July 24, 2011
Funny Math Part 2
In my last post, I introduced my opinion of the extremes in real estate speculation. Today I want to give a specific example of what I mean by “funny math.” Armed with some very solid points, the doomsayers venture into the land of suggesting that all real estate ownership is foolish. Sell your home today if you haven’t already, wait for the market to crash and then go in for the kill. If you’re an established real estate investor who only buys at bottomed-out markets, please, take this advice.
However, for the rest of us, this may not be the best idea. In the aforementioned post, I already stated how cherry-picking numbers can lead to extremes in speculation. If it was a guarantee that the market should crash imminently like the doomsayers say it will, go for it. But it isn’t a guarantee. What has happened, however, is that some doomsayers are going so far to say that renting is always a better investment than buying (I’m talking about home ownership here – not professional real estate investing). This is just as incredulous as the opposite suggestion that buying is always better than renting or that home ownership is often less expensive than renting.
First of all, if someone ever points to mortgage payments (at least in today’s market) and paints the picture that it will be cheaper than a comparable rental, put up a red flag and add transfer taxes, land taxes, strata fees, buying the new couch that suits your new home, etc. Let’s be realistic, home ownership is expensive, but is it honestly a better investment, assuming a moderately flat or slightly increasing or decreasing real estate market, to rent?
The funny math employed by the doomsayers requires taking comparables and add all the costs I just mentioned. So let’s do this. I know my Langley rental market best, so I am going to take a rental straight from Craigslist and compare it to its closest match that recently sold.
A certain 3 bedroom townhome just off of 200th street and 72nd avenue is currently renting at $1350 + utilities. We’ll excuse utilities, because you would have to pay those with home ownership as well. Now, I’m not sure if this is a 1350 or 1500 sq.ft. unit. A similar 1350 sq.ft. unit sold in January for $325,000. A 1500 sq.ft. unit is currently listed at $345,000. Is it fair enough to assume we are looking around $330,000 for sake of argument here? Okay, good.
Now, with the rental, the only thing you are paying is the $1,350. Everything else that you need to pay, you would need to pay if you were a home owner. Good deal. With the home, however, with today’s best variable rates you are looking at a $1,200 mortgage if you can get that 5% down (30 year amortization). This is sort of a new home buyer situation – you’ll still need to be able to afford the $1,475 it would cost you if you were going to lock in for 5 years. But whether you are going variable or fixed, plan for this in your budget. Looks like a good deal.
But let’s get real. We’ll assume you came up with closing costs as your “start up budget”. Monthly, however, you are looking at your $1,200 mortgage + $140 strata fees + at least $2400 yearly taxes (we’ll say $220 per month for budgeting purposes).
So under this arrangement you could pay $1,560 a month if this home is turn-key. Keep in mind, this would be lower if you came up with a larger down deposit (likely from the sale of your previous home). Let’s compare this honestly now. You can chose to live in the same place, renting, for $1,350 (rented out by someone who probably had a larger down payment than you could muster), or you could pay $1,560 plus thousands of dollars in down payment ($16,500 to be exact) and property transfer tax ($0 if you are a new home buyer, $4,600 if you were not).
This what I call funny math. It doesn’t take into account your specific situation, it assumed one situation. It also treats this as an investment property, not a home. This is important. Doomsayers will allude to the idea that the consistent increase in property value does not exceed that of other investments. Of course this is true, but it has, historically, been a safe bet and better than most. But what is more important is that we are not comparing investing $1,560 in another investment, because no matter what, unless you live at home, you need a place to live. So the choice is actually pay $1,350 – either paying for or subsidizing someone else’s mortgage – and “wisely invest” $210 (probably in beer and pizza) or find a good deal and invest $1,560 and pay yourself.
I am not advocating any sort of home flipping scheme or even buy and hold strategies for investors, I am saying that if you are torn between buying and renting, do the math. Have your REALTOR® and mortgage broker give you the real numbers you need, but also do it yourself. Don’t assume you are living for $0 rent and can magically invest in something better. You can’t invest $1,350 into another investment when you are paying rent if you don’t have it. You are paying this no matter what. Wouldn’t you prefer to use that $1,350, add some extra, and in 25-30 years time, have the freedom to live mortgage free and then use what would have been your rent, for your new investment, whatever it may be?
Maybe that $330,000 townhome is worth $165,000 or $330,000 or $660,000 or $1,000,000 in 30 years time. We can’t know. What we do know is that long term real estate has historically been a great investment. Paying rent can be great for transitions, or if you simply have a hard time getting into the market you need to be in (ie. you have to live in downtown Vancouver for whatever reason). But it is not a wise long turn financial strategy. While you shouldn’t let some smooth talking salesperson talk you into buying a home you can’t afford or pushing you into being the next real estate investor mogul, don’t let the funny math of the apocalyptic doomsayers negate the reality of historical numbers and balanced speculation.
