Kye Grace’s Blog

 

As the real estate market begins showing signs of a potential downturn the number of listings has sky rocketed. A lot of these listings are from people who bought their properties over the past three years. They bought when it was obvious the market was on its way up. Does this make them brilliant real estate investors? Not in my books. It makes them a real estate speculator.

 

Although it appears anyone could have got it right in the past few years we are seeing that actually getting it right when it comes to real estate investing takes far more than taking up a seat on the band wagon. You could have bought just about anything and looked like a genius, careful you don’t believe your own success. If you are now trying to unload those properties for whatever profit they may have earned you, you are not an investor. If you fear the properties not being worth next month what they were worried about last month, you are not an investor. If you bought your property with the intent of selling it at the soonest market peak, you are not an investor. You are a speculator.

 

An investor does significant research into the cities or towns looking for job creation, average incomes increasing, taxes going down, transportation improvements all economic fundamentals that drive a real estate market. Secondly an investor finds a property that is cash flow positive. A property that earns an income that pays the mortgage, taxes, maintenance, property management costs and provides a small amount of additional revenue directly to you.  

 

The real difference...speculators buy on the way up (buy high, sell higher) and try to get out before it goes down and hope to make a profit so they can then beat their chest and say look how much money I made. Investors buy when it makes sense regardless of the market; they know how to choose a property to buy, hold and exit while enjoying the cash flow which benefits from inflation. Most importantly they know how to make enormous amounts of money by investing in real estate.

 

There are numerous readings and organizations out there that will guide you in becoming a real estate investor. Here is one that I believe is worth exploring https://www.reincanada.com.

 

I have allowed some of my thoughts trickle out...if you ever want to hear more drop me a note, give me a call or meet me face to face for a chat and beverage. I love dialogue with anyone.

Today's vlog comes with some text to help illustrate the concept I am discussing.

In a downward market you will often buy in the market you sell in. The same influence on your selling price exists for other sellers whom you may buy your next home from. If your property was recently valued at $400 000 and you choose a property recently valued at $600 000. You will find the sellers of higher priced properties will need to accept greater reductions as the market continues to decline. The higher the price of a home, the fewer buyers who will be able to purchase the home. This results in lower demand and the lower the demand the lower the value.

 

The following may illustrate the above statements, I have chosen the numbers for simplicity and in no way relate to any specific property or market.

 

Your property was worth $400 000 however the market has reduced by 5% and is now worth $380 000. You sell for $20 000 less than desired.

 

You choose a property that was worth $600 000 however the market has reduced by 5% and is now worth $570 000. You buy for $30 000 less than the seller desired.

 

You accepted $20 000 less for your property yet saved $30 000 on the home you purchased resulting in a positive net result of $10 000.  

 

Recalculated based on the higher the price the lower the demand concept would look like this. These numbers again are simply for illustration and not an actual indication of real market values.

 

Your property was worth $400 000 however the market for similar homes has reduced by 4% and is now worth $384 000. You sell for $16000 less than desired.

 

You choose a property that was worth $600 000 however the market for similar homes has reduced by 6% and is now worth $564 000. You buy for $36 000 less than the seller desired.

 

You accepted $16 000 less for your property yet saved $36 000 on the home you purchased resulting in a positive net result of $20 000.

 

Some people wrongly believe that there is no binding contract unless a deposit is paid when an offer is made. This is untrue. The three main requirements for a contract are offer, acceptance, and consideration. Consideration is something done or promised to be done by a party in return for something done or promised to be done by another party. In a contract of purchase and sale there is an exchange of promises. The seller promises to transfer title to the property to the buyer and the buyer promises to pay the purchase price to the seller. The exchange of promises serves as the consideration, not the deposit. Instead the deposit is good faith money. If the buyer defaults he may lose forfeit his or her deposit.

 

So why have a deposit then...well put yourself in a seller’s shoes. You are selling your home and hope to get $700 000 for it. A buyer’s Realtor brings forward an offer which contains three components that communicate the attractiveness of the offer: the purchase price, the deposit size and perhaps most importantly the terms and conditions.

 

The price communicates how much they will pay, perhaps not in entirety yet as they will likely offer lower than the actual amount they are willing to pay. The purchase price, albeit the ‘big one’, should not be considered in isolation of the other two components. In fact one may accept a lower purchase than desired if the other two components are extremely appealing. In the end the price may not matter if the rest of the contract causes financial hardship, undue stress or a collapsed deal

 

The second is the terms and conditions. This includes completion dates, possession dates, subjects, warranties, statements and inclusions or exclusions. Essentially this says what has to happen or has happened for the buyer to be willing to hand you the money for your property. I will write about this in my next post, as it is a complicated topic in the context I have placed it here.

 

Third is the deposit. This communicates their commitment to follow through on their promise to give you the full purchase price. Not that they won’t get their deposit back if they fail to follow through, it is rather difficult and expensive to pursue legal retention of the deposit as part of damages for breach of a contract. You can however tie the deposit up while you contemplate legal action (and the costs that go with it) by not signing the release until you have sought legal advice and decided. The bigger the deposit the more likely the buyer is dead serious about buying your property.

