Entries from September 2014 ↓

Lust on the rocks

SIGN modified

A little over a year ago, when it was selling for more than 60% off, this blog told you about Villa Madrona, an orgiastic pile of house porn pulsating on the edge of the sea, heartbeats north of the love capital of Canada, Victoria.

When this opulence sold last summer it was heralded as the biggest deal in almost four years, even though it went for a fraction of the original asking price, and probably below replacement value. After all, the lux guest house itself is 3,200 square feet. The main digs contains eleven thousand feet of carved oak pilasters from a Vanderbilt mansion, Singaporean chandeliers, a Tuscan mural and a library built from the guts of an antique British abode. Of course, there are fountains, marble floors, sculptures, theatre and enough paucity of taste and refinement to befit a home worth of Britney Spears.

But Villa Madrona is more than a rising monument to a hormonal imbalance. It’s a symbol of our tortured relationship with real estate itself, the most emotional and deceiving of assets.

In the hedonist days of 2005, as the American housing market bloated to the extreme, the five-year-old Villa – built by juice king Ralph Bodine – hit the market for an eye-popping $18.5 million, which is heap of money for two acres of land with a walk score of 5. No takers, though. After the GFC decimated real estate and cheap mortgage rates revived it, Bodine relisted – this time for $19.25 million. Crickets.

Over time the price dropped into the nine mill range, then eight, then $6.998 million. Finally, in July of 2013, the love nest found buyers – a Chinese couple who’d taken up residence in Victoria, enjoy a large taste deficit, and plunked down $6.6 million. The deal closed just a year ago.

It all happened about the same time another off-the-wall property, the home of failed Bear Mountain resort developer Len Barrie, was sold by the courts. That 13,000-foot, five-year-old heap was originally listed for $13.9 million, reduced to just under $5 million and eventually sold for $4.4 million to people who need an 1,800-foot bedroom. It also has four dishwashers (apparently they’re all attractive), a putting green and the thing everyone craves – crystal doorknobs.

Anyway, here’s the update: if you missed snatching Villa Madrona last year, you can do so again now. It’s on the market. The new owners are asking $11 million.

What does this tell us?

Beats me. Maybe it says they made a huge mistake in Canadian real estate and are now seeking a greater fool. Maybe they actually believe they can make $4 million in 12 months on a flip. Perhaps they think nobody ever heard of comparables or sales histories. Maybe, inconceivably, they don’t read this blog, as most gazillionaires do. Could be their agent, James Liu of Royal LePage, is just an idiot. And then, perhaps values in Victoria have risen 80% in the past year – which is weird, since the local real estate board says sales prices have flatlined – up a scant 0.3% in the past year – less than the rate of inflation.

Or, simply, maybe’s it more evidence this is an asset whose valuation is so divorced from logic and completely dependent on non-financial factors (as opposed to price-to-income ratios, economic growth or demand) that you can just make it up. In any case, it took the last dude eight years to unload this Villa Dolorosa and I’m betting it will once again prove being rich and retarded are not mutually exclusive.

*    *    *

If you’re selling or buying real estate, here’s something to know. I told you months ago never to fill out or sign one of those property disclosure forms when you list your place. They’re legally toxic, asking you (in effect) to warranty and guarantee your place has no defects, legal encumbrances or unseen flaws. In fact, your signature essentially says there have never been problems, even if they’ve since been rectified or repaired.

You’re far better off to shift the burden of proof on to the purchaser, who should be doing his/her own due diligence anyway – with a home inspection, for example. Lots of the questions on the disclosure form ask for highly technical or legal responses, which most people are incapable of giving. So don’t try.

Hundreds of unfortunate sellers have not heeded this advice, and ended up in court as a result – often losing actions to buyers who walked away with large settlements for problems that cropped up after closing. Now an Ontario court has also ensnared a realtor in this kind of dispute – an agent who worked for both buyer and seller in a deal that went south over a botched disclosure form.

The court ruled the agent had an ethical responsibility to ensure the statements on the form were correct which, of course, is impossible. Clients lie. What realtor is going to risk legal action by standing behind a homeowner’s claim that the septic is pristine and the basement walls never sweat?

So, I expect this disclosure form’s now living on borrowed time. Like the infamous BRA, just don’t sign. Too much potential hurt.

