Selling At A Loss


5 minute read

October 12, 2012

Not everybody is going to make money on every investment they ever touch.

Is real estate immune?  Or have we just convinced ourselves of this?

I know I’ve told this story a thousand times, but it’s the perfect starting point to this story….even if it’s redundant for my long-time readers…

When I was 19-years-old, I gave all of my money to a stock broker, who at 65-years-old, had seen many different market cycles.

He told me to put ALL of my money into one stock: Nortel.  And I did.  I was young, and I knew nothing, and I was counting on a professional to guide me.

I’ll save you the long-winded version of this story that you’ve heard many times, but the bottom line is that my stock broker kept repeating the same phrase over and over:

You’d be a fool to sell at a loss.  Why recognize a paper-loss by actually selling?  Just wait it out, and don’t take a loss..”

I listened to him – after the stock dropped from $50 to $47.  And again at $45.

When the stock plummeted to $30, I could have sold and kept 60% of my initial investment – every dollar I ever made through six years of summer jobs.

But he kept saying, “Don’t sell at a loss.”

I kept the stock until the share price was in single-digits, and sold it once I had moved all my money to E-Trade and began looking after my own account.

So what is the takeaway from this story?

I’m not saying that the real estate market is going to implode and drop 98%, therefore you should take your profits now.

I’m drawing one parallel from the story above, and that’s it, so here it is:

Sometimes, selling at a loss is NOT a fate worse than death, despite what most people think.

And there you have it.  I can’t say it any simpler, or any more direct than that.

In Wednesday’s blog post, I told the story of a young couple who over-priced their house to the tune of about 25-30%, to try and recoup the costs associated with selling, and make an unwarranted bundle in the process.  The wife wanted out, she triggered the sale, and ultimately they ignored the financial constraints that were placed on them, and chose to list their house in a dream world.

One of my readers commented that they “….can’t afford to sell at what the market will net them.”

Define “can’t afford to,” a bit further.

Does that mean they literally can NOT sustain life after this sale?

Or does that mean that they just don’t want to sell at a loss?

My reader further commented with respect to the money the couple put into the house: “Your deposit, the remainder of your downpayment and the money you borrow from the bank is going to be paying me, my broker, the seller’s agent, her broker, two lawyers, the mortgage broker, CMHC, Queen’s Park and City Hall,” and I can’t deny that.

But the disposition of an asset comes with costs, large and small, depending on the asset.  In this case, disposing of real estate can be costly.

So have we reached a point when property-owners in Toronto refuse to take a loss?

Has entitlement run amuck?

In Wednesday’s blog story, we had a young couple who wanted to sell their home only 12 months after buying it.  Are they “entitled” to make money, after disposition costs?

I don’t necessarily think so.

What will the market give them?  What can they walk away with?

When I was 19-years-old, I laughed at the idea of making 10% per year on a stock, even though that was a fantastic return.  I wanted the big bucks!!

Similarly, today’s real estate buyers and sellers expect to make money on everything they touch, and the reality is – sometimes they don’t.

I received a call two weeks ago from a gentleman who is being transferred to Atlanta for work, and needs to “do something” with his condo.

“Sooo….you want to sell it?” I assumed.

“Not necessarily,” he said.  “Only if I come out with a gain.”

I hypothetically asked him, “What if you had to lose $500?  $1,000?  Would you sell?”  He said that unequivocally, he would not.

He paid about $320,000 for his condo about 18 months ago, and after doing the math, and determining what he could walk away with, I advised him that he’d be looking at a high of a $2,000 gain, and a low of a $3,000 loss.

That $5,000 range was pretty narrow, but I was positive I could get his condo sold for something in that neighbourhood.

He responded to me, “I’m not going to lose money on this thing.  No way.  I’ll just keep it and rent it out.”

And this is where I start to question somebody’s motivation.

Is he making a rash decision based on his stubbornness?  Or is this a well-thought-out, financially-minded decision?

