Hot & bothered in Toronto

…where condo fever about to go terminal

Hello Garth
I need your expertise urgently
I am thinking of selling my home shortly, would go for about 440,000.00 and I am thinking about buying a new condo set to be ready by jan 2010 for 301,000, this would leave me a mortgage of 30,000.00 as opposed to the one I have now of 200,000.00, I will retire in 7 years at age 55 and the condo would be paid by then, am I ok to make this committment now to buy the condo, ah, from the time the house sells, I would be living with my brother without charge and save money until the condo is ready

Help! (I really would be honored if you replied back to me!)
Angela

First, is the estimated market value of your house realistic? Better check it out by getting the opinion of at least three agents experienced in listings in your neighbourhood. After the headlines in all four Toronto  dailies today about the real estate market now in decline, you can count on buyers turning into vultures, starting to lowball offers, and look for deals. Second, why on earth would you gamble on buying a condo which will not be built for two more years? All manner of things could go wrong in the meantime, from cut corners due to a slumping market and weak unit sales to outright cancellation. Personally, I would never buy a piece of real estate I cannot see, touch or have inspected. Third, condos are vastly overbuilt in the GTA and will bear the brunt of the mess to come.

In summary, I am glad you wrote me. This is a bad strategy. By all means, sell. By all means shack up with your bro. But wait a year before buying, and ask me what to do then.

Garth,

I heard a portion of an interview you did on CBC Radio the other day. During that interview did you say that it made a very large positive difference to make weekly payments over bi-weekly mortgage payments? If you did make this statement, please clarify as I cannot confirm this to be true after running the numbers on an amortization table?

Thanks kindly for your response as this is obviously quite important to those trying to reduce the mortgage interest paid.

Tim in Kelowna, BC

Absolutely. This is the best mortgage-buster known to man, and I have written about how it works in a couple of previous books. In short, by breaking a monthly payment into four equal units, and making each one of those payments weekly, you will end up paying the equivalent of one extra monthly payment per year.

Not only does that speed up repayment, but it dramatically affects amortized interest, since each week you are eating into the principal, which reduces the accumulation of interest over time. The result is that a 25-year loan can be retired in about 13 years, saving tens and even hundreds of thousands in interest. Ask your bank to make the change today.

Hi Garth,
I’m not sure if you answer personal inquiries but I could really use your advice re a time sensitive investment I just made. I just bought your book and am fascinated so far… here’s my situation.

I’m on the 2nd of a 10 day cooling off period of a pre-constructed condo in downtown TO
http://www.gallerycondos.ca/. I bought a 2 bedroom penthouse suite with a 350 foot terrace (a huge selling feature for me)

Some details:
– i’m 28 yrs old… have done well with real estate investment so far
– i’m paying 20% down
– the property is $546,000
– works out to about$520 a square foot
– i make $300,000 a year
– this is at least a 5 yr investment
– it’s in a underdeveloped area
– it’s on a transit route
– 350 foot terrace!!!
– should appeal to high level person …rent will be $3000 ish a month…same as mortage
– i’m hoping this will double in value over next 5-10 years… realistic?
– i like the idea of spreading the 20% down payment over 9 months
– this is purely for investment

What would you warn and caution me of? My main concern is this… for someone with money to invest… is the best move I can make? Basically I have alot of money sitting around and want to invest in something… what would you do if you were a young guy in a position to invest?
Really look forward to your valued input
Vince

What I’d not do is what you are doing. Are you nuts? You are about to drop $100,000 and take on $450,000 in debt for a condo unit which is unbuilt and unseen. If you are totally hot to live there, that’s one thing. But it sounds like you are just looking for an investment, which is another. You will be buying at the top, suffering through a market correction, and be 100% lucky if you recoup your purchase price in five years. Double your money? What are you smoking? And if you hold it as a rental unit, capital gains will apply to any money made.

Besides, what’s this about rent?