 

As a buyer what size deposit should you offer? The ‘old school’ in this business still hangs onto the 5% rule. In our market 5% may seem like a lot when properties are averaging 500K plus; of course with the mortgage guidelines changing to require a 5% down payment the money will be on hand anyways. If you are not comfortable with 5% I suggest 3% rounded to a whole number. For example if you are offering $700 000 then $20 000 should suffice, unless you want to improve the attractiveness of your offer. In the seller’s mind things could collapse right up to completion, give the seller as much peace of mind as you can and perhaps they will accept an offer a touch lower than they planned knowing they have a committed buyer.

 

My advice, be dead serious about the property you are buying and provide a healthy deposit.

Well not exactly, there are some recent local challenges. In light of the mortgage practices and subsequent disaster in the US, the Canadian Government has taken action. They have passed legislation that is intended to protect the Canadian economy from a similar turn of events. I won’t bore you with my take on this beyond suggesting the mortgage industry in Canada was behaving responsibly and had a great example of why they should carry on with their sufficiently thorough lending practices. In a nutshell my opinion is the legislation was a token effort to guard against perception not reality.

 

The ‘crisis’ is in the number of people trying to beat the deadline of October 15^th (see below for the new guidelines). Unfortunately for many would be home buyers, lenders are already beginning to align their guidelines with the new legislation. These buyers are under the impression they have some time to take advantage of ‘existing’ guidelines...Wrong. On top of this there are many buyers who are trying to get ahead of the rush come October...Too late.

 

Mortgage providers are becoming overwhelmed with applications and live deals and are experiencing a significant backlog. What use to take a few days is taking over a week in some cases. The Underwriters are where the bottle neck seems to be occurring as they are the ones who utilize the most scrutiny as in the end it is their money on the line. What really puts the cherry on top is the number of applications that are ‘flaky’ as one mortgage professional described them. It seems many are just ‘taking a shot at it’ which is bogging down the system. I have two deals which may not have the subjects removed on time; in both cases we had allotted a week to remove the subject which is normally more than ample.

 

If you are buying and plan to utilize zero down, longer amortization or have a credit score below 620 you should get in writing confirmation from your lender that they will honour your preapproval up until a specific date regardless of any internal changes they make to align with new guidelines.  

 

Cut and paste from www.free-press-release.com

 

On October 15^th legislation will take affect setting the following guidelines:

 

Canadian Mortgage and Housing Corporation or “CMHC” controls 70% of the mortgage insurance market and they will be implementing new lending guidelines effective October 15, 2008 that will affect those who are purchasing a home with less than a 20% down payment and who are purchasing a home after this date. Here below is a summary of what is coming.

- the zero-down mortgage program will be removed. You can no longer buy a house unless you have a down payment and enough money to cover your closing costs.

- mortgages can only be amortized up to 35 years as a maximum. The 40-year amortization program will also be removed.

Probably the biggest and most important change is this. Individuals who are planning to buy a house, and who only have 5% of the purchase price available plus their closing costs, are also going to need to have a minimum credit score of 620 to qualify for an insured mortgage.

 

Now I am not becoming the choir boy of any Real Estate Board or Association, however I do believe it is a good time to sell your home. The media is having a field day with what should be described as at best a levelling of the market. These stories have lead to water cooler and dinner table conversations about the ‘downfall’ of the real estate market. Sure some of the numbers are lower than a year ago. The current numbers are being compared to record settings numbers of the past few years. Lower numbers were inevitable; it would be absurd to expect the market to continue to set new records indefinitely. Point being yes the market has shifted, has the bottom fallen out? Not even close, in fact selling today could be considered selling at or extremely near the market’s peak. Of course this is assuming that the Olympic market surge isn’t coming; Vancouver property owners should not bet against another rise in prices after the Olympics.  

 

Selling in this market is not as simple as plunking a sign out front and having your property listed on MLS. There are more properties for sale right now than ever before; you cannot count on your home simply being stumbled upon. You need to find a professional to help you navigate the markets and get your house noticed.  I'm talking about calling a highly skilled professional who knows what it takes and can really give your house the attention that it needs, this isn’t always the Realtor with the most signs in the neighbourhood. You need a Realtor who believes in marketing your home using as many resources as possible. A sign and MLS are great and effective; they are also exactly what every other property for sale is using. I might as well include ‘Just Listed’ mail outs in the standard marketing, I am a Realtor and I don’t look at the 5 to 8 ‘Just Listed’ postcards I get a day, what are the odds this inefficient and unsustainable method will sell your home. Ever notice the picture of Realtor is bigger than the pictures of the property ‘Just Listed’? What are they marketing the property or themselves?

 

Look for a Realtor who insists on expansive and aggressive marketing using the internet, multimedia photo and virtual tours, multipage professional brochures for those who view the home and insist on servicing the Realtors bringing prospective buyers to your home. From experience I continue to be baffled by the number of times I need to be outright aggressive to schedule a viewing of a property on behalf of my clients. How does making it difficult for Realtors to bring clients to view the property help their clients?

 

More on who your Realtor should be treating like gold and modern marketing techniques next time...  

This video clip provides a humorous example of the topic discussed in the post below regarding first impressions.