Entries from December 2011 ↓

The big vultch

An orgiastic day for a Portland realtor starts with seeing BC license plates outside the window. In the last year the number of house-horny Lower Mainlanders snapping up Oregon properties has apparently doubled. Egged on by a strong loonie and flagging American prices, Canadians have been pouring across the border to vultch.

Of course, when you come from a city where the average property costs $756,000 and a SFH goes for a million, Portland looks yummy. The average house there sells for $268,200, which is 27% cheaper than it went for in 2007. Hell, Yankee realtor guy, we’ll take four!

As you may know, this experience is being repeated in a bunch of places. The most popular states for bottom-feeding Canucks are California, Arizona, Florida and Texas – all places where the 2001-2006 real estate bubble blew hard and big. The latest evidence shows Canadians are buying the crap most Americans don’t want – beater single-family homes costing less than $100,000. The majority say they intend using these places as primary residences, instead of renting them out, for example, to gain some income while they wait for the real estate market to rebound.

So, good idea?

On one hand, absolutely. In the past half-century there’s been exactly one occasion when US houses cost half the Canadian average and when the loonie could be swapped at par. That’s now. This has never happened before and a decade hence we’ll be amazed it ever did. Without a doubt, an opportunity to buy low. Americans are sour on real estate after it took a honking big bite out of their net worth, and happy to give their houses away. In fact, 13% of all the homes in America are currently empty.

I’ve told you for the past couple of years how real estate values in the frosty north have only one way to go. Logic, experience and financial acumen lead us to the same conclusion: sell Canada and buy America. New buyers here are being set up for losses. New buyers there, for capital gains.

But there’s always a but. This might not be right for you.

The biggest unknown is how long you need to hold a US property to reap your inevitable gain. Currently, things don’t look great. The latest S&P/Case-Shiller report shows still-falling prices in 19 of the 20 cities tracked. For example prices in Atlanta and Vegas have just hit the lowest point since this mess began. Valuations are back to 2000 levels in many places. Sales are flailing around at numbers not seen for three years, while deals for new homes are the fewest in recorded history.

The real news is nobody expects this to get better for a few years. Millions of new bank-owned houses are about to come on to the market, and a new wave of foreclosures is imminent. This follows a year-long respite while banks were investigated for robo-signing documents that kicked people like you out of their homes without due process.

But whadda we care? We’re northern birds of prey.

Some economists who seem smart estimate prices won’t recover to pre-bubble levels until the early 2020s. After all, it’ll take years yet to find jobs for the millions thrown out of work in the financial crisis, for credit to be extended more widely and all-important consumer confidence to return. Remember, even the lowest mortgage rates in memory have done zip to revive US housing. And this is a country where people can write off mortgage interest and property taxes from their incomes. Still prices drop – down 15% in a single year in Arizona, for example, where there’s a ten-year supply of vacant houses.

So, if you don’t have a decade to wait around, don’t buy.

Other things to worry about include money. Yes, houses are cheap, but you’ll need cash to close the sale and get the best deal. US banks are not hot on Canadian borrowers, which is why so many people are taking equity out of their inflated northern digs to acquire a southern home. That’ll be a gas when house prices here decline. And try convincing CRA you should be able to deduct the interest.

In fact, it’s this non-access to US mortgage money which has so many Canadians buying trash properties. Big mistake. Like acquiring a cheap $85,000 condo in a Florida building which is 60% empty. Imagine how much fun it will be paying the condo fees for all those vacant units!

Things are still worth what they’re worth. Even in the USA.

And watch the tax thing, too. You can’t rent out a house without filing with the IRS. You’ll be subject to withholding tax when you sell, sometimes at both the federal and state levels. You can’t overstay your time down south without risking full tax treatment on global income (including Canada). And now, thanks to Ottawa’s new agreement, every border crossing will be recorded by both countries. Just think where that’s leading us.

Finally, if you still want to buy and hold, get a local agent, a local lawyer and buy title insurance. Unless you understand foreclosures, short sales, points and titling, budget for good help.

The bottom line is that this is a once-only window on America. But it’s not a short-term play, not as cheap or easy as it looks, and laced with considerable risk. If you just want a place to hang out for the winter, rent it. If you think you’re not a mark, think again. If you’ve never wondered why Floridians or Arizonians aren’t buying up unwanted houses, do it now.

But if you yearn for a land where real estate agents pee their drawers a little when they see you, it’s heaven.



How to buy

Let’s get back to real estate. We’ll do this for two reasons. First, houses are about to enter a new phase in which buyers in almost every market of the country get the upper hand. Finally. Second, there’s obviously little appetite on this loathsome blog for posts detailing other investments. No sooner do I tell you about trusts, bonds, ETFs or preferreds than the skies over this site darken with the bodies of a million enraged, flying, doomer rodents.

