Wednesday, June 20, 2007

A Sherlock Holmes Kind of Hunt

I was driving in from a swim at Thetis lake yesterday when I heard an advertisement for Reflections on the Zone. The radio add differed from the print: the price for the radio one was $344,900, print is $334,900. Anyway, the catch is that for the first 12 months your mortgage payments are cut in half (on a 0 down, 40 year amortization plan). Clearly this deal is aimed at FTB's.

PB over at Victoria's Truth wrote about this on Sunday and some discussion took place in comments. Anyway, long story short, the radio add really got under my craw and I knew I wouldn't get it out from there until I figured out just how the sellers were going to pull this off. The discussions provided some questions, but no answers were found.

Was this kind of sales tactic some new relationship with financiers? Were we going to see banks get into the "buy now, do not pay for 12 months" Brick game? The tactic has obviously had remarkable success in the electronics and furniture world. Is this just a logical extension into real estate marketing? Never mind that car manufacturers haven't caught onto this in any big way.

So I did some digging. I talked to some people. I peered around corners. I lifted rocks. I followed some leads. I got lost. I sat down exasperated. I did what all great men do when they need some help: I turned to the brains of the operation and said "Ms. HHV, what should I do?" Her answer was so brilliant it defied odds of simplicity: "how 'bout you give 'em a call? Now stop bothering me at work."

And like all good detectives I hid my true-voice with the sound of crinkling paper and asked my question: "Just who is paying the difference in mortgage payments during that excessively cheap first year?"

The answer surprised me. As it turns out, there is no great conspiracy theory. The Bank isn't involved at all. And you aren't deferring those payments either. Here's how it works: you go get your mortgage based on an agreed upon purchase price. In this deal, it's either $344K or $334K or somewhere around there because, of course, each unit has a different sticker price. Anyway, the developer then gives you a discount, but not in the form of a discount, rather it's like a cash back financing option, except it's not really cash.

You get somewhere in the neighbourhood of $9K-$11K, again depending on agreed upon purchase price. You can get them to cut cheques to your bank for mortgage payments bringing your's down to that magic advertised $995/month or you can get some combination of cheques to the bank or credits at furniture stores or even credit card credits (maybe you can collect the airmiles and get a free trip too!). You still have to qualify for the purchase price: $334,900 plus GST = $354,994, which means you need an income of just under $83,000 and no other debts.

So what do we think? I actually respect the chutzpah underneath the brains behind this scheme. S$&%, you got to give 'em credit for creativity. If you make your money selling RE, you don't want to reduce your prices. At the same time, when the competition heats up, as it obviously has in the local condo market, you have to attract buyers, and, well, money talks. So this scheme satisfies two criteria in that conflicting scenario: buyer's get their discounts, and RE market watchers see that prices did not go down.

Is the scheme deceptive? Sure. Is it ethical? I suppose that depends on who you ask. We don't call the sales tactic unethical, rather the problem lies with the reporting of the sales price. I'm sure your complaints to the VREB will end up in the recycling box. It's a good thing we have new media to make sure the truth gets out there.


greg said...

Qualifying at whatever price, then selling at that price, then passing along a rebate still, in accounting terms, obscures the real price.

Not only that, but the buyer ends up paying (by default) a few hundred dollars more in commissions to the realtors, and I presume, around another $700 in GST (this is a new property, right?).

Or am I missing something...

Aleks said...

I've heard that this sort of thing hid the start of the crash in the US. After all, the reported selling price has not dropped, so it will have no effect on the aggregate numbers for the month. We've already been seeing "GST included" on new condo sales, I guess this is just the next version of the hidden price reduction.

vg said...

Might be a good idea to take this one to the Ben Jones Blog, they will remember when this practice showed up.
It's still a reduction either way you write it, they are losing yet like greg says about the GST and the realtors fees it sounds slimy as you are paying that extra that may equal one month pay back..

hhv said...

one could always just offer $10K less... then they could either accept or not. If they suggest that the deal on offer is the same, bring up the GST etc and maybe they'll kick in some more?

greg said...

hhv -

I like your idea, when you know they will sell for $10,000 less, just offer $10,000 less. Do what my sister did, just tell them to take your offer or forget it - and be prepared to walk.

When that starts to happen regularly, things will get interesting...

hhv said...

