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Legally sad

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Here’s a cautionary tale for you. Sadly, you won’t read about this in the mainstream media (at least not until after this blog post), even though it involves alleged deception, disappointment, bankruptcy, flight and fraud. That’s probably because 90% of the victims are Chinese-Canadian families. So, draw your own conclusions.

Four years ago it was just another Toronto condo mega-project buyers were willing to lap up in the heavily Asian district around Yonge Street north of the 401. This one had two towers, a 150-suite hotel and 258 condos in the heart of a district now bristling with spires and clogged with traffic. Centrium was a joint project of a local firm and a Korean builder. The units sold in a cloud of pre-construction frenzy.

Now there’s $12.1 million in deposit money missing, a bankrupted and disgraced lawyer, two hundred devastated buyers and allegations all those dollars are sitting in a Korean bank. The cops are involved. The law society is being bombarded. The jilted buyers are organizing and have been trying for weeks to get the attention of CTV, or CityTV, the Toronto Star – anyone.

Last year rumours swirled the site had been sold at least once and a new developer become involved. By this March it became apparent to many this puppy was in serious trouble. Construction was cancelled, along with communications. Worried buyers started looking to get their deposits back – from the developer, from lawyers and the new home warranty agency, Tarion.

At the centre of the mess was one Meerai Cho, the lawyer for the developer, into whose trust account a mess of depositors’ money flowed. By last month dozens of Centrium buyers had found each other through chat rooms and were barraging Cho’s office. By all accounts, she refused to respond. Frustration was building. As one buyer posted: “At the moment all I care about is that my money is safe. Can anyone at least confirm that our money is safe and that it hasn’t been stolen by these f*cking builders?”

Said another: “Meerai Cho had given away our money to the developer Joseph Lee, who had already fled to Korea. Meerai Cho as a trustee should not have done this, and this is considered illegal. This money, which is more than 15 million (possibly twice of this amount) dollar, should be paid to Joseph Lee after the construction completed. Meerai Cho shouldn’t have done this.”

Last week came the bad news, as online forums and the local Chinese media reported that lawyer Meerai Cho had gone bankrupt. This statement was attributed to her: “I was retained to act as the solicitor for a builder/developer (“Developer”) of a condominium project in Toronto. In that capacity I received, in trust, deposit monies for commercial, hotel and condominium units totaling approximately $12.1 million. In error I released these funds to the Developer who absconded with the funds.”

Yikes.

Worse, Cho’s bankruptcy and the inability of buyers to track down Centrium’s current owner/developer meant getting deposit money back was turning into a nightmare. According to Robert Charles, trustee in bankruptcy, Cho’s total debt on the day of collapse was $13.2 million, with only $863,000 of that secured. My calls to Cho’s office, by the way, have gone unanswered so I cannot independently verify these numbers. But, if true, they’re staggering.

Toronto fraud cops are now investigating. In the matter of Cho’s missing millions, there is a court hearing scheduled for September 2nd, but it is likely to be little more than procedural. The Law Society of Upper Canada has been fielding complaints, and the jilted, confused and abandoned buyers are trying this week to get attention. They got mine.

By the way, it’s not at all clear if these folks will get their money back, how much, or when. The Tarion warranty program does not necessarily cover a lawyer going bust. Instead the conditions for refund are (a) the bankruptcy of the builder, (b) a breach of the agreement by the builder or (c) the buyer proving they have the statutory right to treat the deal as terminated – which is a long legal process. In any case, the maximum deposit covered is just $20,000, which is a fraction of what many in this instance handed over.

Lessons?

I will say it again. If you buy a condo in a pre-construction attack of hormonal delirium, then you’re taking a big chance. It’s a futures contract, laden with risk. Centrium was supposed to be built a year ago, and is still a pile of dirt. Realtors flogging the project, collecting their commissions when agreements were signed, apparently felt no obligation to tell clients when material changes occurred. Lawyers obfuscated and dragged. Ultimately, as far as anyone knows, the unknown and unproven principal developer just took off.