The mortgage of $450,000 at current rates will cost you $3,150 a month. Condo fees will be at least $400, and taxes on a unit like that about $700. That makes the carrying costs $4,250, plus you have the $100,000 downpayment to remember – invested at 6% a year, it would earn $6,000, or $500 a month. That means just to break even, you need to find a renter who will pay almost $5,000 a month. Chances of that: Zero. We are about to enter a buyer’s and renter’s market. They will both feed off suckers like you.

How did you get to earn $300K a year and be so gullible?

Hello Garth,

I haven’t had a chance to yet read your book, but have found reading your blog most informative. Perhaps you could comment on this situation:

We live in downtown Toronto near King and Spadina and have recently purchased a condo in the King-Spadina area that will be ready for occupancy in 1 1/2- 2 years. One usually buys and sells in the same market. Do you think the recession in the U.S. is going to have severe impact in Canada? If so, you think the downturn is going to be so severe that we should sell and rent for two years or will the market remain steady? The King – Spadina?King West area has certainly experienced a rebirth with its proximity to downtown, the financial district etc. Even if the market were not to gain in value over the next two years, we would prefer to stay where we are, rather than incur an additional move, though we have considered the possible advantage of investing the proceeds from the sale of our condo and using the interest plus money saved from condo fees and taxes towards rent. A downturn notwithstanding, do you think certain areas in Toronto would be cushioned because of location and uniqueness of individual buildings and properties?
Thank you,
Sheldon

No. If you can bail out of the deal, do so now. If you can’t break the contract, sell it – and hope somebody comes along who shares your delusion. This market is going south, and condos will be hit the hardest (see the above responses for more of my negativity in this regard). You have likely bought in at the high water mark in this cycle and there is no way you are going to do anything but lose money. Get out.

Hi Garth,

Its very rare that Realtors or their “news” magazines admit that the market is softening or correcting but they can’t dispute the numbers – no matter how they try and spin it. You’ll notice that they counter the ACTUAL stats with old forecasts or numbers that support their dialogue.

If you decipher through their shameless counter-arguments, you’ll find that:

1. Sales are down 13% from the same month last year. They go onto say “you can’t use 1 month as a snapshot” but if you look at February, sales were down 7% and in January they were down 5%. Surely three months is a reasonable amount of time to say – hold the effing phone Houston we might have a problem.

2. Dollar volumes in sales are up 10% from last year. However, this doesn’t mean that house prices are up 10%….not even close. If you look at the numbers, you’ll find that there were more sales of higher priced homes – some houses saw reasonable price increases while others did not.

3. They try and distract the reader with “Calgary this, Vancouver that” and go on to say that Winnipeg doesn’t have the same problems….blah blah….except we aren’t asking about Calgary or Vancouver or Pheonix for that matter.

Why, for the first time in 7 years have sales in Winnipeg been sliding? Answer that one Darlene Clare, President of the Realtors Association. Stick to the subject at hand and answer that one.

4. When March is a record month like in 2007, they have no problem forecasting streets paved with gold…but when sales are down its “we should wait for 6 months before we can say that the market is trending downward”

Bottom line according to the “NEWS” is that everyone should hire an agent…..which is self-interest at its best.

Scott in Winnipeg

Bless you Scott. You get it. Care to move to Toronto and straighten a few people out? — Garth

34 comments ↓

#1 Vlad Gonchar on 04.18.08 at 7:15 pm

Hello Garth,

My situation is probably very good or even the best example of what you warn people off…

