Greed Is Good……Right?

The 1980’s were said to be the “Decade of Greed,” and if Hollywood’s portrayal was any indication, those of us watching now in hindsight would have no reason to believe it was anything to the contrary.

Market regulations, consumer interactions, and the way commerce is transacted may have changed since then, but greed still exists.

The real estate market, as many of you would argue, is ground zero.

Let me tell you a story about greed, that still after having thought about this for weeks, and written the entire blog below, makes absolutely, positively, no sense…

GreedIsGood

“Greed Is Good”

It makes a great tagline, and looks cool in that quasi-Gothic font next to a young Michael Douglas, who blends into the background darkness in a way that Oliver Stone seems to see the whole world.

Wall Street opened my eyes as a young man, since I actually never watched it until I was in third year university, taking business, dreaming of becoming a caviar-eating, lear-jet flying, financier.

As cool as the movie was, and as great as the one-liners were, I actually found the movie to be quite depressing.

Unlike most people my age, I didn’t think Michael Douglas’ character was anything to aspire to.

Yes, he was rich and powerful, and if he didn’t earn the respect of his peers, he certainly went out and took it.

But like most people who does what he does, he eventually fell hard, as did his protege, Bud Fox, who had to rat out his mentor in order to save his own skin.

Many young people watch Wall Street and say, “That’s exactly what I want to do!”

The movie had the exact opposite effect on me.

I feared an existence like that of Bud Fox, who was only with a woman who liked him because he was rich, and scoffed at the idea of “getting by” in something less than a top-end Penthouse apartment.

And by the end of the movie, I began to wonder if the take-away was that hard work alone isn’t enough to be successful; you also have to lie, cheat, and steal.

The timing of my first viewing of this film also coincided with the tech-boom of 1999, which led to a spectacular bust.

And I began to sour on the world of high-stakes trading, and look elsewhere as far as school, and career, was concerned.

That one line in the movie though always stuck out at me: Greed Is Good.

I never quite understood it.

I think that most people who play with fire, get burned.

I believe in taking risks, I believe in being different, I believe in thinking outside the box, and I think combined with hard work and sacrifice, success – and wealth, is achieveable.

But at what cost?  That’s where every individual has his or her own set of ideas and ideals.

And the whole “Greed is good” mentality never motivated me, because I didn’t think it was a means to a successful end.

There’s no shortage of greed in the real estate market, as many of you can attest to.

Whether you were on the giving or receiving end of greed, we all know that it happens as often as properties go up for sale.

But there are different measures of greed, and different motivations.

I’m not sure what’s worse: greed on a smaller scale, or a larger one.

I have clients who are relocating to Toronto, and they are the very definition of “executives;” a word that gets thrown around a lot.

Executive rentals, executive tenants – what does this all mean?

Well, my clients are actually executives, who have extremely high-paying jobs of great stature, can afford the “luxury rentals” that other people scoff at, and would be the absolute spitting image of a “Triple-A Tenant.”

We were looking at two penthouse condos in a luxury condo downtown, but before I took my clients for a viewing, I called the listing agent to clarify something in the broker’s remarks of the MLS listing.

The Condo was listed for $8,000 per month, and then decreased in price to $7,125 per month.

However, the following note appeared in the MLS listing:

Tenant Responsible For Base Rent of $7,125 Per Month Plus Condominium Maintenance Fees Of $875 Per Month = $8,000 Per Month.

So first of all, the unit wasn’t really decreased in price.  All they did was lower the asking price for the rent, and then build in the maintenance fee.

But more importantly, and as I asked the listing agent, “Who the hell expects a tenant to pay the maintenance fees?”

“I’ve done a hundred rentals,” I told her, “And I’ve never had a tenant pay for the maintenance fees.”

Surprisingly, she said, “I know, neither have I.”

So what was the issue here,  I wondered.  It didn’t make any sense.

“There’s something you have to know about these condos, and the landlords,” the listing agent told me.

“They’re smarter than you and I.”

Interesting.

I knew who the landlords were, since a quick Google search provided ample results.  They were two young guys in their late 30’s, early 40’s; sons of a very wealthy and prominent Toronto family.

“They’re incredible businessmen,” the listing agent told me.

“Allow me to explain,” she said, as I took a seat in my office chair and got ready for an earful.

“My clients aren’t a fan of the maximum 1.5% rent increases, as I would imagine everybody else in the Province aren’t either.”

“So they’re hedging their bet, you see,” she explained.

“If they were to only raise the rent 1.5%, that’s a pittance on $7,000.”

“But if the condo maintenance fees went up significantly, say, 6% next year, and the tenants are paying for that, then my guys are getting a 1.5% increase on $7,125, but they’re not having to pay the 6% increase on the $875 per month.”

