condo owner, and show you why it’s easier than you think to own a home, and why pre-construction is an affordable way to own.

“I’ve lived in downtown Toronto since I graduated from university in 2007 and have been a renter ever since, first with a roommate and now with my boyfriend. I’ve always wanted to buy a home, and for years I’ve considered buying a resale condo, but without a full 20% down payment I was always hesitant to incur CMHC penalties, and putting only 5% down would make my monthly bills too expensive. I know I could move to the suburbs to get a cheaper place, but I love the downtown lifestyle, and have no plans to move to the suburbs (or even north of Bloor) anytime soon.

“The best alternative to moving to the boonies? Buying a pre-construction condo. I just purchased my first condo at Garrison Point, and here are the reasons I think pre-construction is the way to go.”

Well, says Erin, buying a condo that doesn’t exist yet gives you more time to save money you don’t yet have to make a down payment, and means you can secure a unit with just 5% down. “Who has $100,000 laying around in their 20’s? Not me.” Plus you can save money for new furniture, moving, and pesky closing costs. Second, buying this way means “you don’t have to worry about market fluctuations,” which is kind of an intriguing thought. “As a first-time buyer you don’t know what to believe, and after years of watching people speculate I’ve learned that no one knows for sure,” Erin says of those who warn that maybe – just, maybe – having 105,000 condos go up at the same time might skew the demand/supply metric. But she’s not worried.

She also tells her readers this is a great investment. “You’re buying a unit at today’s market price, and moving in 2-3 years down the road when the price per square foot will have inevitably gone up. And when people say it’s only a great investment if the market is doing well… I tell them that if the time isn’t right to sell, I can always rent it out.” Wow. Where do I start?

Of course, a normal market correction would wipe out Erin’s equity and leave her with a mortgage potentially bigger than the value of the condo. Interest rate increases (which are coming, of course) will make each mortgage renewal more difficult and wound the market. Owners like Erin will always pay more to live in the same unit than it costs to rent – which means she’ll be in negative cash flow if she does bail, can’t sell, and gets a tenant. And, of course, buying an unbuilt condo is like taking out a futures contract. You risk cash today, gambling that three years from now you won’t be crushed.

But, wait. “Down the road …the price per square foot will have inevitably gone up.” This is Erinomics. Pay attention, kids.

Finally, why did Erin buy here? She says:

“So why did I purchase at Garrison Point over the other pre-construction projects in Toronto? Well there are a million reasons I chose this specific development. First is the location – King & Strachan, which is on the streetcar line and also close to Liberty Village. Second is my unit – I purchased a two bedroom-plus-den unit with two balconies and a lot of space, so I can have a family there. Third is the planned community – when completed the project will be five buildings, retail stores, a 4.5-acre park, a planned community pool, and unobstructed views of the lake and downtown thanks to the rail lines on either side. I feel it’s not only a great home for a young family, it’s a great investment.”

There may be a fourth reason. She’s paid to.

Erin Bury’s employer, 88 Creative, is owned by BuzzBuzzHome, one of Canada’s most successful condo marketing companies and sites. And Garrison Point is a client of 88 Creative, where Erin is in charge of things as managing director. In fact, her company created the Garrison Point blog that Erin writes, under pretense.

At least, that’s what 88 Creative claims on its corporate site: “We’ve built the online community using Twitter, Facebook, Instagram, and a Garrison Point blog, directly impacting project registrations and raising the profile of the brand.”

And here I thought this was the generation of transparency. How naïve of me.

Bad news

BAD NEWS

So, does it never make sense to buy a house? Some people would have you think that I hate real estate. Like the Globe, which called me the “king of housing bears”. This is ironic, since I’ve written almost as many books on how to buy property, as how to avoid it. At least I now get to wear little crowns on my boxers.

Actually I love real estate, and have owned lots of it. But I also recognize it’s turned from a necessity to a leveraged investment asset, into a cultish obsession. With so many people owning, housing’s now viewed as riskless. Those without it feel disenfranchised. Kids buy condos before they get cars. Weird.