I am originally from Ukraine, 52 now. In Canada since 1998. Right at the beginning – divorced. Hard years to learn the language, find first job, second… In few years, in 2002, I bought my first house for $225,000. My salary has grown from $40,000 to &80,000/yr (computer programmer for entire life). I had very good credit history and no debts at all. I think very hard how to provide decent retirement time. Last year I refinanced my house increasing my mortgage from $170,000 to $340,000 (real cost now is $370,000 just to cover closing costs). The main reason was to give money to my two children, who just graduated UfT, for down payment to help them to buy their own homes. Rest of the money $90,000 I bough 3 condos (“Beyond the sea” project, South Etobicoke). It was just down payment. They cost $250,000+$240,000+$420,000 = $900,000.
Agree – it is scary number, but I planned to sell them with profit before I get mortgage and possession (the builder “Empire” gives option for one free assignment).
Wanted to become richer in one night! I am realizing it was mistake. On top of that, 3 months ago, I bough a bungalow for $500,000 with 5% down taken from my line of credit. It resulted in mortgage of $506,000 and $35,000 debt on lines of credit. I want to buy something to rent and live there was deceived with the purchase completely not suitable for this purpose property. I overpaid $50,000. There were few mistakes done: it was private sale, so no real estate agent, had bad advisors and wrong hopes. Bad things come together (btw, good thing also).
Now I am trying to sell everything. After selling (if) the two houses I will end up in about $100,000 loss. Hopelessly – no buyers for a month already, no single offer. I do not know what will happen with condos – no buyers too. To close the deals I have to take money from lines of credit again. I might end up at the very bottom in this life. I am 52 and I do not have time to recover in this life.
Now I do not even think how to become richer. I think how to get out of the deals and minimize inevitable losses, how to survive not making suicide at the end or not end up on the street.

Please give me advice what would be my decent strategy of exit. I try to not lose my soul, keep my mind clear and behave decent. I know, it is shame what happened. This exactly what you warn people about.

Vlad

Hey, guy. Call 9-1-1. You’re a train wreck. — Garth

#2 curious to know on 04.18.08 at 9:42 pm

To Vlad:

Would you care to tell me where you got the mortgage for the $500,000 bungalow? And is it CHMC insured?

#3 vultur on 04.18.08 at 9:48 pm

DARTH DISTORTS should be the headline!

Yes, sales volumes are down in Toronto but the average price of a home went up 10%! Also, listings DROPPED- the opposite of over-heated markets like Calgary and (d)Edmonton.

No one cares about the drop in sales from historic highs except for commission-based salespeople like realtors. As a seller you don’t give a rats behind- you just want out, fast, at a high price. And that’s exactly what the data is telling you will happen today in the Great City of Toronto.

Also, to the guy making $300k- that’s probably triple what Darth earned in his best year (way behind him) so it is he who should be asking you for advice not vice versa!

Your desperation is unzipped. — Garth

#4 Chris on 04.18.08 at 9:51 pm

Garth,
I’m considering buying a hobby farm in Lunenburg County or an oceanfront property outside of Halifax to retire. Prices there seem really cheap compared with Central and Western Canada. Do you think NS would be affected as much as the rest of Canada during the downturn? What do you think?

Yes. That’s demand property where prices have climbled smartly in recent year. You want water and a view and a deal? Go to Cape Breton. — Garth

#5 vultur on 04.18.08 at 9:52 pm

Angela my dear,

Please do what’s best for you, not what this overgrown schoolyard bully mistakenly believes is best for you. Yes, the condo make depreciate slightly by the time it gets built- maybe 10% -15% from your pre-construction price?

Can you afford the absorb this loss in the shorter term? It shouldn’t matter much if you intend to make this your primary residence as you’ll make up any loss over the long term as your condo probably will be worth 5% compounded more in say 15 years than it is today.

No biggie, don’t sweat it, and enjoy the hassle-free condo lifestyle- it sounds like you’ve earned it!

#6 Sam on 04.19.08 at 1:54 am

Garth,

Isn’t it time we stop seeing Vultur on this forum now ?
I think he is now crossing the line and is becoming insulting.

#7 Investments on The Finance World For News and Information Around The World On Finance » Blog Archive » Hot & bothered in Toronto on 04.19.08 at 4:33 am

[…] Hot & bothered in Toronto Do you think the recession in the US is going to have severe impact in Canada? If so, you think the downturn is going to be so severe that we should sell and rent for two years or will the market remain steady? The King – Spadina? … […]

#8 patriotz on 04.19.08 at 4:40 am

your condo probably will be worth 5% compounded more in say 15 years than it is today.

Yeah right. It took nominal prices in Toronto 14 years just to get back to the peak they reached in 1989.

Also you don’t seem to consider the excess of monthly ownership costs (interest, condo fees, taxes, etc) over renting a similar unit a loss. Well it is.