July 17, 2011
Funny Math Part 1
Upon referring a persuasive book to a good friend of mine, she admitted that she could be easily convinced of a wide range of ideas from any well-written book, whether it was “right” or not. This was a moment of honesty very few people can even admit to themselves, much less to others. Sometimes we agree with something we have read because we want to agree with it, or maybe it just “feels” right, or maybe it is actually true. The fact is, none of us have the tools to be experts in everything, but the problem is that we almost need to be experts in which “experts” we can trust. My first rule is if someone calls him or her self an “expert”, he or she usually isn’t.
Real estate speculation almost seems like Vancouver’s official sport. Everyone has an opinion and everyone seems to be an expert. It is safe to say that even in the last few years of troubling economic times, Vancouver has been the hottest market in Canada, and probably in the top 10 in North America. At times it can seem insane. Maybe it is. But this market has led to two speculating camps, both using what I call “funny math” to prove their point.
Don’t get me wrong, they are both convincing. Problem is, they are so convinced that they are right, that they ignore everything the other side says, when the truth likely lies somewhere in the middle (or is utterly unforeseeable either way). The two camps I speak of, in regards to real estate speculation, are the utopians and the doomsayers. Utopians believe that the market will forever keep rising and rising – there may be small corrections along the way, but Canada will always be safe and steady for real estate investment. Doomsayers, on the other hand, are always calling for the biggest collapse in real estate history – unaffordability cannot be sustained and the market is sure to dive at any moment.
Unfortunately, as real estate professionals, we sometimes get caught up in the speculation. It sometimes seems natural that we should should give our opinion on the future of the marketplace. But we shouldn’t. While we are professionals, we are also salespeople held to a code that we must put our client’s interest before even our own. It is almost entirely against our benefit to forecast a poor market. So when was the last time you heard a real estate agent say that he or she believed a downturn was coming? Utopians will usually quote population projections and livability quotients.
On the other hand, doomsayers generally advocate that their followers should rent until judgment day, when all the greater fools will get what is coming to them and those who waited can pick up the pieces of a crashed market (like many Canadians did on American soil). Doomsayers quote household and government debt numbers, unaffordability ratios and rising mortgage rates.
Unfortunately for both camps, they let their passion blind them and ignore the balance of the two. What ends up happening is that the general public doesn’t know who to trust. You can’t ignore the numbers of either. This isn’t a zero-sum game. You can’t tell people for 10 years that the market is going to collapse any day and expect credibility to last forever. You also can’t paint rosy pictures when history has continually shown the reality of real estate cycles, and the subtle or not-so-subltle warning signs for market corrections.
So do your own research and follow the money. You want to invest in real estate? Talk to a real estate investor who actually makes money buying and selling real estate. Not an author. Not someone who lives in New York or someone who wants to sell you something (like a book or membership to some exclusive club). Talk to someone you know has seen the market rise and fall. Want to buy a home? Understand that if you sell in the peak of the market, you will probably buy in one too. Same with a slow market. Don’t play the game. Buy and sell what you need. Get a good deal and let your REALTOR® do what they do best – sell your home for the best possible price and find you a home that matches your needs. They can inform you honestly about the past market and the current market – but REALTORS® are not soothsayers.
July 13, 2011
Autism Fundraisers & Open House
It’s a busy busy weekend! There are a few events I want to tell you about in Langley, and I hope we can get as many people out as possible. So straight to the details.
Friday/Saturday, July 15 & 16
80′s Rock for Silas Autism Fundraiser
Station House Pub 3122 Station Rd., Aldergrove
Doors open at 4pm both nights, music featuring 80′s cover band Heatseeker and Canadian Idol Top 5 contestant Greg Neufeld.
Tickets are $20 in advance (still available!) and $24 at the door, both include a burger and beer!
50/50 draw, raffles, silent auction – plus prizes for best 80′s outfit, etc.
Advance tickets available at the venue or give me a shout.
Facebook event details here.
Sunday, July 17
Whiskies of the World Grand Master Tasting
Station House Pub 3122 Station Rd., Aldergrove
Presented by Roberto Roberti
Admission is $25 and all proceeds go directly to Silas’ Autism Fund.
An exclusive 40-person max. event! Tickets still available.
Give me a shout for tickets!
Facebook event details here.
Support for Silas Website
And finally the open house. It is actually before the Whisk(e)y tasting, so come on out to Fort Langley’s Bedford Landing and then head out to Aldergrove for a great experience!