Chances are – the principal portion of his mortgage over 18 months was greater than $3,000, so even if he did lose money on the sale and disposition of the asset, he’s not walking away completely empty-handed.  Everybody calculates their “profits” and “losses” differently.  Some people will even include their hydro, phone, and internet bills and cry foul that they’ve “lost” money.

I understand that nobody wants to lose money, but we’re talking about $3,000 here (at worst), compared to a $320,000 asset, and a lifetime move to a different country.

On the flip side, he can rent out the property, and play landlord from 1,500 KM away.

So what are the pros and cons to each idea?

You know where I’m going with this, and you know my opinion.

Imagine trying to start your life in Atlanta, at a new job, with a new house, new friends, and a new world – all the while, trying to look after your 1-bedroom “investment condo” back in Toronto.  Sure, it can be done, but at what cost?  The positive cash flow from this unit is barely $50 per month (rent minus carrying costs), so what is the upside in keeping it?  That’s a $600 per year gain, assuming you never have a single day of vacancy, and never need to pay for repairs to the condo.

Wouldn’t it be easier and more worthwhile to take the $3,000 (maximum) loss on the property, and start your life anew?

Sure, the market can continue to rise, and could be appreciation.  But as a non-resident of Canada, and as the property would not be considered a primary residence, now there are taxation concerns.

I don’t make it a habit to tell people to take a loss, but in some cases, it makes sense.

We’re lucky our market here in Toronto is as strong as it is.  If you’ve ever watched “Million Dollar Listing” which takes place in Los Angeles, these agents routinely convince their clients to sell their properties for $3,200,000 when they’re got $4,500,000 into it.  They say things like, “You’ve had a great two years living here, so just chalk it up the cost of two of the best years of your life.  It’s time to move on to new challenges.”

Well, that’s certainly putting a positive spin on it!  “New challenges,” you say?

It can’t be easy to help somebody into a $1.3 Million loss, but what other options are there?  What if the market continues to drop, and next year the property is worth $2,500,000?  It’s like my Nortel experience all over again…

Comparing a Toronto-loss to an L.A.-loss isn’t fair, but the thought process is the same: “Is it worth risking further loss and/or hardship, all for the purpose of not taking A/ANY loss?”

My answer is: no.

When I sold my last investment property, people kept telling me, “Hang on to it for another six months!  When the dust settles, there’s more money down the road!”

I wanted out, and SOON.  What “more” was in there?  Another couple-grand?  Was there $10,000 waiting for me, ten-months down the line?  Maybe; probably not.  And at what cost?  What risk?

Sometimes, you just have to cut your losses, and many people in Toronto feel as though it’s their RIGHT to not lose a penny.

The guy who says, “I can’t take a loss on this” isn’t really saying that; he’s saying “I don’t want to take a loss on this.”

If you took a $5,000 loss to ensure you’d never lose $15,000, AND your sanity along with it, wouldn’t that be worthwhile?

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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  1. George

    at 9:36 am

    It’s about analyzing each situation anew and disregarding sunk costs. As situations and information change, the best strategy might change as well.

    It’s like when a sports team spends a high draft pick or large sum of money on a player, and then keeps playing that player well beyond the point where they feel someone else might be better. They would rather try to erase a past mistake than confirm that mistake and make a fresh decision based on new information.

    1. David Fleming

      at 11:47 am

      @ George

      LOVE the sports analogy!

      I think half of the Toronto Maple Leafs from the early to mid 2000’s fit into that category….

    2. Sam

      at 8:31 pm

      Sounds like the Alex Rodriguez situation.

  2. Geoff

    at 9:37 am

    Great post. I love it when sellers say on those shows “I need to get $50,000 or whatever.” Sellers don’t set prices, buyers do. Always have, always will.

  3. Joe Q.

    at 10:23 am

    David — the other (unspoken) message from your story is to be very careful about putting all of your eggs into one basket. There’s an important parallel there, too.

  4. Jeremy

    at 1:09 pm

    I think another way of looking at it is that the price you paid for something is irrelevant once you own it and are looking to sell it. The only thing you should compare the potential selling price to is other options that you would be able to exercise in the *future* (eg, renting out).