#9 Dom-GTA on 04.19.08 at 8:11 am

Garth, totally agree with Sam. Vultur is a waste of space. I like contrarian people, (my wife is one!! :-)) but Vultur is just being infantile. His opinions are obviously in the minority on this thread, and that must be very frustrating for him as he is now lashing out with just plain stupid comments.

As for 300K guy, he is symptomatic of what we are seeing, people making way too much money for what they know/do. He must be a financial broker or something….selling bonds or ABCP paper. I find that is the most overpaid industry for the amount of effort and work.

Makes you shake your head a little bit when 28 year olds are making that kind of money and too many families can’t meet their monthly bills.

Vlad!!! OMG!! What is wrong with you!!! You had it right until you refinanced and put all your eggs in one basket.
Time to make your kids sell their properties and give you back your money!!! + interest.

Typical Eastern European mentality, help the kids, even if it screws you. I hope your kids are grateful and will support you if that becomes necessary.

Good luck.

#10 Peter on 04.19.08 at 11:59 am

Hi Garth,
I don’t agree that people should be censored here. I sold my house last October here in Leaside. I am hoping that you are correct in your projections. I have been following the market and it seems Vultur has a point . The homes I have seen recently (this past wknd) have gone for vastly over asking or within 1 or 2% . I am going to wait and see , but do you really see a large price drop in the established areas where people aren’t into the 5% down 40 year mortage situation? I sold hoping for a correction , but it seems there is still a high demand for these over priced properties in the better areas. I have bet the farm you are correct…. hope I am not a the fool. Thanks Peter

#11 Another Albertan on 04.19.08 at 12:51 pm

Hold it, people. Individuals like Vultur have just as much right to postulate their views. If Garth is claiming that he isn’t censoring, we have to take him at that word.

In any case, hearing the diatribe is part of the process of learning how to make your own decisions, especially when they are counter to the direction or mood of the herd.

If anything, people who want to learn and aggregate as much diverse information about a particular subject should be thankful that the Vulturs of the world care enough to go blue in the face on the Up points as Garth and other commentators are on the Down points.

Making decisions based on single-source inputs is what created this real estate environment in the first place.

#12 Sam on 04.19.08 at 2:02 pm

Great! hopefully Vultur will be out soon. Pls do it Garth…

#13 vultur on 04.19.08 at 4:11 pm

Dom, he earned the money. What business of it is yours? Stop being so jealous.

I’m hardly frustrated. I’m not over-leveraged so I actually encourage a downturn in Toronto. I just don’t see any.

#14 Crikey on 04.19.08 at 7:31 pm

As annoying as Vultur is, I don’t believe he should be censored either.

His posts are definitely beginning to smack of desperation, but if he’d like to give himself up as connon-fodder to brighter people’s wit, so be it!

Keep on posting, Vultur! Thanks for the laughs thus far… I’m looking forward to more.

#15 Dom-GTA on 04.19.08 at 8:15 pm

Vultur,

Truthfully, I think you are jealous of all the positive attention Garth is getting.

“Earned” it is a relative term that self entitled people like you like to throw around for having been lucky.

I am not jealous of Vince, things are going pretty well on my front. Maybe I don’t make 300K but I do ok.

I have had the pleasure of having been around the block, and you remind me of the “pump and dump” guy that was pushing Nortel and Bre-X on Stockhouse. I think you have placed some bets here on the RE market going up and you now realise how screwed you are. Hope it isn’t as bad as Vlad.

And I am actually not for sending Vultur, because as it has been pointed out opinions are like a**holes, everyone has one.

#16 Vlad on 04.19.08 at 11:24 pm

ResMor Trust Company, CHMC insurance ~$34,000

#17 jrochest on 04.19.08 at 11:36 pm

And bluntly put, if Angela buys a presale condo things could work out just the way that Vultur says, OR:

1) the project could be canceled altogether, if the company goes under or financing is pulled.

2) the price could go up, if the financing costs are much higher than anticipated.

3) Angela could wind up having to pay 300,000 while comparable units sell for 200,000.

And how can you be sure, in your mid-to-late 40s, that you’re going to be able to stand living with your brother for two years? What happens if there are construction delays and you wind up living with your brother for 4 years instead?