Sunday, July 17 2-4pm
22882 Billy Brown Rd., Fort Langley Open House
Property Details: MLS®: F1112449
NATURE VIEWS IN BEDFORD LANDING.
Show Home Quality 2-storey with finished basement offers privacy front and back. Features wide open floor plan with hardwood and tiled floors, granite counters, custom pantry and picture-perfect window in the living room. Upstairs boasts master bedroom with vaulted ceiling, and views of mountains & green space, Jack & Jill ensuite for the other 2 bedrooms, laundry for convenience. Fully finished basement is self contained with 1 large bedroom suite – great for in-laws or growing teen.
Fenced yard with southern exposure has pond features and is an oasis retreat. Double garage plus open parking has lane access. This unique location in Bedford Landing is surrounded by nature yet close to everything that Fort Langley has to offer.
Listed by Andy Schildhorn – PREC, Macdonald Realty 1st Pioneer
July 10, 2011
Buyers Market vs. Sellers Market
You hear these terms often. Is it a buyer’s market or a seller’s market? My readers will likely understand my aversion to market speculation (which will probably come more apparent in the weeks to come), but reading the cold hard facts and explaining the present market is definitely something that you should expect your REALTOR® to do. The general idea is basic. A buyer’s market is when there are more sellers than there are buyers, lessening demand and usually reducing prices. A seller’s market is when there are more buyers than sellers, increasing demand and prices.
While that is obviously oversimplified even in theory, it does lead to the practical problem of gauging the market. How do we know that there are more buyers than sellers? It isn’t like there is a daily poll out there asking random households if they are looking to buy – and even if there was, what does “looking to buy” even mean? When are you looking to buy? Do you have the funds to buy? How serious are you? So when a REALTOR® says that we are are in a buyers market or a sellers market, where are they getting that from?
Generally speaking, at at least in our area, we look to the sales-to-listing ratio. That is, in one month, how many properties sold compared to how many properties were on the market. We then compare that to some imaginary breakpoints that someone has decided at what ratio is a “buyers market”, a “balanced market”, or a “sellers market.” Different organizations will use the same numbers, but different breakpoints.
Here are two pertinent examples: the Fraser Valley Real Estate Board offers suggested ratio breaks of 0-18% as a “buyers market”. This means that for every 100 homes on the market, between 0 and 18 sold. A balanced market is between 18-22% and a sellers market is over 22%. Generally speaking, if you hear that it is a “hot” market, we are looking at ratios in the mid to high 20s. A “soft market” will probably be in the single digits. The second example I would like to point out is through the Canada Mortgage and Housing Corporation. Although similar, they suggest a buyers market is between 0-15%, a balanced market is 15-20% and a seller’s market is over 20%. The general idea is there though.
Diving deeper still, we live in a big country with a lot of different product. I often say there is no such thing as a “Canadian housing market”. I sometimes joke that there is the Vancouver market and then there is the “rest of Canada” market. In truth, there are many Canadian housing markets. Further to that, one product – say detached homes – may be hot in the same community that townhome numbers are in the dumps. Why is this important? What if someone led you to believe that because we are in a “hot” market, and we were (overall), you decided to try selling your townhome. But townhomes aren’t selling. The detached homes and condos were pulling up the numbers. Don’t you think that might weigh in your decision to sell? Or buy?
Part of the reason I am writing about buyers and sellers markets is to showcase our current situation in the Fraser Valley. Over the last two months we have seen two headlines when it comes to our present market: huge variations between locales and huge variations between product type.
For the month of June, the entire Fraser Valley sales-to-listing ratio was 16% – a slight buyer’s market, right? But let’s break that down a bit. For detached homes, the ratio was 22% – jumping the balanced right into a slight seller’s market. Townhouses in the area were also at 22%. Which means that condos must be pulling down the number – and they are, a slow 12%.
But what happens when we look at individual communities? The Fraser Valley Real Estate Board covers Abbotsford, Mission, Langley, Surrey, White Rock, and North Delta. Often, these numbers look pretty similar. But what about June? Abbotsford’s overall sales to listing ratio was at 15%, but White Rock’s was 23%! What’s in 50km? So it might be misleading to tell someone in White Rock that their board is experiencing a buyer’s market, no? The numbers don’t lie, but oversimplified data won’t do anyone any good.
