Entries from August 2014 ↓

More ambition

BLIND modified

Time for some follows.

RECO is the housing cop in Ontario. It functions as a regulator of the industry, but without the cut-off-your-glands judiciary clout of the agency that oversees the financial advisory business. Still, RECO can fine agents, suspend licenses and make life reasonably miserable for those who break the rules. The trouble is, unlike the financial and bank cops, RECO doesn’t have a platoon of investigators, inspectors and auditors who make registrants live in fear of breaching the smallest rule.

Hence, the Wild West that now exists in our biggest province, with imitations across the country. In BC, for example, land of yellow helicopters ferrying fake Chinese agents, and condo showrooms with fake Chinese buyers, the Real Estate Council of British Columbia’s turned from watchdog into lapdog, or maybe more like a pet guppy in a plastic bag in your mom’s guest bathroom toilet tank. Egregious malfeasance on the part of professional housing marketers has escaped scot-free.

Well, back to Nancy Taza and her condo-thumping fictional math. Former career realtor and housing consultant Ross Kay says not only is the 31-year-old realtress in contravention of RECO guidelines with the email message posted here yesterday, but also with content posted on her web site and wild-‘n-crazy Facebook page.  (Note: after this post was published Ms. Taza’s FB page, replete with its bikini pictures, was taken offline.)

“While RECO can’t touch TREB or it’s non-registrant staff,” says Kay, “Taza is a different story.  This has been brought to RECO’s attention.”

TAZA modifiedIndeed. A developer, builder or marketing maven  can promise you a 160% return in three years on a two-bedroom condo that isn’t built yet, but it’s a different story entirely when a licensed agent/broker makes the same broad statements. As pointed out here yesterday, there are an astonishing number of people who actually believe it all. Especially when it comes from the lips of a Mercedes-driving, penthouse-dwelling, party-going Amazon.

And here’s another follow for you – the sad saga of Meerai Cho, the go-to lawyer for Toronto’s real estate-buying Korean crowd who mistakenly gave $12 million in condo deposits to a developer who promptly flew to Seoul. The cops figure she’ll eventually face 300 charges, while she’s already been thrown out of the legal profession, and declared bankruptcy. But the victims find themselves in a limbo – covered only marginally for lost deposits by the new home warranty people, and unable to sue a dink who fled the country.

So will they be able to go after Cho’s malpractice insurance policy – blanket coverage all lawyers must carry?

Not so fast.

CHO  One of the blog dogs is an insider, and provides this: “All the stories seem to be leaving out that as a practicing lawyer she’d have malpractice insurance coverage,” he says. “What it would hinge on though, among a million other things, is whether it was a genuine error (which is covered) or fraud (which is isn’t covered by the policy).

“It all depends entirely on what kinds of claims end up in our claims department, but my two cents is that those buyers would be a lot better off if she genuinely just screwed up.”

The Cho saga resumes on October 2, with her next court appearance. Unfortunately for the victims – at least one of whom plopped down $700,000 – the combined local cop/RCMP investigation could take well into 2015, and no insurance payouts are expected until the whole mess has been unpeeled.

There are lessons here, as I’ve pointed out. Despite the fact 70% of Canadians are heavily invested in this one asset, and have placed $1.1 trillion in financing on it, real estate remains basically unregulated. Agents can promise future returns on property that doesn’t exist. Real estate boards can secretly alter published numbers, without consequences. Consumers can be denied access to basic information, like days on market or sales histories. Developers can delay for years handing over product they’ve already sold. And 200 families can lose their life savings and look forward to diddly.

Meanwhile people worry about losing money on a bank stock. It might be different, of course, if there were a tank top involved.

The manipulators

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Why do people make stupid investments? That’s easy. Greed. Add in sex and food and you’ve pretty much explained what manipulates human society. I’d say Nancy Taza knows that well. More of her in a moment.

This week’s arrest of the career, 63-year-old Toronto lawyer who accidently lost $12.1 million in condo deposits then went bankrupt and could face up to 300 charges of fraud and breach of trust got me to thinking. Buyers in that unbuilt edifice fronted deposits ranging from $40,000 to $700,000, when the new home warranty program would cover only $20,000. Obviously they took a giant risk – as do all pre-construction purchasers – given the fact they secured nothing but a futures contract. In this case not only did the developer take off, the sales staff disappear and construction never commence, but the lawyer collecting deposits was untrustworthy.