#18 jrochest on 04.20.08 at 12:29 am

Oh, and Vince? Did you actually look in the Star to see what ‘luxury condos’ usually rent for? They seem to sit around 1600 to 1800, with very few at over 2,000 a month. There’s very few places for rent for 3,000 or above.

Why should someone pay you five grand a month when they can get something equally nice for half that?

#19 vultur on 04.20.08 at 12:46 am

You make me laugh Dom.

In truth Darth’s attention does generate a certain degree of kernel of envy knowing that I have the a quantum of the intelligence and real estate experience that he does and knowing that I have the ability to craft a far better self-help manual for the masses than this poor lemon head of a MP ever could.

Darth is desparate, Darth is predictable, Darth is one diemensional. We’ve all heard Darth’s song time and again. Real estate markets are cyclical, it appears to be the top, don’t buy or you’re gonna get burned. Yes, yes, it all rings relatively true and so tiredly predictably so.

Darth is telling you nothing new that you couldn’t source with 10 google searches. He’s just doing it with a truly annoyingly irreverent tone that is growing more tired than his political career.

#20 Nick on 04.20.08 at 10:33 am

I like Vultur’s posts…..he’s no more a a jerk than Garth is. That aside I agree with Garth that the RE is currently overpriced and a correction is comming.

#21 Dom-GTA on 04.20.08 at 3:59 pm

I think that some of you are confusing Gath’s straight shooter comments as being a jerk or arrogant, but it seems that people need to be hit over the head with a hammer when it comes to RE, otherwise you just get ignored.

Vultur, the truth finally comes out. So this is all because you think that you are smarter and better than Garth, but you know what so do I. I think that of most people. The difference is Garth got of his ass and actually wrote something instead of just thinking about it. How many morons out there write stuff and make money about things that are obvious and self evident.

Vultur, get off your ass and write that book. I’ll even publish it if you do :-)

Good luck.

#22 Brent on 04.20.08 at 5:07 pm

vultur has been posting his perma bull speel since the beginning of time or maybe it was the first hint that the party was over. Either way he lives in complete denial as he watches his real estate investments continue to drop.

#23 vultur on 04.20.08 at 5:20 pm

Thanks Dom. Your words do inspire. I give Darth full credit for having the conviction to research and write about the subject at hand and do wish that I had the discipline to do the same. As I’ve often stated, I share his sentiments. Vancouver is particular scares the crap out of me and has no ago diverged by fundamental analytics of real estate investments and headed towards flat out money laundering haven territory. Owning property there for any reason other than to stash cash makes you sense. I do however believe that Toronto, at under $400 per square for new condos, is travelling through far safer waters as the worldwide credit crunch continues to challenge most markets.

Timing is ever so relevant. Perhaps I’ll be there to pen the everyman’s guide to surviving the real estate downturn! Any idea how many page I need to write to get the attn of the big publishing houses?

#24 Future Expatriate on 04.20.08 at 5:40 pm

I just want to know one thing… which third-world country boiler room has the real estate industry hired “vultur” out of? Probably not India; they can read and write English pretty well there. Judge vultur’s real estate wisdom by his atrocious spelling and command of English, and by all means let him post away; he preaches to no one left and exposes his agenda and intelligence with every mispelled word.

#25 vultur on 04.21.08 at 12:17 pm

futur,

You got me. I don’t edit my blog posts. Guilty as charged. One would think that good grammar and spelling are not pre-requisite to off the cuff opinions in the blogosphere but thank you greatly for the ad hominem attack.

After I’ve written my manuscript I’ll be sure to hire you as my editor.

#26 Confused on 04.21.08 at 1:39 pm

Maybe I’ve misread this somehow but by my math there’s no way a 25 year mortgage is going to be repaid in 13 years simply by switching to weekly payments alone. As Garth states, switching to more frequent payments essentially allows you to make an extra payment against principal. This alone does not add up to a 12 year savings on interest…

#27 Ultraman on 04.21.08 at 2:48 pm

Weekly versus bi-weekly payments,

Garth, I don’t think that you have answered Tim’s question in full details.

