Entries from November 2008 ↓

How to be a vulture

I’m often asked by people who like to prey on others how to buy real estate in a falling market, like this one. The danger of doing so is that you buy before the bottom arrives, and take a capital gains hit. The advantage is you hold absolutely all the cards, and can strike a great deal while the victim-seller is writhing in pain and begging for mercy. That’s the fun part.

So, don’t ask me if it’s time to buy yet, because you won’t like the answer. But if you want some tips on being a vulture, for when the moment’s right, then clip this and stick it on the fridge. (By the way, this is another preview of my coming book.)

* Offer what you want to pay, not what the vendor is asking to be paid. With so many properties listed, and so little sales activity, every offer has to be taken seriously. Only by writing up an offer on your own terms, at your own price, will you get a sign-back showing the true level of desperation you’re dealing with.

* Always submit the offer with a deposit cheque, which is like putting a shiny lure on the end of your fishing line. However, the offer must stipulate the cheque is not cashable until a firm and binding agreement is reached. So, it means nothing, while having a powerful psychological impact.

* Throw in as many conditions as you want. This will create an offer that is completely tailored to your needs and wants while providing elements you can remove in order to gain things you truly want. So, for example, make the offer conditional on the vendors paying all your closing costs, including land transfer tax. While you never expect that to happen, you can remove it during negotiations in order to get what you do want and expect, which is a bargain price.

* Ditto for conditions giving you time to arrange financing or even to sell another property – they are both traditional deal-breakers, and the vendor’s agent will know that immediately. So, by reluctantly removing them you move far closer to getting that price.

* Best, however, to insist on a home inspection. This condition should give you five business days to complete the process, and is normally done at the purchaser’s expense. The reason you want this is because almost all properties need some kind of work done in order to make them perfect, and when you get the inspector’s report you have leverage to help you drive down the price. Simply get an estimate of the cost of the repairs and ask for the deal to be rewritten with a price reduced by that amount. Since the vendor knows the condition is entirely for your benefit and the deal will die unless you sign a waiver, well, guess what? Vulture.

* And remember that the closing date is also an important poker chip to play. Have your agent find out what the vendor wants, and then use that to help leverage the price down. Additionally, you can throw any assets you see around the property into your offer – power tools, appliances, lawn tractor, Harley-Davidson, whatever. The more you put in, the more clutter there is for the vendor to wade through, and the better chance you have of securing the best deal.

* Speaking of which, why not make two offers at the same time on two competing properties, and then let that fact be known (through your agent) to the vendor? That will add even more pressure to the poor guy, as he tries to figure out what he must do to save the deal, and give you what you want. This may be cruel and unusual, but just consider it payback for all those multiple-offer situations greedy vendors placed buyers in during the bubble years.

* And, of course, you can make a low-ball offer, get a sign-back, and then just let it die. Wait a week and go back in with another one, for the same low price. Odds are you will not get the same response this time. The stressed-out vendor may hate you, but he’ll close.

Pants ‘o Fire

Tomorrow in Parliament the finance minister will deliver an economic statement and begin a process of trying to save the nation from financial ruin. If he repeats the statement he gave during a television interview this week, he will say:

“Eight weeks is a long time. When you look at what’s happened in the global economy in the last week eight weeks, it’s staggering. And the election was called in September. No one in September – no one – had ever suggested the Canadian economy might go into recession, and that is now a definite possibility.”

This, of course, is a lie. The Canadian election was called early – just days before MPs were to go back and debate the economy – because the government and its bureaucrats knew the crap storm which was coming. During that election we wasted precious weeks when Canada could have been preparing. Instead, we were told (a) Canada is not the US, (b) our economy is solid, (c) our banks are perfect and (d) there will never be a deficit.

Last week at APEC our prime minister alluded to 1929 and said this is about as bad as it gets. The OECD (and every economist) says we’re in recession. The banks are issuing new shares in a falling market to raise money. Ottawa bailed out Bay Street with $75,000,000,000 in tax money. The deficit could be $14 billion within a year, says the Parliamentary Budget Officer.

Is the finance minister an idiot? Or does he think we are?

For the record, Mr. Flaherty, below are words published here at least eight weeks ago. You know, because you and your boss read them.

September 15 (nine weeks ago)…

The full implications of this can’t be clearly seen by anyone at the moment, but I’d say this is what Canadians can expect:

* The stock market will be hammered, eroding the value of every investor’s portfolio, RRSP and pension. This brings household wealth down, drops confidence and is nothing but negative news for real estate as liquidity is drained away in financial losses.

* Credit is going to be a lot harder to find. Banks on both sides of the border have already pulled their horns in a little, and that can only accelerate. Look for far tighter restrictions on loans and mortgages to new borrowers, to builders, for renovation and lines of credit.

