Tales From The Fall Market: Part II

Not that it’s a contest, but I wonder which story will seem more outrageous between today’s and Monday’s, after you’ve read them both.

In Monday’s blog, we talked about crazy sale prices, relative to previous sales – both those from 15 months ago, and those from one day ago.

Today’s blog is not so much about the pricing, but the competition and feeding frenzy that exists when a new listing comes out – often resulting in unconditional, and/or sight-unseen offers…

TorontoRealEstateMarketUpwards

Quick question for you – do you get more excited when your common shares of RBC go up from the $50 you paid last year to $60 today, or when the same model unit as the $250,000 investment property you bought last year sells today for $300,000?

There’s something inherently more exciting about real estate investments than equity investments, although they’re more complicated, and more time consuming.

And I don’t find it surprising at all that over the last three years, I’ve sold more “investment condos” than in my previous nine years combined.

The bears, and the Vancouverites, will point to all this secondary-buying as the cause of an “unfair” and “inflated market,” but what makes real estate any different an investment from say, stocks, bonds, or rare coins?

Sure, we live in real estate, but it’s also an investment vehicle.

And yet there’s this sentiment out there that “real estate investors” need to somehow be reigned in, taxed to death, or discouraged.

In any event, I’m currently working with a slew of buyers looking to get their hands on smaller 1-bed condos in the downtown core for investment.

I find the best investments are the small 1-bed, 1-bath units, which provide the best yield.

I use three metrics when evaluating investment condos: the cap rate, first-year ROI, and monthly cash flow.

In today’s market, a good investment condo downtown will get you over a 4% cap rate, but 18 months ago, that was over 5%.

The monthly cash flow is often close to zero, but with principal repayment, the first-year ROI is often 14-15%.

I have a client who has been looking for a small 1-bedroom for the past month.

Last week, we found a place right in the heart of the Financial District that looked like it could work.

At $339,900, with a $1,700 per month rent, the numbers worked, and we were on our way to see it within hours of the listing.

The unit was a little bit banged up – the fridge was leaking, the kitchen cabinets showed some wear, and the unit needed to be painted.  But that $1,700 per month rent, plus the location – right across from Shangri-La, made this a better-than-average long-term play, so we figured we’d offer a few thousand under list price – $330,000, and hopefully settle at $335,000.

We made the offer the following morning, and I spoke to the agent, who said he would get back to me later that afternoon.

 

I didn’t hear from him later that afternoon, and I didn’t hear back from him later that night, despite leaving him a voicemail and asking why he hadn’t got back to me.

The next morning, I left another voicemail, then another.

I just had that “feeling” about this guy.  There are a lot of agents in the city, an overwhelming majority of which can’t tell their condos from their co-ops.

After paging him through the office, and sending another email, he finally got back to me after 6pm – which was about 28 hours after we had submitted our offer.

He told me that he was sorry for the “delay” in returning my messages, and that he had moved north of the city, and he had a new phone for which he didn’t have the charger!  He said that no store up north sold that particular charger, and that he was without phone access for 24 hours.

Oh, and he also added that unfortunately, the unit had sold.

I didn’t really care, because my client and I had sort of cooled on this place, and we didn’t like the idea of working with this guy through the closing, but I was frustrated by his blatant disregard for real estate rules and regulations.

“The unit can’t have sold,” I told him.  “Because I had the only offer.”

He completely missed my cynicism, and said, “Oh no, there was actually another offer that came in after yours.”

And I replied, “That can’t be correct.  Because, you see, I never received any indication from you or your brokerage that after having registered my offer, there was a subsequent registered offer.”

Again, he missed the point.

“I couldn’t really do anything,” he said.  “I had no phone.”

“What about email?” I asked him.

“I had no email, my phone wasn’t working.”

“Then how did you accept the other offer?” I asked him.

That’s when things went quiet, were followed by a pause, and then he said, “Look man, the unit is sold, okay.  I’m sorry.”