  5. Kyle

    at 1:50 pm

    Seems in the media and blogosphere, the focus of real estate has become solely about prices. Let’s not lose sight of the fact that a house is much more than just an investment. I would hope that those contemplating buying care about more than just “what is this place gong to be worth next month, or next year?”. And those selling care about more than just how much profit or loss they stand to make. There are many reasons why people buy a house and many reasons why people sell a house, price should not be the driving reason.

  6. Ralph Cramdown

    at 2:19 pm

    Humans don’t do money very well. They’re more averse to a $100 loss than they are happy about a $100 gain, they’ll bet differently depending on how the question is phrased, even if the bet is identical.

    As such, real estate agents spend a LOT of time and effort convincing buyers — especially first time buyers — to do a deal. They stress long term price appreciation using horrible charts that don’t account for inflation and magnify recent gains while minimizing gains and losses further back in time. They bury a lot of the transaction costs into the supposed price of the house, downplay and minimize risk, and they get the deal done.

    The disclosure done on a typical used house deal (“UFFI: N. SPIS: N. No survey available.”) is less than the disclosure boilerplate on a typical corporate press release. Somebody opening an investing account has to answer a lot of questions about investing experience and risk tolerance that never get asked in the real estate game.

    How’s this for an idea: “TREB announces a program whereby all purchasers will receive a free major appliance.” Easy, just break out real estate commissions from the all-in selling price of a house and have the buyer or seller pay for them separately. On a $500k transaction, that saves $1k in land transfer tax and nobody except the government walks away from the deal with less money. But it’ll be a cold day in hell before TREB issues that press release.

    So it isn’t really surprising at all when amateurs are shocked by their potential losses, or lack of gains, and no surprise that some of them even decide to become amateur landlords for the sake of $5k. So sad.

  7. David

    at 3:08 pm

    …..So downturn ahead eh?

  8. Josh

    at 4:46 pm

    FSBO sites have grown dramatically over the last couple of years. I sold my T.O. condo privately a few years back and was one of the only downtown listings on the site at the time.

    As things start to slow down in the G.T.A I see a lot of part time and sub-bar realtors unable to keep up as owners try everything to not sell at a loss by saving a substantial amount of money on real estate commisions. No one knows your own house/condo better than you do – and I think you have the ability to sell it just as easy as a realtor. It’s not rocket science setting an asking price, buying some perrier and hosting a open house.

    1. Joe Q.

      at 9:57 pm

      What shocks me most is the sheer number of Realtors in the GTA. According to the TREB website, there are “more than 34,000 licensed real estate Brokers and Salespersons” in the area. 34,000 realtors divided by 5.6M people and 2.8 people per household works out to about one Realtor for every 60 households. You have to wonder how sustainable that is.

      1. Ralph Cramdown

        at 7:27 am

        Sustainable in the sense that the bottom 1/2 (2/3?) of producers need a second job or they starve? Or in the sense that, as many of them drop out, more will get sucked in, to pay thousands in course and initiation fees for the privilege of manning open houses and giving their broker a big split of the commission of the few friends and family whose transactions they’ll handle badly…

        The numbers will go down in a slump and grow in a boom, but the basic business model of allowing anyone who can use a calculator to get licensed, then foisting them on the public for as long as they’re willing to try remains sound.

        1. Joe Q.

          at 9:03 am

          Nicely put.

      2. jeff316

        at 7:49 am

        Agreed – as things fizzle that number may not drop substantially but the number of active pros will. Personally, I don’t think growth of FSBO or private sales will dent it, moreso downward pressure on commission rates and prices that will erode the ability to make a living on a few commissions a year. It is easy in easy out profession.

  9. Sam

    at 8:34 pm

    This is why prices are sticky downwards and will not crash 50%+ like some bearish posters on certain message forums.

    If not for reasons of moving out of country, job transfer or death, most people will just hold on to the property and rent it out rather than selling at a loss.

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