* An inevitable result is a sharp acceleration in the decline of the Canadian market. Without a steady flow of new investors and buckets of borrowed money, there is no alternative, especially in real estate markets where prices are unsustainable…

Those Canadians who thought we could end up with a five-month adjustment, after the Americans have been through a three-year Armageddon, had better think again. This is just the beginning, pushed along by big events like those unfolding on Wall Street and in Washington this week.

Circle these days. You’ll want to recall when the lights started failing.

September 17 (nine weeks ago)…

We’re in the early days of a credit freeze which will affect almost everybody in North America, and most voters in all Canadian ridings now being contested. What’s happening on Wall Street, on Bay Street, on financial markets globally, will not stop there. Already the contagion has wiped billions off the worth of the American middle class, and the next phase could hobble that country itself. To think we’re immune is delusional.

North American stock markets have plunged. More than 20% of all the wealth represented by the Toronto market has been erased in the last 90 days. Three of the biggest investment banks in America have failed. The largest US mortgage companies were taken over by the government. The biggest insurance company is a basket case. At least a hundred more US banks could fail. Liquidity in the world’s largest capitalist country has evaporated. America’s triple-A credit rating is being called into question.

Here’s what this means to Canadians.

Soon – two or four or six months from now – getting a bank loan, mortgage or line of credit will be tougher. First-time homebuyers, people needed refinancings to pay debts, retirees, entrepreneurs and small business owners could be SOL. Banks will simply recoil from risk.

The residential real estate market could be choked off in the process. With mortgages tight, the economy slowing and unemployment rising, the ranks of buyers will be thinner. Desperate sellers will cut prices in a spiral which has already started. For the past nine months I’ve forecast a decline of between 15% and 40%, depending on the housing market. I may have been too optimistic.

Commodity prices, especially oil, could tumble as a serious and multi-year recession dramatically quenches America’s thirst for energy. This has already begun, as crude gyrates wildly, rising and falling more than $100 a barrel this year alone.

Oil might actually go right back to $50, making the oil sands marginal. Combined with a deep freeze on bank credit, well, so much for the Western miracle.

Overall, expect a sharp economic slowdown, the erasing of billions of dollars in real estate equity and retirement savings, and a new normal of falling consumer prices – and incomes – which could last several years.

Now, to the politics of the matter….

Putting Mr. Harper back in office will guarantee the picture I’ve painted will come to pass. In this election he hasn’t said his reckless spending will stop, that he’s got a jobs plan or understands the real estate market. His government has no money left, and even spent the contingency reserve. When the economy sputters later this year and into the Spring, revenues will fall and deficits result.

This is the greatest threat the Canadian middle class has faced in a generation. Just the housing woes alone will be painful. Look south for a preview.

October 1st (eight weeks ago)…

This much, we know. The US economy is in recession and the times will get worse for months and months to come. The mess, as feared, has slopped over onto everyone. Canada, Europe, China – all will be impacted. Commodity prices will keep going down for a while, along with real estate. Billions more will be lost. This is the start, not the end.

Banks will fail, but not here. Ours will just stop lending money to lots of people and businesses. Condo developments will go bust. Marginal companies won’t make it. Car sales will fade with car loans. Inflation will become deflation. And you can stop worrying about high gas prices.

Debts will become unrepayable for many people, so I hope you have few. Interest rates will be going down as central bankers try everything to stop bad from becoming worse. Albertans, and the oil sands, will not be so envied soon. Prices for just about everything will fall, as will the value of your home.

Regardless of whether or not the $700 billion financial bailout passes the Senate tonight or Congress on Thursday, global confidence has been dealt a major blow. With less confidence, there is less credit. And without free flowing credit, economic expansion stalls. This is what terrorized stock markets on Monday, and will continue to do so.

I suppose it is possible the United States could slump into a quasi-depression, taking us with it. But that’s unlikely. A protracted recession – a year or two of negative growth – is quite possible. Investment portfolios could lose a third to a half of their value. Home equity will fade by, perhaps by as much in certain markets. The value of your mortgage will not fall, even though your wages might. This is deflation – when cash grows in value because every other asset is declining.

Although Stephen Harper did not know the events of today would take place, he knew the danger of imminent financial chaos. So did I. And if you’ve read this blog, so did you. I have spelled out the reasons for real estate deflation, falling family net worth, a protracted US downturn and the considerable impacts on Canada. I told you how the Harper government policies of 0/40 mortgages and of cutting the GST instead of income taxes would make us more vulnerable. And I have detailed why massive higher government spending and a blowing of our surplus would make such a time as this more difficult.

Harper knew the danger, as did the finance department, the head of the Bank of Canada, the PMO strategists, and you and I. That’s why he alone triggered the election, not chancing to wait for Parliament during the very dangerous month of September, when he’d have to answer to the people daily.


My conclusion: You are about to witness the greatest government intervention in the marketplace in Canadian history. More spending, deficits and debt. Mounting deflation will be countered with an attempt at reflation, along with more dollops of revision. I hope you kids out there like paying income taxes. — Garth