Trust me

Some weeks ago a 30ish couple in Edmonton, both engineers, making $175K between them, came here for help. They live in a 700 sf condo downtown, have a $270K mortgage, $50K of student debt, and a problem. With a little engineer on the way, the place is too small, but selling it will incur a loss of about $30,000.

Should they sell anyway, avoiding an even larger loss? Aggressively pay down the mortgage debt with their high salary? Buy a larger home with little or nothing down and rent the condo?

You can guess what my advice was. But what about local realtor James Knull, to whom the engineers turned for a ‘professional’ opinion? Mr. Knull, by his own admission has “flipped a ton of houses” and now toils for Re/Max. Just to get him lubricated, the engineers directed him to this blog, where he apparently lost his virginity on Thursday.

“This guy seems like a bit of a yahoo,” the realtor said in an email to our heroes, referring to moi. “Based on his lack of real advice or prescriptive measures and total lack of a real resume in real estate in his ‘about author’, I’m guessing he earns a living selling soap box rants and not as an actual player in the real estate market.”

Mr. Knull, by the way, earned his university degree in philosophy, including “metaphysics of the mind.”

As for the investment advice to the engineers mulling the fact real estate in Edmonton had just wiped out their entire net worth, the Knullifer has this to say:

“If you want to sell, and you bought 3 years ago, there is a good chance that the condo is worth 30k less than it was 3 years ago. Tough break. Here is a pretty darn simple piece of financial advice: selling at a loss is a really really bad idea unless you are in an emergency situation. If anything, when you are losing money on an investment that you know is going to rebound in the short to medium term (like real estate, as an example) then the strategy of “dollar cost averaging” makes a lot more sense.

“If you bought 50% of your asset at 100 and then another 50% at 50, your average cost is 75. Brilliant. If you are planning on hunkering down and saving up 30k anyways, the best place to put that money is back into real estate. The better idea would be to buy the house with the 30k and rent the condo out until you can sell it for what you paid and incur no loss of 30k.”

Ah, life must be sweet on planet James as it gently circles the orb called Re/Max. In that world, real estate is an asset that always rebounds in the short term. Unless, of course, it falls like it just did in the short term. But in any case, if you just keep buying it, darkness will never come. It’s a metaphysical thing. You wouldn’t understand. Just sign here.

Adds James, commenting on this blog: “All of this guys doom and gloom should be a very clear message to an intelligent investor BUY BUY BUY!! …I wouldn’t be surprised if the person “vultching you raw” is the guy, or a friend of the guy, who advised you to sell below market at a big loss.”

So, what are we to make of this?

Well, the price of a SFH in Edmonton last month declined by $11,600, or 3%. Annualized, that’s a 36% correction. It means the engineers’ condo just lost more altitude. But what of the argument that only fools sell for a loss, and smart people who understand ontology actually keep buying real estate?

Hard to make that argument to a middle class American who put off a decision to sell in 2006 because of a potential small loss, only to see all equity gutted by 2010. And while Canada is not America, given the latest jobs numbers – which crashed our dollar – and household debt levels (now surpassing the USA), why will it be so different here?

Sadly, our Re/Max guy’s advice to a couple whose only asset is real estate (on which they have taken a loss) to buy more real estate, is telling. It tells us how completely the moral hazard of living on commissions erases morals. It says this person is desperate and without perspective. It indicates an utter lack of professionalism or sense of fiduciary duty. And it whispers that this market has depths yet to probe.

By the way, the engineers have news.

“The condo is listed! Thanks for your response and advice. We have decided to move into my mom’s place (built-in nanny and minimal living expenses) and destroy our debt asap.”

Regarding Mr, Knull: “Any comments from you on this guy’s assertions would be warmly welcomed…especially since they’ve got my wife second guessing our plans.”

I imagine we might have a few…

Garth's latest podcast is here.