Clearly I misjudged sentiment. More people would rather fear risk than sup opportunity. They’re happier being negative than positive. After all, what’s the point of earning a nice yield on your investment when the world’s about to collapse into a steaming pile of systemic rubble?

So, as I said some days ago, I give up. Forget I ever told you where to get a decent  return without volatility, how portfolio balance cuts losses by two-thirds, what to pack in your TFSA, or even that I warned you about gold before it plunged $400 an ounce. I’m wasting my time. The blog vigilantes can get stuffed.

This brings me to Tony. Nice kid. Good question.

I’m like a bunch of your readers. I’m late 20’s and right now I’m renting on the Danforth, in an area my girlfriend and I would not currently (maybe ever), be able to buy. We pull in just over 100k a year and in the next 2 or 3 years would probably be interested in a house.

My question to you is simple: How do I know what a good price is?

I’m talking ME, a know-nothing guy who has 15 minutes to walk around a house and then commit to pay for it for almost the same amount of time I’ve been alive. I’m not asking about an area or a timeline. I’m asking about how do I know if it’s GOOD VALUE. If the market drops 15% some houses will be worth it and others will be not. How do I find the house that is a deal or just fair value. I’ve read that 3.3 times your salary is a good place to start, but within that price range how do I pick the good deal over the money pit?

What Tony wants to know is what nine of ten new buyers don’t even think about. Most house-horny young couples spend less time inspecting a home prior to making an offer than they do trying on jeans. They respond emotionally to decorating and appliances, and walk out completely ignorant about the electrical service, survey, heating system or the sales history of the home and demographics of the hood. Then they plunge into a bidding war or are blinded by the romantic notion of chinking long-stemmed glasses before a gas fireplace while wearing their best skin.

Even worse: buying a house which isn’t built after gazing at floor plans and counter top samples in a sales trailer with a consultant in stilettos.

So what should a prospective buyer do before even thinking about an offer? The list is a long one, but here are ten actions:

  • Nothing is more important to real estate than location. So, focus more on the neighbourhood than the interior – you can always change that. Get a city house on transit or a suburban one with arterial access. Check out the neighbours – the population mix, the quality of cars in the driveways, the graffiti, the condition of yards, mean dogs. Find the nearest shopping and learn the school catchment.
  • Get the property’s background, how many owners in the last decade, for example, and successive sales prices. Too much flipping is not a positive, nor is a big price jump since the last guy bought 14 months ago. Your agent can dig this up.
  • Speaking of which, always have your own agent. No exceptions. Never use the guy the sellers engaged to flog the place, since you need your own advocate to negotiate the best deal and represent your interests, as well as ferret out information on comparables and history. By the way, never sign a BRA.
  • Your first visit should be lengthy. Go with a notepad, and a camera. Shoot every room, the panel box, the furnace, the yard, the street. Find out if it has 100 amps or better, gas or oil or heat pump, water or forced air, block or poured foundation. Look for basement damp (don’t forget the flashlight), settling on the driveway or swales on the lot line.
  • If it’s a tract house on a subdivision street, check out other properties for external basement cracks, sagging porches, dried-up window caulking or cement crumbles. Better yet, knock on a   few doors and ask the guys who bought there if they’d do it again. Amazing what you can learn in an hour.
  • Is there a survey? If not, stipulate the owners provide one. If they balk, move on.
  • Never, ever, ever buy a house without an inspection as a condition of the offer. If you’re in a bidding war situation, shame on you. Walk. But if you have to compete, then get the inspection done first, so the offer can be clean. Spend some time finding a good inspector with recommendations and creds, not the cheapest one or your cousin who’s a part-time drywaller. Go with the dude and plan on spending four or five hours crawling around.
  • Never buy a new house from plans, no matter how convincing the salesguy gets. The contract almost always gives the builder unlimited delays, substitutions and changes, while locking you up financially. If you are still dumb enough to do this, get a killer real estate lawyer to review the deal. Yes, before you sign. Duh.
  • Buy the worst house on the best street, no matter what your spouse says. Stay away from corner lots. In a complex, get the end unit.
  • Learn the current property taxes, as well as local tax history. Ask for copies of electric, water and heating bills. Find out the condo or strata fees. Ask about any zoning restrictions, like parking your 60-foot Winnebago in the driveway or having your motorcycle gang over for tea regularly.
  • And, price. Seek motivated sellers, which usually means a stale listing or something with a little hair on it. Find out the DOM, and whether or not the place has been relisted. Get pre-approved for a mortgage. Try to have 20% down to avoid costly insurance. Make a big deposit, so you can pay less (it actually works). And wait.

There’s every reason to believe houses will be cheaper in a year in most places. Which means you can come back and read my coming posts on how to be a ruthless, mercenary, heartless, pitiless buyer.

Just don’t ask me about bonds. I’ll kill ya.