My Favorite Mistake

I wasn’t referring to the Sheryl Crow song, “My Favorite Mistake,” but now that I think about it, Sheryl has a wicked voice…

Anyways, I’ve witnessed many great moves within the real estate market, but seen some poor investments, bad decisions, and terrible mistakes.

There is one mistake that stands out in my mind more than all the rest, but it wasn’t the financial disaster that bothered me, but rather the sheer ignorance disguised as arrogance of the potential buyer involved…

mistakepic.JPG

About four years ago, in the spring of 2004, I met the prototypical “friend of a friend” who was just starting his family.  He had been married for a couple years, and his wife had just given birth to their second child.

They were living just off Danforth Avenue on a nice street and paying $2000/month to rent a house, but with the birth of the couple’s second child, they realized they needed to make a move.

I assumed they would look to purchase a house, since the market in early 2004 was in full swing and everybody was buying, but when I asked him what his plans were, I was very surprised to hear his response.

“I’ll buy a house when the real estate market bottoms out.”

Stop the presses!

What a novel idea!

“Buy Low, Sell High.”  Has anybody ever thought of this before?

Excuse my sarcasm, but I find two faults with his logic.  First, the market was NOT at a bottom when he made this statement, and second, nobody has a crystal ball, and nobody knows when the market will reach a bottom.

But he went on to explain his theory: “It’s gonna happen man!  It always happens!  Every market, every place, all the time—there are highs and lows.  It’s a cycle!”

Geez, to think I spent all that money on a business degree and a university education when I could have just learned all I needed to know from this man who was currently double-fisting two Molson Canadians.

While I don’t disagree with him, in that all markets go through cycles, I just don’t see “waiting forever” as a viable option.

He needed to make a move due to his growing family, and the market was strong.  But his perception was that it was too strong.

So, he decided to rent a larger house for $2500/month rather than buy.

And in the next four years, the market continued to get stronger and stronger, and house prices skyrocketed.  His rent also increased to $3000/month in the third year.

Now I’m not going to suggest that I knew what was going to happen in the market, or that anybody else did.  But my problem is that this guy never admitted his mistake!  He could have purchased a house after year one, or in year two.  He could have finally said “I give” and bought a house in year three, or seen how strong the market was in year four and decide to invest.

But he never did.

After the first year, when the market in his area increased over ten percent, he said “The bigger they are, the harder they fall!  When the market crashes, I’ll pick up the pieces.”  He spent $30,000 that year in rent, and a house he could have purchased for $479,000 was now worth $526,900.

The trend continued into the second year, when he watched his friends and co-workers purchase houses, and he called them all “suckers” for “buying at the height of the market.”

To make a long story short, in the four years since he first told me that he was going to wait for the market to bottom out before he would purchase a home, he has spent $132,000 in rent (at least a monthly mortgage payment contains a principal portion that you get back in the form of equity), and the house valued at $479,000 in Riverdale that would have been perfect for him and his growing family would cost him close to $700,000 today, in what has proved to be one of the hottest area of the city in the past four years.

I know that this is all in hindsight, but I have a few theories of my own that make the hindsight argument a moot point.

I firmly believe that in the real estate market, the only way that you can get hurt is if you have a very short time horizon.  Some people can’t control this, if for example, a work transfer forced a couple to sell their house after only a year.  But For a 30-something-year-old man starting a family, it should be assumed that he could be there for ten years, fifteen years, or perhaps longer. 

On a fifteen year time horizon, the market can go from strong, to weak, and back to strong again.

As long as you have a gameplan, and this is far easier for a man starting a family than a young professional living downtown, you can make an informed, sound investment decision.

Let’s assume for a moment that if this man had purchased a house in early 2004, and the moment after he signed the papers, the market began to tank.  Unless he had to sell his house, he wouldn’t lose a penny.  He could go about his life, and as the market goes through these cycles that he loves to talk about, he could wait out the storm.

Instead, he is losing money on rent, losing money on the appreciation of the house, and waiting for a “crash” that might never come.  Sure, the market may “correct” itself, “weaken,” or lose some steam.  But how long is he prepared to wait?

And what are his reasons for waiting?

I think it has less to do with his predictions and beliefs about the market, and more to do with his ego and inability to admit that perhaps he was wrong.

A week after I met him in 2004, I sold a house to a young couple (25 and 29 years old) at Bathurst and Queen for $305,000.  Their house is now worth $375,000, and their monthly mortgage payments have been the same as their rent was before they purchased.

I know, I know…..hindsight, right?

Well if it’s all hindsight, then anybody who ever made a dime in any market is just lucky, I guess…

1 Comment

Post A Comment

Your email address will not be published. Required fields are marked *

  1. Skiing senior says:

    This scenario illustrates beautifully that it’s always wise to pay a monthly mortgage instead of rent. Then, sell only if and when the market is strong, as you said.

TWEETS