My home of Langley can show the other extreme variation going on right now. Want to sell your detached home in Langley? Probably won’t take too long if it’s priced right – ratio was 24% in June! Think that’s good? 3 in every 10 townhomes in Langley sold in Langley. That’s right, a 30% sales to listing ratio (a fuller story might be how many of those are in new developments vs. resale…). So what about those Langley condos? There are a bunch being developed right now, so the demand must be there, right? Wrong. 10.3%. Just over 1 sale for every 10 listing. Even slower than May’s 12.9%. So why all the development? Well, remember development takes time. Just last year in June of 2010, the Langley condo market was at 17%. Over-saturation? Maybe. Or maybe the people who normally bought condos – young couples, are now unable to meet new mortgage standards. Hmm. Or maybe investors/speculators who normally could pick up a few new condos to rent/flip can’t do it because of the updated mortgage restrictions. Or maybe all three.
Point is, be in the know. The media is going to take the best headline possible. If you are needing to or interested in buying or selling, ask your REALTOR® to zoom in on the pertinent data.
July 3, 2011
My dream home already has an accepted offer…
Many home buyers understand the concept of a “back-up offer” – a seller accepts a preferred offer in a multiple offer situation, but wants the option to have a back-up offer in case subjects are not removed on the accepted contract. But many home buyers don’t realize that you can actually write up an offer even after there has been an accepted offer on a property.
However, both buyers and sellers need to know a few things before entering into a back-up offer situation.
First, for sellers, you must make sure that your real estate agent, upon accepted a back-up offer, writes a back-up clause into the secondary offer, preventing you, the seller, from being legally bound to selling one property to two different buyers (awkward…). Make sure that your contract is rock solid – that is, one contract at a time.
An accepted offer is a legally binding contract. But for those of you who have bought a home know, a change to that Contract of Purchase and Sale usually constitutes a rejection of the previous contract (this is how the offer-counteroffer process works). If you have an accepted offer with a backup offer and you re-open negotiations, you could actually be rejecting your initial contract and therefore legally activating the backup offer. So always get legal advice from a lawyer well-versed in real estate transactions if this is the situation you may be finding yourself in.
For buyers, the backup offer may be a great idea in case subjects are not removed on that home you were just too late to get in. Deals fall apart all the time. However, what if you write up that backup offer and then find something else that you like? Well, just like any other offer, it can revoked prior to acceptance (we’ll leave the complications of revocation for another post). However, just make sure that this possibility is addressed in the backup offer in case of acceptance. Have your agent write in the proper clauses so that you are able to collapse the accepted offer in case that “other dream home” pops up. Just remember, certain clauses signal to the seller’s agent that your offer is leaving too many “outs”, which may weaken your negotiating position. Sellers want to see serious contracts with buyers that have the full intent to purchase.
| Abbotsford East, Abbotsford Real Estate
| Abbotsford West, Abbotsford Real Estate
| accepted offer
| Agassiz, Agassiz Real Estate
| Aldergrove Langley, Langley Real Estate
| backup offer
| Bedford Landing
| Bradner, Abbotsford Real Estate
| Brookswood Langley, Langley Real Estate
| Burke Mountain, Coquitlam Real Estate
| buyers market
| Canyon Springs, Coquitlam Real Estate
| Cedar Hills, North Surrey Real Estate
| Central Abbotsford, Abbotsford Real Estate
| Chilliwack E Young-Yale, Chilliwack Real Estate
| Chilliwack W Young-Well, Chilliwack Real Estate
| Clayton, Cloverdale Real Estate
| Cloverdale BC, Cloverdale Real Estate
| contract of purchase and sale
| Downtown VW, Vancouver West Real Estate
| East Newton, Surrey Real Estate
| Eastern Hillsides, Chilliwack Real Estate
| Elgin Chantrell, South Surrey White Rock Real Estate
| for sale by owner
| Fort Langley
| Fraser Heights, North Surrey Real Estate
| Fraser Valley
| Fraserview VE, Vancouver East Real Estate
| Grandview Surrey, South Surrey White Rock Real Estate
| gross debt service ratio
| Guildford, North Surrey Real Estate
| Hazelmere, South Surrey White Rock Real Estate
| home evaluation
| June 2012
| King George Corridor, South Surrey White Rock Real Estate
| Langley City, Langley Real Estate
| market analysis
| market update
| mortgage rates
| Murrayville, Langley Real Estate
| open house
| Port Kells, North Surrey Real Estate
| Promontory, Sardis Real Estate
| qualifying buyers
| real estate cycle
| real estate history
| Royal Heights, North Surrey Real Estate
| rules & regulations
| sales-to-listing ratio
| Salmon River, Langley Real Estate
| schedule A
| sellers market
| Simon Fraser Univer., Burnaby North Real Estate
| Sullivan Station, Surrey Real Estate
| Sunshine Hills Woods, N. Delta Real Estate
| Walnut Grove, Langley Real Estate
| Whalley, North Surrey Real Estate
| White Rock
| White Rock, South Surrey White Rock Real Estate
| Willoughby Heights, Langley Real Estate