The last time we bought a car, we made our final offer and told them they had 15 minutes to decide. Then we went and wandered on the lot so they didn't have us "captive." It's amazing how motivating that can be for a sales manager.

vg said...

Global just had another bit on how they are lining up like sheep to scoop these condos and houses and just using any means possible... how many ways can you spell sucker ?

Meanwhile economists are saying today the high interest rates are going to have a serious drag on the Canadian economy,just the time I want to buy something at an all time high.

vg said...

So how long does it take for all these new listings to hit the MLS ? thought I heard someone say once it could be up to a week ?

Dave said...

There's been a lot of talk on Ben's blog in the past about the big US homebuilders offering various rebates and incentives. This keeps the sale price up and helps support the market a little longer. But even those tactics seem to be giving way to price reductions down south. It would appear Victoria is no more than a year behind.

vg said...

Well well well, this is not suprising to see,wonder what kind of fallout we can expect from our banks who have invested deep in the US the past 7 years.

Mortgage Losses Push Hedge Funds to Brink

By David Cho and Tomoeh Murakami Tse
Washington Post Staff Writers
Thursday, June 21, 2007; Page D02

Two Bear Stearns hedge funds, worth more than $20 billion, teetered on collapse yesterday after absorbing major losses from investments in the subprime mortgage industry.

The troubled funds, which lost a key financial backer yesterday, are the latest sign that the problems in subprime mortgage industry are spreading across the financial markets. If the hedge funds fold and their holdings are sold off at a discount, the value of similar assets owned by other banks, hedge funds and investors also could fall.

That ripple effect worried financial markets yesterday. The Standard & Poor's 500-stock index dropped 1.4 percent, its steepest decline in two weeks. The Dow Jones industrial average lost 1.1 percent.

The yield on the 10-year Treasury note, which affects rates on mortgages and corporate loans, rose to 5.14 percent yesterday from 5.09 percent the previous day.

Bear Stearns, a major investment bank, is the biggest hedge fund broker. The unraveling of two of its funds is "at best an embarrassment for [the firm], and at worst, it threatens to have a ripple effect on valuations across the subprime sector," Kathleen Shanley, an analyst at Gimme Credit, wrote in a report released this week.

vg said...

And one more:

Wholesale trade unexpectedly dives

Globe and Mail Update

June 20, 2007 at 10:34 AM EDT

Canadian wholesalers posted the sharpest drop in nearly four years in April as auto sales tumbled, a sign that economic growth wilted in the month.

Sales slumped 3.1 per cent to about $42.8-billion, Statistics Canada said Wednesday, a contrast to the 0.4-per-cent gain economists had expected. It was the largest drop since August, 2003.

The weak report suggests economic activity subsided in April, after a robust first quarter, and prompted some economists to consider revising their growth estimates for the month. It also comes one day ahead of Canadian retail sales in April, which will be released Thursday.

“Today's wholesale trade numbers are going to put a big dent in April's gross domestic product, shaving off approximately 0.15 per cent,” said Jacqui Douglas, economics strategist at TD Securities, in a note.

Both TD and JP Morgan are waiting for tomorrow's retail sales before deciding whether to cut their April growth forecasts.

April's drop followed increases of 2.3 per cent and 0.9 per cent in March and February respectively. Many sectors erased all of the gains they'd over the previous two months.

greg said...

vg -

I saw that news about Bear Stearns this morning, and it sounds like the beginning of the scenario Charles Hugh Smith has been spelling out for the past few years. Today he wrote an excellent critique on how the sub-prime mess is impossible to contain, and then along comes the Bear Stearns story.

You can read Charles' column on how the housing bubble will pop here

vg said...

thanks greg, great article,that ones a keeper.How anyone can think we are immune from the fallout from this is beyond me,this is a global event and easy street is coming to an end.

greg said...

hhv - I see it is a tag team match over at Vibrant Victoria. I wonder where jmk is today?

Anyway, as someone who gets tired of the "it only will go up mantra", it was kind of fun to go over there and shift the development crowd a bit out of their comfort zone, for one thread anyway.

Aleks said...

Holy sh**! That graph of household cash less liabilities is a sight to behold.

olives said...

Michael Shedlock's blog has an interesting post today about inflation/stagflation/deflation.