Almost worth it

COP modified

“I’m doing pretty well for my generation,” she says, which I guess speaks volumes. Like most 33-year-olds these days, Pat has one yard stick for wealth, social status and accomplishment. Real estate. In this case, her condo. Her only asset, and her biggest debt.

But to her credit, Pat’s confused. This blog has played a pivotal role, I’m happy to say, in messing with her head.

“My dad is a big fan of your blog and directed me to it. I have to say your outlook on the condo market is making me nervous! My dad reads your blog everyday he keeps suggesting that I look into selling my condo. I’m so confused, as it seems I would pay pretty much the same amount to rent a condo (around $1600-$1700/month) as it is to own my current condo (around $1800/month).

“I’ve been a condo owner in downtown Toronto since March 2010. I bought my 1 bedroom condo for $290K with 20% down ($25K of that came from my RRSP using the first time home buyers plan). I owe around $200K on my mortgage now, and I recently emailed my real estate agent who said my place is worth somewhere between $325K-$350K. Not bad for a 4 year investment.

“My condo is currently costing around $1800 per month ($1300/mth for my mortgage, $330/mth for maintenance fees, and $2000/yr for taxes). My maintenance has gone up around $30 per year since I moved in (my building is about 4.5 years old) and my taxes have gone up around $200 per year. My biggest concern is the increase in maintenance fees and taxes year over year, the fact that everywhere I look a new condo building is popping up, and of course the possibility of a housing bubble! I don’t want to move anytime soon (I’m 33 and single) but I also don’t want to risk losing the money I’ve invested.

“What advice would you give to someone in my situation? I’m sure you get loads of emails for advice so I appreciate you taking the time to look at mine.”

Well, Pat, your dad’s a smart guy. Let me tell you why you should listen to him.

First let’s put your “not-bad-for-a-4-year-investment” in context. You bought for $290,000, with $58,000 down which was partially withdrawn from an RRSP where it earned tax-free gains. With closing costs, that condo would actually cost a little closer to $300,000 – which the realtor says might now fetch $340,000. Let’s say he’s right (I doubt it). If you sell and pay 5% commission, you’re left with a profit of $23,000, or about $5,000 a year. That’s called a capital gain, so score one for Patricia.

On a cash-in/cash-out basis, after selling for $340,000 and paying commission, the mortgage remainder (assuming zero penalty), and returning the downpayment and closing costs to your bank account, you have $55,000 left.

Yay. Real estate rocks!

Now, look at the cash flow. The mortgage ($1,300) plus condo fees ($330), property tax ($166) and money the down payment could have earned if left alone (at 7% – $340 a month) means it costs you $2,140 a month to live there. That’s a $540 premium over renting the same place, and over four and a half years, it means you paid $29,000 more to be an owner than a renter.

So deduct that premium from the $55,000 left after selling, and your net is $26,000. That’s what you actually made for 4.5 years of ownership. Not great, but not bad.

But what if you’d left the downpayment and the closing costs invested and enjoyed the same return as, say, the TSX by just keeping it in an ETF that paced the market? (Remember markets have soared 17% some years and tumbled 11% in others.) In that case the $58,000 would now be worth just shy of $85,000 – for a profit of $27,000. If that money were back inside your RRSP, plus in a TFSA, all returns would be tax-free.

So, Pat, there ya go. Your condo made the same as if you had rented and invested in financial assets. So, is it a wash?

Hardly. This is probably a best-case scenario – in which you sell for top dollar, do it now before the market wilts and pay no penalty to break the mortgage. You are also getting rid of a relatively new unit before it ages and becomes less attractive to the next wave of hipsters who salivate for newness.

Selling also reduces risk – and you’re shouldering much. With 104,000 new condos in the pipeline in the GTA there’s a massive amount of supply hurtling towards a market were demand can be squished in a few months. That could happen in 2015 as mortgage rates start a long and relentless ascent or as the economy struggles, thanks to a crappy job market, sluggish wages and an inflationary 89-cent dollar.

So was the condo a bad investment? Not exactly. But in the midst of a bubbly real estate boom, it’s done no better for you than if you’d done nothing. Meanwhile you assumed market risk, rate risk and economic risk. Your monthly costs unexpectedly increased. Plus paying a hefty premium to own, not rent, came right off your liquid net worth. And you could have lived in exactly the same unit.

Worth it? Tell us once you find a buyer. I guarantee it’ll be another virgin.