I told him that although I could take him to RECO and get him fined, I wasn’t going to bother.  It was a waste of taxpayers money, and I was confident that he would be out of the business in a year anyways.

But it was amateur hour in his household.

Even a rookie agent on their first day understands that most of RECO complaints deal with non-disclosure of offers, and this is a very easy mistake not to make.  If you have an offer registered, and another offer comes in, you can NOT simply work with that second offer, without notifying the person who holds the first.

This is one of the recurring themes in this fall market – new agents with no experience, knowledge, or professionalism, are running all over the city like chickens with their heads cut off.

In any event, I often find that after “losing” a property, a better one comes out right after.

On Thursday of last week, a way-too-good-to-be-true property came out in King West, listed at $329,900, and already tenanted to somebody long-term at $1,725/month.

The numbers worked – they were better than expected, and this 2-storey loft was worth more than the list price, so I loved the appreciation potential.

I told my client we needed to get in there asap, and have an offer ready.

As luck would have it, the tenant wasn’t allowing showings until Friday, after 6pm.

So we had no choice but to wait until Friday for a viewing, and the possibility of an offer.

I woke up on Friday morning and said to myself, “This market is the craziest I’ve ever seen it.  I need to think outside the box here, otherwise I’m just another horse trying eat from the trough before all the food gets gobbled up.”

I called my client and said, “We need to make an offer on this property, sight-unseen.”

Now here’s where the bears, and anybody with a conservative bone in their body, tells me I’m pushing my client too hard.

Well, guess what?  This is Toronto in 2016, and this is the market we’re working in.

I knew this property was under-priced.

I knew this property was going to get multiple offers.

So if I could get this property for the list price, with a condition on Status Certificate that my client could use as an “out” if something went wrong, then we would do that – sight unseen.

We had an appointment scheduled for 6pm anyways, but we made our offer – for full price, conditional on Status, and submitted it at 11am with a 6pm irrevocable.

I knew this building like the back of my hand, and I had seen this layout a dozen times.  I knew exactly what this unit was, and I knew what we were buying…..hopefully.

The listing agents called me shortly after I emailed my offer, and said “We can’t work with the 6pm deadline.”

I asked, “You can’t, or you won’t?”

They said, “We won’t.”

Apparently they had a dozen showings booked from 6pm onwards, and thus they didn’t think it was in their client’s best interest to sell the unit now.

Well no kidding.

These are top agents.  They’re no dummies.

As crazy at it might seem to say, “We’re past the point of ‘full asking price’ being attractive,” that’s just where we find ourselves.

So knowing full-well that we had to gain yet another competitive advantage, I got a copy of the Status Certificate from the listing agents, and I went over it with my client.  It helped that she was a lawyer, of course.

Having clients already in the building helped, since I knew there were no major issues there.

But going through it with my client, and having the entire afternoon to do so, enabled us to satisfy ourselves of the contents therein, and prepare to make an unconditional offer.

At 6:00pm, I showed up at the building, and there was basically a lineup to get inside.

The best part was when the listing agents’ assistant showed up with marketing material – feature sheets, floor plans, print-outs, and I said, to him, “What the hell do you need those for?”  They would be in the garbage within four hours.

We were in the unit with two other buyers and their agents, and my client was hilarious – she asked them, “Hey, do you guys know if that’s a 24-hour streetcar?”

“Getting in their head, are you?” I asked her as she shot a smile back.

I had her sign three copies of the offer – one at $329,900, one at $340,000, and one at $345,000.

She went on her merry way – trying to enjoy her Friday night, while bidding on a condo in the hottest market on the planet, and I went back to the office.

The listing agents called me back to say that they had a second offer on the property, and they were expecting a third.  I figured it was from the agent I saw outside the building, on her phone, looking at the MLS listing, who I would guarantee was on the phone with her assistant or front desk.

Within a half hour, they had a third offer.

And so we submitted our offer:

-$340,000
-$20,000 deposit (bank draft in hand, scan sent to listing agent)
-Unconditional

I dare anybody else to beat that!