“Genius,” she told me, as I could feel her pride through the phone.

“I don’t understand,” I told her.

She began to explain it to me again, and I stopped her: “No, no, no, I mean I understand the math, that’s not my problem.  I mean I don’t understand the purpose,” I told her.

She began to explain, the same thing, again, and I said, “Do you mind if I put you on hold for just one second?”

She said it wasn’t a problem.

So I got out my trust calculator – same CASIO that I’ve had since Grade 9, and did some really complex calculations.

If the unit rented for a flat $8,000 per month, and landlords raised the rent of the $8,000 per month condo by 1.5%, that would be $120, and thus a new rent of $8,120.  With the landlords paying the $875 per month maintenance fees, the net rent would be $7,245.

If the landlords rented the unit for $7,125 per month, and the tenants paid the maintenance fees, the 1.5% increase on the rent applied would be $7,232.

However, let’s say the maintenance fees went up 6% in the first scenario – from $875 per month to $927.50.

That means the $8,120 per month rent, minus the $927.50, would result in a net rent of $7,192.50.

And that is what the landlords are trying to guard against, you see!

You can play with those numbers all you like.  If fees went up, say, 10% in a year, then the net rent would only be $7,157.50.

So if you’re like me, right now, you’re thinking, “Who the F&$K cares?”

Why in the world are these jackasses monkeying around for $48 per month?

I came back on the phone and told the agent, “If I’m doing this correctly, it seems your ‘genius’ clients are looking to take on a downside risk of $13 per month, in the event that fees don’t increase, but an upside risk that is…………..infinite.”

That was sarcasm, in case you weren’t playing along.

But the agent was!  She said, “EXACTLY!”

“So if maintenance fees went up, like, ten percent in the first year of the lease, your clients stand to gain a net of $87.50 per month.”

“Right on,” she said.

“Can I ask you an honest question,” I asked her.

“Sure,” she said.

“How fucking bored are your clients?”

There was silence on the other end of the phone, and eventually she said, “Come again?”

“Your clients’ family probably has a net worth in the $50 – $60 Million range.  Your clients could stop working today and live off the interest of their sizeable net worths.  So why in the world are they messing around over twenty-five goddam dollars per month?”

“Because,” she told me, “They’re genius businessmen!”

I don’t think she and I were on the same page.

“These guys are really tough negotiators,” she told me.  “This is the way they do all their business deals.”

It made no sense to me.

And it was the greatest combination of greed and stupidity that I had seen in such a long time.

These guys, with their two penthouse condos, looking for $8,000 per month tenants, were getting creative with all their big-deal-business-acumen, trying to squeeze out an extra $10, $20, $30 per month in rent, which would represent a gain of less than one-half of one-percent.

If there’s one thing I’ve learned in this business, it’s that people don’t like working with assholes, and don’t – when they can avoid it.

I told my clients the story, gave them the lowdown on how the rent would break down, and threw them an ever-so-gentle opinion of mine, based on what I’ve said above.

We went and saw the unit, and it was fantastic.

But in the end, nothing would be worth dealing with those two knuckleheads as landlords.

And I’m not judging a book by its cover here; that one situation with how they want to deal with the rent, is chapter and verse of what to expect moving forward.

If this was my condo, I’d be looking for Triple-A tenants who would be easy to manage, quiet, respectful, low-key, and who would stay for another year, and another after that.

If this was my condo, I’d do everything possible to ensure I didn’t have a month’s vacancy, since losing $8,000 in rent would blow my entire return.

But it’s not my condo.  It’s a condo that belongs to somebody that is either really bored, and needs a hobby, or somebody that would cut off his nose to spite his face.

These guys have more money than the know what to do with, and thus maybe they’re okay losing $8,000 per month, to get a “victory” in having a tenant agree to their “genius” idea, that showed what a “tough negotiator” they could be.

But you know what?  I don’t think it’s the latter.

I think that greed can get in the way of smart decision-making; not often, but often enough.

And this is a case where these guys, despite all their wealth, and all their business acumen, aren’t thinking about the long-game.  They’re letting greed, and ego, get in the way, and massively inflating their downside, all in search of a limited upside.

Greed is good, right?

Not in this case.  Not a chance…

23 Comments

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  1. DJL says:

    IMHO, while greed isn’t necessarily great (since it’s usually paired with amoral behaviour of some sort), but it isn’t necessarily a truly bad thing either when it comes to seeking success. Greed is a motivator, and with the exception of the truly addictive kind, motivators are generally good things. Greed, paired with brains and a strong work ethic will more than likely produce positive results.

