I always like to compare the real estate market to the stock market, in many different contexts.
We look at the amount of “shares” traded in real estate, the frequency, the acquisition/disposition costs, the “dividends” for investment properties, and of course – appreciation!
But whereas a stock can drop in price all the way to zero, a piece of real estate, it seems, can not.
Let’s take a look at the problems at 40 Panorama Court in Etobicoke, and ask the question that is today’s blog post, one more time…
I don’t want to be accused of adding fuel to the fire here, but I do want to bring this topic up before it passes us by.
The woes at 40 Panorama Court were reported on about a month ago, as stories appeared in The Huffington Post and CBC.ca, among other outlets. It’s a very interesting, and exceptionally unique case, and it warrants discussion.
As the story goes, the owners at 40 Panorama Court are seeing their maintenance fees increase by an unfathomable 66.67%, with $1,200 fees going to $2,000.
The building has apparently had $8,000,000 in repairs over the last decade, but still needs another $600,000, and potentially more.
The story made headlines, and as with many headlines, it did so for both the right reasons, and the wrong reasons.
When I see a story like this, as a real estate agent, a condo-owner and investor, and a person with common sense, I ignore the “We need justice” quotes, and look to find out what’s really going on in the building.
I understand that residents are frustrated, and I would be too.
I understand that many people in the building won’t be able to afford the increase in maintenance fees, and I sympathize.
But if a condominium is an “investment,” and condo fees are a variable expense that comes with the investment, then perhaps “needing justice” isn’t the right turn of phrase.
Of course, if we’re going to compare real estate to the stock market, then we should consider every accounting scandal (Enron, Worldcom, Nortel) or fraud (remember Bre-Ex?) that had a major impact on share price.
It can happen, both in the stock market, and the real estate market.
But many of the owners were quick to cry foul and make accusations about “kickbacks” and “embezzlement,” and after a cursory review of what’s going on in the building, and back in 2011 (previous media coverage), it looks to me like this building is just falling apart.
It’s awful, but it’s not necessarily anybody’s “fault.”
If a stock can go from $100 per share to $0 per share, based on intrinsic value, and where the company is heading, then can the same happen to a condominium?
It was four-and-a-half years ago that the Toronto Star published THIS article about 40 Panorama Court, and detailed the major financial problems in the building.
The 2011 article explained that previous condo boards in the building had neglected repairs, and tried to keep condo fees low, making problems worse, and eventually necessitating a court-appointed administrator to deal with the condominium’s finances.
I’m sure it’s a matter of opinion as to whether previous condo boards were “neglectful,” but think about the ugly hallways of your condo, and how the board doesn’t want to spend money to modernize them. That’s more of a discretionary expenditure, but one that you can relate to. So what if your parking garage was crumbling, and every day, another piece of concrete fell from the ceiling? Would you want the board to fix that?
In any event, I’m amazed by the fact that, despite that media coverage, and despite the awful, miserable shape the condominium was in, FORTY-TWO condos have sold in that 200-unit building since May of 2011 when that article came out.
Forty-two people looked at this building, literally crumbling and falling apart, with massive budget shortfalls and major repairs still scheduled, special assessments being handed out like candy on Halloween, and said, “I think I’m going to buy in that building.”
So if you purchased some penny-stocks, and they became worthless, who is to blame? The company, for going bankrupt? Or you, for buying penny-stocks?
The owners in this building are upset, and “demanding answers,” but is it fair to say that many of them didn’t do their homework?
Is this a case of “you get what you pay for?”
Consider the case of one particular unit, that was sold in 2003 for $146,000.
This unit was re-sold in 2012 for $43,000.
That’s an awful loss, right?
I mean, had you bought just about any house or condo in the city of Toronto in 2003, it would have likely appreciated 50% at a minimum, and some properties might have doubled in value.
But the person who purchased in 2012, after the reports about the major problems in the building, must have thought this was a steal!
I bought shares of Nortel in 2001 for $50, after they had dropped from a high of $124.50.
And I rode them down to about $2…..
Should I have looked deeper into Nortel? Should I have done a forensic analysis of their financial statements? Was I qualified to do so?
Here’s where I want to draw a comparison to real estate once more.
I’m not going to suggest that I, or anybody else, had any clue what was going to happen to Nortel’s share price in 2001. Maybe some insiders, and maybe some really intelligent and gifted traders, but for the most part, nobody had a clue.
But in the case of 40 Panorama Court, a very simple look at the Status Certificate would have revealed millions of dollars in recent repairs, and millions of dollars of repairs outstanding.
The massive hike in maintenance fees, and multiple special assessments, should have also set off alarm bells.
Is this different from, say, a company cutting its dividend payout by 5% in the 3rd quarter?
Am I being biased here because I’m in real estate, and I know what a “Status Certificate” is? Or is a physically-crumbling building just a lot easier to spot than three future years of shrinking sales at a Fortune-500 company?
There’s only so far we can take this real-estate-versus-stock-market comparison, and we’re all going to have our own biases.
But I’m just absolutely floored that forty-two people have purchased at 40 Panorama Court since the problems in the building surfaced in 2011, and to be honest, the increase in maintenance fees are something they maybe, sorta, possibly, oughta seen coming.
I feel terrible for the residents. How can you not?
But people make bad investments all the time, and they don’t always sign a petition to ask the Province to intervene.
If you can stomach a 15-second commercial, watch the CTV news story:
So let me go back to the beginning here, folks.
I’ll ask again: can a condo’s value ever drop to zero?
I don’t know if it’s ever happened before, but this is a good example of how it could potentially happen.
There are 200 units in this building, and let’s say each one is worth $50,000.
That’s $10,000,000 right there.
But what if this building needed $9,000,000 in repairs, and it was going to cost $1,000,000 to run for the next year?
Wouldn’t everybody’s unit, theoretically, be worth zero?
If residents are going to pay $2,000 per month in maintenance fees, how long will it take for them to spend more than their condos are worth?
Ignoring mortgage interest, property taxes, and utilities, just consider that if residents are paying $2,000 in fees, that go toward repairs and operating expenses, and if the units are going down in value, wouldn’t it almost be smarter to just walk away?
It’s a really sad situation, and I can’t help but feel that many of the people who bought into this building were chasing the only chance at home ownership they’d ever have. I also think they might have been among the most uninformed buyers, and I can’t for the life of me imagine what kind of real estate agent would put a buyer into this situation.
But if the mold in the building spreads, and if the underground parking garage continues to sink, or the concrete continues to crumble, there may come a time when a condominium just might not be worth repairing.