We patiently waited, and around 10:30pm, when I was in the middle of “Jason Bourne” with my wife, which is a really, really awful movie by the way, the phone rang, and the listing agent told me that they had kicked one of the offers to the cub, but that we were in a “virtual tie” with the other offer.

I talked to my client, and we decided to go with our max: $345,000.

We had pre-signed the papers, so I simply sent it over to the listing agent, and hoped for the best.

Our offer was unconditional.  I can’t imagine the other offer could stake the same claim.

We had a deposit cheque in hand.  That had to count for something.

But in the end, the other offer prevailed.  It was being bought by an end-user, and I guess they were just willing to pay a little bit more money than we were.

Enjoy that 24-hour streetcar outside your second-floor window, pal!

But I digress…

The offer that was accepted was conditional, but the deal has already firmed up.

We lost by just less than $10,000, which in hindsight, I guess we could have paid, but I’m glad we didn’t.

We drew a line in the sand, and we stuck to it.

The purchase made sense at $345,000, and we wanted to be pleased with the purchase; not begrudgingly adding money three times to “win.”

So that’s the fall market, folks!

We’re making offers sight-unseen.

We’re reviewing documents ahead of time so we can provide unconditional offers.

We’re going to showings with cheque-in-hand.

And some of us are doing this, and still losing.

Don’t read all this and think “caution has been thrown to the wind,” however.  A lot of due diligence went into this offer, and we covered all our bases, and were always in control.

But as with Monday’s story, I fear some buyers, and some agents, are just going buckwild.

I’ll be back on Friday with yet another epic tale…

20 Comments

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  1. Jack says:

    You cannot argue that both (1) real-estate assets are an investment no different from stocks or rare stamps, and (in another blog entry) (2) we should be concerned about those who cannot afford to live in Toronto because of inflated house prices. Owning stocks is optional; having a place to live is not. If you really believe (1) then the absurd solution to (2) is to say “if you cannot afford a house then buy some rare stamps instead”.

    In all the excitement we are forgetting fundamentals. The primary purpose of residential real estate is to provide space for people to live. All the other purposes attached to it, such as saving for retirement, generating profits for mortgage lenders, and making real estate brokers rich, are secondary.

  2. Kramer says:

    I sold my rental condo in August… I’m sure I will regret it on some fronts, but yes David, I am learning to appreciate my stocks increasing instead, as long as you don’t watch them daily! But yes, I like the way these solid companies I have bought fractions of are earning billions of dollars of net income per year, are well managed, and I have to do literally nothing. Plus I can diversify, and if Mr. Market has a tizzy and offers fractions of the high quality company at an even more attractive price, I can buy more fractions very easily.

    Happy to be retired from real estate investing… next decade is for long term equity ownership.

  3. Lucielle says:

    This market us truly crazy! My cousin and her husband were considering moving to somewhere further from the downtown core – they wanted more space for the kids, and their head-office had moved to Mississauga. They decided to test the waters first, and listed their home on Prelist.org first to get a sense of what it was worth. I’d never heard of the site, but apparently, it’s a free listing service. Once they realized how in demand their little place was, they took it to a real estate agent to get it up on MLS. She confided to me that without the opportunity to list it and see the reactions, she probably would not have gone ahead with the selling process.

    1. Mike says:

      You’re spamming on a blog from a real estate agent for a service that any decent real estate agent would happily provide for free.

      You could also get a pretty good indication by using realtor.ca and seeing what houses were listed for in your area.

      Your business plan is so bad that I’m prone to thinking that your site is just meant to get suckers to click on it only find out later that the site was responsible for downloading some kind of virus.

      Sad and pathetic.

  4. IanC says:

    Making pricey unconditional offers sight unseen may have worked LAST month, but if buyers TODAY are expecting to win bids, they should be willing to demonstrate their full commitment. Seriously, most healthy people can get by just fine with ONE kidney.