Yes it is very profitable to make bi-weekly pmts versus monthly pmt if and only if you pay half the planned monthly pmt since you end up making one extra monthly pmt a year. Actually this is called Accelerated Bi-Weekly pmts. By doing so you will shave 4-5 years on the life of you mortgage, depending on interest rate. Of course the higher the interest rate the more spectacular the results. You won’t shaved 12 years though.

Keep in mind that you could still make bi-weekly pmt based on a full 25 years amortization period with little benefit but some small interest saved.

As Tim has observed on his mortgage calculator, making weekly pmts as opposed to bi-weekly will save you very little (some interest cost) because you are not putting any more money down.

This said the best return is to match your paid period with you pmt frequency. It doesn’t make sense to make a weekly pmt if you are paid bi-weekly. Why leave the money in your bank account if you could have allocated it to your mortgage a week earlier.

I hope this help.

#28 Ultraman on 04.21.08 at 3:18 pm

I met to say matching your pmt frequency with you pay period. Easier than the other way around.

#29 vultur on 04.21.08 at 4:16 pm

I agree with Darth Bubble that an individual should be trying to pay down their mortgage as fast as possible, particularly in Canada where interest is not deductible.

However engineered, double-up payments or whatever the banks are dreamed up this week, faster AM’s are a wise idea as personal debt is something all should aim to eliminate.

Drawing on your prime HELOC and paying 5% to invest in a pool of REITs yielding 9% probably isn’t the worst idea in history though but get the personal debt retired first.

Do you agree Darth Bubble?

#30 Confused Agreement on 04.21.08 at 4:58 pm

I agree with Confused. From what I can understand, a 25 year mortgage can be shortened to 21 years.

Also, Garth, Tim in Kelowna was asking about the difference between accelerated bi-weekly and weekly payments. There’s no real difference. You either make 26 payments or 52 payements per year.

There is a vast difference between weekly and bi-weekly payments, since the mortgage debt’s amortization is lessened with more frequent payments of principal. Hence, paying down a chunk of principal every seven days reduces the compounding of interest on the outstanding balance more than paying a piece of the principal every 14 days. The key is to ensure that a monthly payment is divided into four equal portions, with that paid every week, rather than a weekly payment which equals one-fifty-second of the total of the annual 12 monthly payments. And, yes, the repayment period can be reduced on a 25-year amortization by close to half. — Garth

#31 Confused on 04.22.08 at 12:23 pm

Garth,

With all due respect, I really think you’re missing something here (and math is a strength for me). Please post some statistical information that proves your point or at least a link to a calculator that substantiates your calculations. Here’s the one I’m using and it does not support your conclusions.

http://www.mortgagescanada.ca/Calculators/Mortgage_calculators.htm

By my calculations based on what you’re describing, you can reduce your mortgage by a little over 4 years and that’s all (again because you’re basically making extra payments over the life of your mortgage).

Also I seem to recall reading somewhere that in Canada, mortgage interest is calculated twice yearly (though I’m not certain of that point).

#32 Ultraman on 04.22.08 at 6:03 pm

Confused,
mortgage interest is calculated daily based on a rate componded twice yearly.

#33 Confused on 04.24.08 at 11:26 am

Ultraman – thanks for the clarification.

Garth – ok I finally understand how you got the numbers you are claiming with one BIG caveat. Your suggestion that weekly payments can reduce your mortgage amortization by about half only hold true at interest rates hovering close to 20%. We haven’t seen rates like that in decades and even the most pessimistic among us would say that this not likely to happen anytime soon. IMHO, you’re leading your readers astray by dispensing advice like that isn’t well grounded or at least properly explained.

So, don’t take it. Pay more. Your choice. — Garth

#34 Confused on 05.03.08 at 9:07 pm

You’ve missed the point. Your information is erroneous or at least flawed. There is no way you can support your claim that moving to weekly payments will reduce your amortization by close to half based on today’s interest rates. Period. The least you can do is admit it.

The rapidity of repayment and the amount saved will, of course, depend on the rate of the loan. Duh. But the savings are monumental. I hope you have a weekly mortgage. — Garth