Entries from January 2014 ↓

‘Trust me’

POOLS modified

When Paul joined the dearly departed he left the house to his three kids, Jimmy, Bev and Trish. Bev had a husband, two kids and a high degree of house horniness so she persuaded the younger two she should live there, with all three of them being on title. “You’ll always have the equity here,” she chirped, “and because we’ll pay the upkeep and all the bills, and the house will gain in value, it’s a great deal for you.”

Ten years later the place is worth a ton more. Jimmy, now 31, wants to start a micro-brewery and could use the $300,000 he figures his share is worth. Trish is happy to let things ride until she finishes university. Bev?  She’s come to think of the place as hers. When Jim told his sisters he wanted out, Bev was stark. “I’m not selling, and there’s no way we’re taking on a giant mortgage so you and your buddies can piss it away on some stupid beer project,” she said. “Seriously. Just get a job.”

Families. What a great invention.

Jimmy came to see me which was pointless, since he has a legal problem, not a financial one. Being on title for the house doesn’t mean he can force a sale of the property, nor can he force the evil Beverly from living for free inside his equity by demanding she mortgage and pay him out. “So how the hell did this happen,” he asked?

And I told him: the lawyer handing the estate and the transfer of ownership of his father’s house screwed up. He didn’t act in the best interests of the siblings by failing to draft a co-ownership agreement, for foreseeing B would become a bitchy princes. Such a document would clearly set out the rights and obligations of each kid, plus a mechanism for them to monetize their equity or otherwise benefit from being an owner.

So what now?

Jimmy has to take action against sis. That involves hiring a lawyer, forking over a big retainer, and filing an application under the Partition Act (the place is in Ontario, but each province has similar statues). In essence Jimbo is asking the court to force a sale of the house, so the proceeds can be distributed among the children (who will also have to pay capital gains tax). Likely Bev will oppose the application (after she hires a lawyer and cuts a big retainer cheque), claiming there was a mutual understanding at the time of Paul’s death, and that Jimmy’s a hophead anyway.

She’ll argue there was a fundamental understanding she could live there, and absolutely no defined moment in time that occupancy had to end. By leaving her there for a decade, she’ll say the other children tacitly expressed their consent. So there. Suck it up.

Who will win? Jim, likely. That’s because the law is clear: all joint tenants can be forced to sell the property if ordered to do so by a court. That happens when a co-owner, not being malicious, obtains legal approval in the absence of a co-ownership agreement covering such events. That court can also decide to not even give Bev the right of first refusal in buying the property from her siblings, forcing her to bid for it on the open market under a court-supervised sale.

This is obviously worth knowing if, say, you’re part-owner (with a family member) in a cottage, or if parents decide to add their kids to the deed before they kick. Because people’s lives and circumstances can change at a rapid clip, any co-ownership situation can turn into a legal battlefield and an emotional swamp, when the proper protection isn’t there.

So you can only imagine the pain that might be in store in Vancouver.

Various wingnuts at the big credit union, VanCity, have created a co-ownership mortgage. It got some media exposure this week when CBC profiled two families who teamed up to buy an $800,000 house using what’s being called a ‘mixer mortgage.’ One family lives on the top, the other in the basement, and they share the kitchen and dining room, along with cooking, cleaning, monthly bills and the mortgage payment.

Says one of the hapless owners: “You have to take risks and sometimes you have to do things that are uncomfortable, but the payoff is huge.” See what house lust does to you? It can put you into a situation far less dignified and private than renting, make you absorb $400,000 in debt, while being responsible for everything a landlord should worry about. Worse, if the housing market should correct in Vancouver (hello?) you can lose whatever equity existed and end up owing more than you own. Tell me again about the ‘huge payoff.’

But that’s just the start. What happens if a co-owner loses his job and can’t pay the monthly? Or the other couple divorce and want to sell? Or they accept an offer from a biker gang that cements in the front windows?

VanCity acknowledges there are issues and dangers, and to its credit says mixer mortgage people need a co-ownership agreement, which starts out as a checklist between the parties and even includes garbage duties. They also need a damn fine lawyer. Plus a sanity test.