Beyond these risks – against which there is virtually no effective protection in law – pre-build buyers make a huge commitment to a structure they can’t see, touch or gauge the quality of. They have no idea of the building’s ultimate demographics and social mix, durability of construction (the windows factor) or future resale value.

In short, a stupid investment. So, cue the greed.

In Vancouver, Edmonton, Calgary, Toronto and Montreal, people who are afraid of predictable financial assets have routinely thrown money into rank real estate speculation, greased along by realtors sometimes as wanting in ethics as they are in math skills. The outcome could be a mess, and the spray could blot the entire housing market.

Let’s have an example. So here’s Nancy, a 31-year-old dynamo, who opened her own little condo-slogging boutique office a year ago. She’s a promoter, dog-lover (that part’s good) and an aggressive marketer. Here’s her Facebook photo, which will give you a little glimpse into the pizazz she’s bringing to Taza real estate.

TAZA FACEBOOK modified  All that’s cool and good. Selling condos is the ultimate in eat-what-you-kill, commission-driven salesmanship. Most people would crash and burn. But succeeding by fuelling the flames of avarice within novice and naïve investors, who you’re leading into massive purchases and heaping piles of debt, is definitely not cool.

This week, Taza real estate sent out an email blast that helps us understand why thousands of people too timid to buy a preferred share in a stable bank paying 5% and giving you a fat tax break would risk hundreds of thousands on an unbuilt concrete box in a market clogged with inventory. The offer is for a few two-bedroom condos in a development called Quartz which will be built sometime next year, sitting in the middle of a vast condo community called CityPlace.

Here’s the pitch:

“The prices I am offering you are significantly lower than today’s market value.  I assure you this is the best deal you will ever find in downtown Toronto, but you must act fast! I’m presenting you with a 2 Bedroom incredible investment opportunity. $20,000 Discount Directly Off the Top of the Builder’s Price + Additional 8% Credit Cash Back On Closing.”

So, a condo ‘worth’ $479,900 is being offered at $423,108 (which means that’s what it’s really worth. Maybe.) Ten per cent down now, another ten on closing. Here’s Nancy’s math, and where the greed juices really start to flow:

* Monthly Mortgage Payment: (Based on 20% Down Payment with a 2.99% 5 Year fixed mortgage rate) $1425
* Monthly Tax: (based on 0.9% 2015 property tax rate increase) $317
* Maintenance fee:  (.51cents /sf) $427
* Total Monthly Obligation: $2169
Rental Value: $2350
Monthly Rental Income: $181

Return on Investment after 3 years of possession:
Exclusive savings from the builder price:  $56,792
Value Appreciation:  (based on 4% year) $76,784
Rental Income:  ($181 per month x 3 years) $6,516
Mortgage principal paid by tenant:  ($600 x 3 years) $21,600

Total Return on Investment: $161,692

Wow. Spend $90,000 buying a two-banger in CondoLand and score a profit of $161,692 three years later? Sign me up, babe!

See what I mean? She’s good. Ignored was the opportunity cost of the $90,000 down payment, which invested at 7% would mean $525 a month should be added to the true cost of the unit. That alone bumps the monthly to $2,694. By the way, CondoLand is peppered with rental two-bedroom condos available for $1,900 or $2,000 (a larger unit than this), so a moist little landlord could expect to be losing about $800 a month.

But it gets worse. The difference between the sale price and the builder’s fictional price ($56,792) is lumped into ‘total return on investment’, then the whole shebang is goosed by 4% annually for the next three years, when most investors in the same hood shed tears of joy when they recoup their original purchase price after that period of time. The rental income is a cash flow loss, and adding the repayment of debt as ROI is nothing buy voodoo accounting.

This is deceptive and misleading. It guarantees future returns. It details no downside. It’s honey for the unsophisticated, nectar for the gullible. Sexy, riskless, urbane, alluring – and unregulated.

We’ll all pay for it.