    But in this case, I see nothing but stupidity, or lack of understanding:

    Rent + maint. fees is not the norm. I suspect that a lot of potential renters will look at that and wonder if there is something to worry about (does the landlord suspect a massive maint. increase is coming?), and thus will pass on an otherwise great apartment out of fear of the unknown.

    As you mentioned, worrying about a possible $50/month increase in maint. fees seems silly when you’re currently dealing with a vacancy (ie. a loss of revenue) at $8000/month.

    And correct me if I’m wrong, but don’t most high-end luxury rentals tend to last no more than 2 or 3 years? If that’s the case, and assuming I understand the new rules properly, there will still be an opportunity to adjust rent upwards beyond the ‘rent control limit’ every 2 or 3 years when the tenants leave.

  2. Natrx says:

    What about house rentals + Utilities? Isn’t that greedy?

  3. Vancouverite says:

    The potential for the contagion of this idea is quite high. How about if all condo landlords start playing this game, then you’d be forced to play along as much as you hate it. Like you said, it’s splitting a small amount of money either way.

  4. Rachelle says:

    This is just an attempt to circumvent the new rent increase legislation which is actually patently unfair to landlords who cannot control the cost of maintenance fees in condos. In other jurisdictions such as BC and Quebec, rent increases are based on actual cost increases in rental unit related items.

    However, your tenant is not a shareholder in your landlord business, and while I would assume that anyone who pays 8K per month in rent can afford an increase, there are lots of $2000 per month condos with maintenance fees in the same $ range.

    The method of collection for this is going to be the N-5 and I would give $100 to be a fly on the wall when the first case like this lands at the Landlord & Tenant Board. Then we will see how enforcement goes. Not to mention if your tenant doesn’t pay the maintenance fees, Boards do not mess around. So this should be entertaining.

    1. Max says:

      The board doesn’t care who is supposed to pay the maintenance fees in the lease, do they? Why wouldn’t they just hold the owner responsible, up to placing a lien, if the tenant doesn’t pay the maintenance fee? That is the most likely enforcement scenario, in my opinion.

  5. Joel says:

    I think that this is more ego than greed. They would make more money renting this out at $7500 and not having a month of vacancy than renting at $8000 and having only one month of vacancy.

    I think this is what we are seeing with sellers right now as well. Houses sitting on the market as they want the number, or higher, than their neighbour got a few months ago. Overall getting your house sold, or rented is the only way to realize your gains. Otherwise it is useless equity, or another deduction when you have to pay mortgage and condo fees for another month.

    1. Natrx says:

      Definitely ego and response against the government intervention. i can see their point. You do this? Then I do that.

  6. Max says:

    Definitely not worth the trouble. The fees probably have to come from the registered owners account anyway so it sounds like more administration less money. Notify the tenancy each time fees increase? Yeah right…

  7. Mike says:

    I thought about this when the new rules were announced and wondered how long it would be before we started seeing landlords request maintenance fees to be paid by the tenant. Not long I guess.

    Here’s the issue that these two businessmen will need to contend with; what if the tenant refuses to pay the increase in maintenance costs? You can’t evict them, since rental increases are limited to the prescribed rate set out in the RTA (Residential Tenancy Act).

    But you say, that in the rental agreement the maintenance costs are born by the tenant and the increase is in those costs, separate from the rent. Refusal to pay the increase is a violation of the lease and grounds for terminating the lease.

    Then you get to the LTB (landlord tenant board) and the Chair points out that maintenance is the responsibility of the Landlord and that a tenant (or anyone for that matter) can’t sign away rights given by law (no pet clause, damage deposit are examples). So the landlord’s paralegal will argue that the landlord, in exchange for lowering the rent (consideration) the tenant had agreed to cover the property maintenance; which is allowed under the law.

    Unfortunately for the landlord, a hefty chunk of your maintenance fee doesn’t actually go to maintenance but rather to the reserve fund and insurance. You’d pretty much have to strip out any cost included in your maintenance bill that doesn’t directly affect the tenant so you’d be looking at only cleaning of common areas, snow removal and grass cutting. As such that portion of the fee not covering those three items wouldn’t be required by law and as such would need to be returned to the tenant.

    It’s highly unlikely that the cleaner, snow removal or landscapers are going to up their price 10% per year.

  8. Stuart says:

    “Greed knows no bounds”

    I have seen deals go South because the sellers would not include the 15 year old washer and dryer. “It’s a matter of principle they said” “They were wedding gifts from my mom” Well, your so principled you just lost a clean offer…

    1. T says:

      A good, ‘non-greedy’, realtor would have picked up the cost for a washer and dryer.

      Try working in your clients best interests some time. Not just your own pocket. You probably never even considered this.