Mostly, every co-owner in the land needs to follow Garth Rule #7: Never buy real estate with anyone you have not slept with.

Bombs away

BALOON CAT modified

With nary a squawk of protest, our poor dollar just slid under the 90-cent mark, shedding the better part of a half-cent in a day. It’s on the way to 85. In fact, I’m told, down under 80.

The latest credible research comes from the boys at Scotiabank, who point out the loonie sailed on through a major four-year ‘head-and-shoulder’ formation last month. Whazzat? Technical analysis, which is (simply put) the study of price and momentum, which ends up being a tracing of human emotion. After all, things (even currencies) don’t change value all on their own – they’re constantly repriced according to what people think they’re worth in light of what comes next. Houses included.

A ‘head-and-shoulders’ looks like this:

Head modified

A bearish head and shoulders forms when something tops out in value, while a reversal or inverted head and shoulders indicates a bottom. The key is to look for an asset which then breaks out of this pattern, because history tells us that three times out of four, it will form a new trend which is likely unstoppable.

The head-and-shoulders above is not a happy chart. It shows an asset that’s risen in  price (left shoulder), dropped back to a support level, jumped to a new high-water mark (head) before falling again to the point when it looks cheap, then retested its high (right shoulder) before breaking below the neckline. The greater the volume of trading on the right shoulder, the more momentum the downward move becomes. This signals a fundamental shift in investor sentiment, because at the neckline, most people no longer think the thing is as cheap as it’s going to get. – which means they’re right. Bombs away.

The same pattern in reverse tells an opposite tale, when a falling asset hits a support point (as cheap as it’s going to get – the new neckline), jumps up to a point of resistance, falls again to that same bottom level, then rises again, this time right through the resistance point. This tells you that investors have suddenly decided this thing has reached a point where it’s too much of a bargain to ignore. Sentiment changes, buyers move in, and the momentum turns decidedly bullish. The greater the trading volume, the more advance that lies ahead.

OK, so back to the loonie. What’s going on? Why does it matter to your mortgage?

The ‘head’ for the dollar a month ago was 94 cents US. It then crashed through the support level, and the momentum to the downside has been breathtaking. “As the CAD now slips below $0.90, the next major technical level of support is highlighted at $0.85,” says Scotia. And while there could be a boomerang rally, the bank says if you’re into FX (and you shouldn’t be), that would be a golden sell moment.  Because, “The completion of this major 4-year top is significant and should continue to pressure the CAD to below $0.80 over the longer-term.”

Wow. Less than eighty. I sure hope you listened to this pathetic blog two years ago when our dollar was worth $1.05 US and houses in Phoenix and parts of Florida were selling for 40% of their 2006 stickers. Sell Canada, buy America. Remember that advice? In response, busloads of haters and doomers came here to say the States is a failed, bankrupt state, and Canada’s different.

We sure are. Ten thousand jobs a week gone last month, high-profile layoffs everywhere, the economy stalled and the Big Dog bank guy warning about debt and deflation. Besides lower commodity prices and tumbling oil exports (thanks to US fracking) there’s a simple reason our currency is melting – we’re not special any more.

So what?

Two things. First, a low dollar will bring more inflation because half the crap we buy comes from China. Families are struggling enough already with high debt levels, so this will impact consumer spending, as will the rise in unemployment. And there’s nothing affected more by stressed buyers than real estate. The last thing you should do in the two months to come is equate engineered news of bidding wars in Toronto or Vancouver with a strong housing market.

Second, our sick currency and slagging economy will keep the Bank of Canada rate where it is for at least a year, and also soften bond yields – an unexpected but real development. Therefore variable-rate mortgages will stay put until the autumn of 2015, and there’ll be some cuts to fixed-rate five-year loans as well. Nothing massive, but enough to trick the lightly-read.

Have you been toying with the idea of selling your house this Spring? Brilliant.

Especially if it’s in Phoenix.