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.


ADVICE modified

They finally sold their house. Rejoice.

In doing so, the real estate agent had asked them to fill out one of those property disclosure forms, full of inane questions that Bill and Joyce hardly thought about. After all, the house was in great shape. When they came to the question, “Are there any water or moisture issues with the basement,” they answered ‘no.’ And why not? A past leak had been repaired and remedial actions taken.

Before firming up the deal, the buyer conducted, and paid for, a thorough home inspection. The guy found nothing of concern in the basement, including no signs of water damage.

Months after the deal was done and the house had changed hands it rained bejesus hard and the basement flooded. Upon inspection is became apparent this had happened because the gutters were clogged and the downspouts had been moved. The new owner sued the sellers, alleging that they lied when they filled out the disclosure form – even though the statement that there had been no water issues was correct.

But the buyer won. The court ruled the sellers made a false statement because they should have known the question on the disclosure form not only referred to the current condition of the house, but to the property’s entire history. And, in the past, there had been water damage. Furthermore, the sellers should have known that improper gutter or drain maintenance would cause flooding, and disclosed that, too.

Bill and Joyce had to write a cheque for $34,000, plus court costs, and hand it over for the reconditioning of the basement.

This is a true story. There are many more.

In fact, a lawyerly column in the Toronto Star a day or two ago made a similar point. In Thunder Bay (where the real estate cartel has made it mandatory that sellers sign a property disclosure form) Vance and Dorothy Overacker sold their house for $392,000 after answering ‘no’ to the same question as above.

Because of a high water table they’d always relied on the sump pump, and three years before selling had experienced a flood. The received $35,000 from the insurance company to fix the problem, and thereafter considered the issue solved. So, the realtor said, just answer that question in the negative. They did.

After closing, the buyers had problems with the sump pump and found water had saturated the septic bed. They sued the sellers for misrepresentation, arguing that had they known there were problems, they’d never have done the deal. The courts agreed. Vance and Dorothy were found guilty of wilful misrepresentation and making statements (on the disclosure form) that were untrue, inaccurate, incomplete or misleading.

The buyers walked away with a cheque for 30% of the house sale price – almost $118,000 – plus the sellers had to pay heavy legal bills. They sued their realtor for bad advice. They won $42, 500.

The property disclosure form, pushed by almost all real estate boards across the country, has resulted in more than 240 lawsuits, and millions of dollars in awarded damages to buyers – even those who had detailed home inspections done, and even when problems occurred years after closing.

These things are toxic. The questions are ambiguous and answers can be wide open to legal interpretations. In many cases, vendors don’t even know what the question means or what the correct answer might be (“Are there any encroachments, registered easements or rights of way?”, “Are there any restrictive covenants?”, “Is there any galvanized metal or lead plumbing?”). The forms also ask far more than the law demands of a seller, and yet once you answer any question and your agent hands the thing over, it becomes a consequential legal document.

So why do the realtors pump property disclosure forms (along with those horrible Buyers Representation Agreements)? Simple. The industry believes any liability arising out of a real estate transaction will then be dumped squarely on the seller, not the agent. In fact if you look carefully at this form, you will see that spelled out. Realtors, in other words, are running away from their duty of care, leaving clients to fend on their own.

So what are we to conclude? Simple. Two things.

If you are a seller. Never, ever fill out one of these despicable, intrusive and potentially explosive documents. If you live in a jurisdiction in which nobody will list your home without it, just write “As is” across each page, and sign.

If you are a buyer, always insist on a fully completed property disclosure form.

Now you know why.

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