Buyers were screwed, without a doubt. These buildings will never rise. A lot families will suffer. And there’s so much blame to go around.

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The ride

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This week a survey found 80% of renters want to be owners. There are 2.4 million people under the age of 50 who lease their accommodations. If Altus Group is right, eight in ten lust to have a home of their own.

Of course, three in ten also want a pony. And seventy-three per cent would take a new Mercedes. Plus, taller and slimmer would be great, while you’re at it. Thanks.

Owning real estate is a societal obsession, and were it not for the lowest interest rates since Noah (I actually had to watch that flick, yuck) the people who could truly afford houses would buy them. But these times aren’t normal. People routinely buy stuff they shouldn’t, in ways that are destructive

Like cars.

The average car loan in Canada, says JD Power, is 69 months in duration, down a little from the record 72 months recorded late last year. As you know, a number of car companies advertise loans of 96 months, which is a year or so longer than the average marriage and the lifespan of most cheap rides. Dennis Desrosiers, the car guru guy, says it takes 80 months of payments on such loans before a consumer is back in the money. In other words, by the time you pay most of the loan down, your car is worth a few dollars more. If it still goes.

Why would folks be so dumb as to incur years of financing charges on an asset destined to deteriorate in value – ultimately to zero? Easy. They want cars but can’t actually afford them. Demand for car credit is rising now by almost 10% a year, with loans of six to eight years being the reason. Kinda like 5% down houses with cash-back mortgages, except that cars always devalue.

Cheap cars loans, long terms and low payments have a predictable result: people borrow more and buy bigger. So they get into trouble. The credit bureau guys say up to 15% of all their cases involve vehicle financing. The advice: if you can’t cough up 20% of the car’s price, you’re not ready to buy.

Hmm. So back to houses, where the average down payment is way less than 20%, loans are 25 years long and bankers will lend to poodles. What does the Altus survey tell us when 80% have house lust?

That’s easy. We have problems. If those renters tried to buy with 5% down, a 25-year amortization and at the posted rate for a five–year mortgage (which is the baseline requirement), then only 250,000 would actually qualify to acquire real estate. Yup, 80% want to buy. Only 10% can – with the skinniest of deposits, and rates at an all-time low.

This goes to the bleak facts this pathetic blog keeps on yapping about. Savings rates are miniscule. Most TFSAs are in cash. Growing numbers of people admit they have little or nothing put away for retirement. Most gains in net worth have come real estate froth, not because families earned more and spent less. Meanwhile debt – for cars, house and LOCs – keeps on growing, and the real estate ownership level is 70%. Just imagine what happens when rates start to inch higher.

RBC warned this week that’s bound to happen, with a ‘substantial impact’ on real estate.

Said chief economist Robert Hogue: “The higher home prices get relative to income by the time rising interest rates really start to bite, the more prices will have to adjust downward over time to keep longer-term affordability from reaching intolerable levels. This means that any price increases exceeding the rate of household income gains in the near term (2014 and 2015) likely would result in steeper price declines down the road.”

And on Wednesday the latest release from the Fed showed a growing bias toward raising US rates sooner than anticipated, now that 200,000 jobs a month are being churned out with regularity. For the record, this is how the central bank put it: “Many participants (at the Fed policy meeting) noted that if convergence toward the committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

By the way, “monetary accommodation” means cheapo lending rates, whether achieved through its stimulative bond-buying program (known affectionately as ‘QE’) or by keeping the Fed rate low. Either way, 2015 will be the year when the cost of money starts going up. Get ready.

It all begs the question – if people are so inept when it comes to cars, with finance-laden terms because they lack the cash, then isn’t it scary half of all real estate sales are to newbies who can’t actually afford what they’re buying? And that 80% of renters think they can be buyers? It would scare me. The last place I’d want the bulk of my net worth would be in property. Or, shudder, a Kia.