Too Good To Be True?

Business

5 minute read

February 18, 2011

I’ve always told people that when it comes to real estate, if something is too good to be true – it likely is.

But once in a blue moon, a “deal” slips through the cracks and money is left on the table.

Last week, I received a call from a young lady that wasn’t looking to be my client, but wanted my advice nonetheless.  I told her to take the deal and run with it…

Last week was a tough one for me personally.

I’m an active guy, and my bout with vertigo rendered me useless and laying on the couch, “working” from home.

Call me old-fashioned, but I don’t feel like I’m truly working and applying myself to the fullest unless I’m sitting at my desk in the office.  I know that scores of Realtors work from home, but I see far more value by being present in the office setting.

In the office, you are constantly surrounded by other Realtors, and thus you overhear things that you wouldn’t hear at home.

“Hey did anybody see the new listing at Chocolate Lofts?”

“Oh yeah I did – it’s a wonky layout; too much wasted space, totally over priced.”

“Do you guys know anything about a developer called Can Alfa?”

“Yeah they’re a mess – don’t go near them.”

Sitting on your couch (or at your desk, I suppose…) at home means you won’t get the knowledge and experience that floats around your office for free each and every day!  Young Realtors – take note.  This is the best piece of advice I’ll ever hand out…

On Thursday of last week, after taking a medicinal cocktail and washing it down with Fruite, I received a page from my office to call “Josie.”

I was absolutely bored out of my mind, and “relaxing,” as I was ordered to do by my doctor, was clearly wearing my patience quite thin.

I called Josie and she asked for my opinion on a west-end development that shall remain nameless…

Josie had found a “for sale by owner” on Craigslist, and asked if she could borrow my ear for a few minutes, even though she wasn’t looking for an agent.

Vertigo or not, I would always make time for somebody even if they aren’t going to buy through me.  Call me naive, but I feel that my knowledge and experience is something that should be shared, whether I get paid for it or not.  Just look at this blog as an example.

I talked to Josie for the better part of an hour.  It was better than Oprah…

I told her to stay away – that this was an awful building, with a very low-brow demographic.

The developer is a crook, the finishes are awful, and they won’t be registered until October, which means eight months of occupancy fees.

The current residents of the building are all starving artists, and the hallways smell like pot.  I don’t have anything against people who make clay-pots for a living and expect the government to subsidize their hobby as an occupation (or maybe I do…), but I wouldn’t want to live or invest in a building where they are the main demographic.

Josie took everything that I said to heart.  She told me what she did for a living, why she wanted the space, how she felt about the area, and what she could afford.

It was when she started to talk about the price that my ears perked up.

She said she could only spend $260,000 and she didn’t want a bachelor condo or a tiny 1-bedroom.  Unfortunately, even a decent bachelor condo in Toronto is pushing $250,000 on average.

Josie said that she was looking at 620 square feet for $240,000, and I immediately thought, “This is way too good to be true.”

I told Josie that something was amiss, and she should be VERY weary.

I reccomended that she hire a very good lawyer to look through the original agreement, as this was going to be an assignment of the original buyer’s Agreement of Purchase and Sale, and these assignments are very complex and they are full of loopholes.

The three major hurdles that Josie would have to get over are the occupancy fees (who pays it?  how long is the building in occupancy?), the assignment-fee (could be as much as $7,500), and the Land Transfer Tax (could be double-taxation if the original buyer closes the deal and then re-sells to Josie).

Josie said she would discuss with her lawyer, and get back to me, and sure enough, she called me on Monday of this week.

The results were astounding.

The original buyer had paid $218,000 for the condo back in 2007, and was now looking for $240,000.

The original buyer would be paying a $3,000 assignment fee, and Josie would pay occupancy fees of approximately $800 for as long as it takes for the building to be registered.  Josie would close the deal with the developer, thus freeing up the original buyer of any Land Transfer Tax obligations.

In essence, the original buyer was looking to sell this property for far, far less than it’s actually “worth,” and Josie would be getting a downright steal.

We examined this from every angle, and I could see any hidden costs or any scam.

Josie’s lawyer examined the original Agreement of Purchase and Sale, and determined that the original buyer just wanted “out.”