  5. Mike says:

    So you ask what would get you more excited, a year in RY stock or a year at in a condo. Stock goes from $50 to $60 condo goes from $250,000 to $300,000

    I get excited over the stock. Not only will it net you over a thousand dollars more in that year but there has never been a time in history when a Canadian Bank has been late on a dividend payment, never mind default on a payment.

    I find it sad that Real Estate Agents can offer up “investment advice” yet not know how to actually calculate a CapRate.

    1. Andrew says:

      no kidding. These guys are a joke with their numbers.

      14-15% first year ROI? hilarious.

  6. Tim hesner says:

    Wow, those crap cap rates. These “investors” are the dumbest of the dumb money.

    1. Andrew says:

      I’d like to see his calculations on these ROIs and Cap Rates. Wonder if he will show his work?

  7. Joel says:

    Are there any price points and areas that you are not seeing homes sell this fast and with such competition?

    I generally see $3 million homes sit a bit and everything else sell within the week. Is this common across the board?

  8. Kyle says:

    “I told him that although I could take him to RECO and get him fined, I wasn’t going to bother. It was a waste of taxpayers money, and I was confident that he would be out of the business in a year anyways.”

    I usually agree with you David, but here’s where i have to respectfully disagree. My gut says he ignored your offer to double-end this deal. Do you think he even informed the seller of the existence of your offer? If the other buyer was represented by him, than i don’t think it was “inexperience” that lead him to ignore your offer, it was lack of ethics. And if that is the case, i urge you to at minimum take this clown to task with his Broker of Record.

    1. @ Kyle

      My broker is filing a complaint with RECO. Who knows if it will go anywhere, but perhaps this is the only way agents will learn.

      1. Kyle says:

        Thanks i commend you and your office. I strongly suspect the seller wasn’t even made aware of your offer. I doubt any seller in their right mind would say, “Forget about offer 1, let’s just go with offer 2”.

    2. Negotiator says:

      The real estate profession should be subject to the same rules that apply to lawyers and many other professions – if you see misconduct, you are obligated to report it. If you fail to do so you yourself are guilty of misconduct. Now maybe that’s the case already and RECO is just toothless, but it’s a problem when an agent like David thinks its not worth the hassle of reporting someone violating their professional obligations.

  9. Libertarian says:

    David, I’m glad that you admit that real estate is an investment like any other. My hope is that our various governments hear you in saying that and increase the requirements to become a real estate agent, similar to other industries that handle people’s money. Not only that, but the OSC could get involved if there agents out there promising rates of return and income streams, etc. After all, if RBC has to file quarterly numbers and constantly disclose whatever it’s doing, so should agents and condos operating as an investment. I believe that the Trump Tower is dealing with such problems right now because of all of the civil claims filed against it.

    From reading your blog over the years, I know that you’re in favour of anything that makes your industry more professional. Here’s hoping that this issue helps lead to that.

    1. Mike says:

      While I agree with most of what you’re saying I’m just more than a little shocked seeing someone posting for more government regulation under the name “Libertarian”

      1. Libertarian says:

        Hahaha, you got me Mike. I’m not anti-government. Of course we need government. It’s more about what the role of government should be. Do we need laws to protect people and their money? Of course. Most professions are self-regulated and simply report to government bodies. This includes real estate agents, so I’m not really asking for MORE government, just tweak the existing system considering how much money people are spending on real estate. Just as the cliche says, it’s largest investment most of us make. Shouldn’t the person helping us with that be educated and held to high standards?

  10. Homeowner says:

    I am not an agent but as an observer it doesn’t make any sense in this market why you did not go in at $345k with a 6pm deadline to start . That’s the point of making a bully offer . If you knew you had to buy it sight unseen, why not go in with your best offer upfront ?

  11. Andrew says:

    I don’t think you know how to calculate cap rates properly….or ROI for that matter. and I assume most agents calculate the same way you do which explains a lot about the market.

  12. Ralph Cramdown says:

    If your investments — financial or real estate — are ‘exciting,’ you’re doing it wrong. Seek excitement elsewhere.

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