(I recall my parents asked my rebellious older brother when he was 17 what he wanted as a graduation gift. A car, he said. So they did. He got in and drove away. Forever. Made perfect sense to me at the time.)

Anyway, a house since provides shelter and emotional security. Astutely bought, and wisely financed, it can make you long-term money. Gains are tax-free. You can borrow against it, rent it or expand it. Your mom will be proud. But against all these positives are a growing stack of negatives, chief among them the massive debt involved in buying an asset at historic-high levels. This means as prices rise, so does the risk of paying too much – especially when interest rates inevitably creep up and the debt gets ugly.

So, buy if you can truly afford it, and if the real estate represents a reasonable amount of your net worth. That does not mean 5% down with a 3% cash-back mortgage if you’re a burger-slinger at Wendy’s.

But here are two other examples of when being an owner beats being a renter. Or, rather, when renting sucks. First, here’s Mark in West Van:

“My wife and I just rented a house in West Vancouver.  2 year lease for $4000 per month.  Our landlord and agency said they wouldn’t list the house before I’d agree to sign the lease.  Two months after we moved in she listed the house for almost $500,000 over assessed value, which has almost no chance of actually selling.

“So we could easily be harassed by potential buyers for the whole lease, just in case of the off chance that someone wants to severely overpay for the house. $1.81 million assessed, $2.3 million price.  What would you do if this happened to you?”

First, Mark, I’d pay my lawyer two hundred bucks to send the LL a letter alleging breach of contract, since verbal assurances given to you formed a critical part of your decision to lease the home. It’s worth a shot. Lots of landlords want nothing to do with legal action, since it’s costly and protracted. And I hope your lease was properly papered.

But according to BC tenancy legislation if the owner sells the property and the new owner (or a family member) wants to move in, you have to move out (after two months), unless you have a fixed-term lease. But it has to be done properly – your existing landlord must receive a written request from the new owner prior to serving you notice. Ask to see it. The request must say the new owner requires vacant possession in order to move in. If this request does not exist, or the new owner wants to do something else with the property, you can stay

By the way, if you are kicked out after the house sells, after the vacant possession request is made, after you receive notice, and after two more months, then you must receive a month’s rent as compensation.

In Ontario the Landlord & Tenant Act says you can be evicted if the LL sells to someone who will move in (or his family), “however, a tenant can only be evicted at the end of their tenancy and only if the Board issues an eviction order.”

Now, here’s another problem, from Mike who apparently dissed me in the past (before he required free advice):

“My name is Mike and I read your weblog everyday and post comments.  I apologize for anything I have posted that was in-appropriate.  I have a problem and some questions I am hoping you can help with. The condo I am renting has been foreclosed on.  I was served with a notice this morning.  I mostly have questions about my rights.  I think the foreclosure happened July 4th, 2014.  How long do I have before I am told to leave?  Do I keep paying rent? I sent post dated cheques, should I put stop payment on them?

“I really don’t know where to start or what to do. “

When a LL goes paws up, the bank’s right to collect on the mortgage debt takes precedence over your right to live there. This is a pain, but I sure expect to see a lot more of it in the future since so many amateur landlords own properties that are cash-flow negative.

You should have received a court document called a Petition, Mike, delivered to you. It spells out how long the owner has to pay outstanding arrears before being forced to sell (usually six months). You should go to the court house and file a Response to the Petition which will then entitle you to receive copies of all documents, so you know what’s going on. You have 21 days to do so.

Do you keep on paying rent? Yes, you must until you get a court document naming a new owner. The court might inform you that the property can be shown to prospective buyers, and you must accommodate that. Finally, if the court tells you there’s been a sale, or a change in title, you’ll be given a possession date by which you must split. That is, unless you contact the new owner and work out a new lease.

In general, renters are subsidized by owners. Often massively. In every major city (even Calgary), it costs less to rent a condo or a home than to own it, once all the costs are factored in. And yet scores of silly people have purchased properties thinking they can lease them out, and get on the path to real estate riches. Many are learning otherwise. And this is why sales and foreclosures happen.

So, you can accept the reality, move and enjoy subsidized rent again. Or you can buy, and roll the dice.