So Josie began to ask me why she seemed to be the beneficiary of such an incredible deal, and here is what I came up with…

I believe that the original buyer put down 10%, or $21,800.  Since occupancy was given in September, the original buyer has been bleeding $800 per month, or about $4,000 in out-of-pocket cash.  The building is likely not going to be registered for 6-8 more months, meaning another $5,000 – $6,000 that the buyer has to come up with just to carry the property.

Once the building is registered, the buyer may be contractually obligated to give the developer another 5%, or $10,900, or even as much as 10%, depending on the original agreement.  And if the buyer needed 20% as a downpayment in order to get a mortgage, then he or she would need to come up with that $21,800 regardless of the original agreement with the developer.

To close the deal, the original buyer would have to pay Land Transfer Tax of as much as $3,810 if he or she is not a first time buyer, as well as legal fees.

Ultimately, I believe that this original buyer doesn’t have the cash flow necessary to carry this property, isn’t savvy enough to play “landlord” and find a tenant to cover the cost and he or she just wants to stop the bleeding.  The additional money necessary to close this deal is far out of reach, and this person just wants “out.”

Perhaps the original buyer already has a massive debt and the thought of coming up with $30,000+ over the next few months is completely out of the question.

I told Josie that I believe this condo is worth $279,000 at the moment, and in one year when the building is registered and construction is complete (not to mention building amenities, exterior grounds/landscaping/walkways), this condo could be worth $299,000 – a modest estimate of about $480/sqft.

Josie is taking on some risk and some headaches.  She’ll have to live through a few more months of construction, the building amenities won’t be finished for quite some time, and the flood of renters, investors, buyers and agents that currently invades the building every day will continue for the next year.

But how can you pass up a deal like this?

I often get phone calls or emails from buyers who say that they are only in the market if I see a substantial “deal.”  I tell these people that we live in Toronto, the market is hot, and “deals” don’t exist.

But every so often, I hear of a situation like Josie’s.

I have no idea how she found a seller who is willing to give up such a massive potential profit, and who doesn’t know that a $218,000 condo in 2007 has GOT to be worth more than $240,000 today.

But I applaud Josie for moving ahead, and I only wish I’d found this “deal” myself.

I still believe that “if something is too good to be true, it most likely is.”  But maybe it’s worth investigating once in a while…

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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4 Comments

  1. Craig

    at 9:50 am

    What happens to the builder’s warranty responsibilities when the unit is re-sold in pre-registration from a private seller? If there are deficiencies, is the builder off the hook because they did not sell directly to the 2nd buyer? Or does the 2nd buyer inherit the right to make any complaints to Tarion regarding deficiencies?

  2. Spose

    at 10:40 am

    Good on you for helping her…While I applaud you for sharing your knowledge, If someone “saved” me $40,000, I’d say it’s worth a case of a decent wine + some referral/future business!

    One thing though -I’ve frequently found that mispriced real estate in Toronto is usually do to one thing: ghosts. Wouldn’t normally be applicable with a new-build condo (unless a cemetary was there previously) but sometimes when you factor in exorcism costs -the deal of a century isn’t such a good deal. That said, 8/10 times, ghosts are usually the owners kids playing pranks becuase they don’t want to move or an unscrupulous developer trying to keep prices down or medlesome kids away so they can complete evil deeds.

  3. David Fleming

    at 4:03 pm

    @ Craig

    With any assignment, the original buyer is essentially selling his or her piece of paper, including all rights and warranties associated with it.

    On the other hand, if the original buyer were to close the deal with the developer, and then resell the unit one day later, then all the rights and warranties would die with that original buyer’s one day of ownership.

  4. Sandra M.

    at 3:52 pm

    David, the Ontario New Home Warranties Plan Act (which creates the TARION warranties) defines an “owner” as “a person who first acquires a home from its vendor for occupancy, and the personâ??s successors in title” – so these particular warranties continue to apply, notwithstanding changes in ownership (they are still time-limited in the sense that they will only last for their prescribed duration (1, 2 or 7 years, depending on the warranty, from the date of first possession or ownership), but they will not “die” with the original buyer, as you indicated above). Here’s a link to an article published by TARION on this point:

    http://www.tarion.com/New-Home-Buyers/Documents/Reselling%20New%20Homes.pdf

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