      90% of you might as well be used car salesmen for the amount of value you actually bring to transactions.

      1. Stuart says:

        Ah, you assumed “I” was the Realtor doing the deal! Bad assumption. Nope just office chatter around the ole water cooler. Truth be known however, I only did 3 years in the Biz in 2006-9. After doing the Corporate gig for my entire life I thought I would be a good fit for the Realtor industry. I was wrong, I had morals. lol

  9. George says:

    I searched my ass off on MLS and couldn’t find this listing, sold or active.

    Did you make this one up, Dave?

    1. @ George

      Email me and I’ll send you the listing.

  10. Alexander says:

    To be honest 875 dollars of maintenance looks rather low compare to 8000 in rent. I expect the condo is rather substantial in size and new, so maintenance can actually increase by 50% in 2-3 years time. I may be wrong, but trying to cover for future increases are quite reasonable – especially in the current situation with rental control apocalypses. At the end it is up to the end user to decide whether to take risks or not – or to David to negotiate all inclusive deal IF he is ready for it.

  11. megan says:

    It seems like these landlords are extremely bored you got that much right! They are dropping dollars while trying to pick up a few pennies. They are obviously as ill-suited to run multi-million dollar companies as they are “landlords” – the time it took them to figure out how to squeeze out an extra $30 a month could have been better utilized, say actually working perhaps? But I digress..

    Greed is alive and well in this market and everyone wants to make money without working it seems. The idea of becoming “landlords” is a the coolest job to have since sliced bread. Everyone and their uncle is a landlord. Seems like the true few dedicated landlords are leaving the game, they don’t want to play these sneaky gimmicks and ruin their reputations. I think it really is a shame there is so much greed, but hopefully the bad apples don’t ruin it for everyone, there’s still lots of good out there if you look hard enough

  12. D says:

    Not just greedy and stupid, but illegal, and hoping someone doesn’t go after them.

    It’s pretty ironclad in Ontario that any sort of additional “fees” charged for rent – that includes maintenance fees for rental condos – are included in the province’s rent control. Which now will apply to all units, not just those built before 1991.

    Because these geniuses are SO SMART that nobody at any of the huge REITS that own apartment buildings in Toronto could have ever figured that idea out in what, 1993?

  13. crazyegg says:

    Hi All,

    Great article David!

    However, I respectfully disagree with your assessment. I am siding with the Landlord/Listing Agent on this one.

    What is the issue here? Is it that the Landlord is not including the maintenance fees in the rent (which is not the “normal” thing to do) or is the issue that he “didn’t actually reduce the price”?

    Regardless, there is no RECO violation here. David stated that the broker notes clearly spell out that the Tenant is responsible for the maintenance fees, so there is no deception. As always, astute realtors always read the fine print…

    “Reducing the price” will also have the added benefit of garnering more traffic to the listing. Ultimately, as a listing agent, that is one thing that should be high on the priority list…

    Regards,
    ed…

    1. Xoxo says:

      You’re missing the point.
      This isn’t about legality.
      It’s about a greedy landlord playing games for fun and/or an extra $30, which turns off tenants, as David’s clients clearly were.
      If I were told how genius these landlords were, and how savvy, how tough they are in negotiating, I’d be turned off. Especially if I had the scratch to afford 8k a month.

      1. crazyegg says:

        Hi,

        Greed, while i am sure everyone will agree has negative meanings, myself included, has an inherent level of subjectivity (i.e. the threshold of greed is different for everyone).

        IMO, the landlord is not playing games. He has a clearly listed price plus his terms are clearly listed. While these terms may not “be normal” in the GTA, they are clear and obvious to any educated reader.

        While David did not agree with the Landlord’s terms, he was free to put in his own terms into the offer and wait for sign back. As he was turned off by the Landlord’s “greed”, he decided not to. Free country. Move on to another listing…

        Arguing with the Listing Agent is a waste of time but is makes for great reading in a blog! 😉
        Regards,
        ed…

  14. Real estate millennial says:

    I don’t know if I’d call that greed or stupidity and the other agent has zero back bone. In any business there’s a sense of decorum tell your clients maintenance is the owner’s responsibility this is not a commercial triple net lease. Given the conversation I’d question the other agent’s real estate acumen.

  15. RPG says:

    Tenants should be scrutinizing landlords as much as these landlords overly-qualify the tenants.

    The last thing you want as a tenant is an overseas landlord who will never respond to your requests to fix the broken washing machine or God knows whatever other problems arise. Too many tenants in Toronto get stuck paying to fix things because they give up on the landlord taking responsibility.

  16. Ed says:

    I think you story is a great example of how people can inherit wealth but not the business smarts to manage that wealth.

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