Monday, August 10, 2009

Are buyer's agents redundant?

Let me start out by stating clearly that this post is not an attack on BC's REALTORS®.

I've often stated in the past that when buying real estate, it's in the best interest of the buyer to use a dedicated buyer's agent. After a conversation a while back with someone who has taught me a lot about real estate, and subsequent self deliberation and research, I've changed my mind.

Dual agency is the way to go for me.

Here's what the BCREA has to say about dual agency (warning PDF):
Dual agency occurs when a Brokerage is representing both the buyer and the seller in the same transaction. Since the Brokerage has promised a duty of confidentiality, loyalty and full disclosure to both parties simultaneously, it is necessary to limit these duties in this situation, if both parties consent.
Sure, you need to get consent. But what agent out there isn't going to try to double-end a potential deal? Which brokerage isn't going to encourage their agents to attempt this? And how many sellers will object to seeing an offer? I'm guessing few.

Here's why I'm leaning towards dual agency buying deals:

Average single family home price is currently $565K. Average commissions are 6% on first $100,000 and 3% on the rest ($6000 + $13,950 = $19,950). If you use a buyer's agent, the deal is usually split 50/50. So each agent walks away from the deal with almost $10,000 that they then in turn split with their brokerages.

I'm not sure how many agents get to double end deals or how often they do, but I'm guessing it's not a common occurrence. I'm also thinking it's a mighty big carrot to get a deal done. And those "bonus bucks" present some wiggle room for everyone involved in making the deal happen.

Let's say I pop into an open house, like what I see, and decide to make an offer. I call the listing agent, let them know I'm pre-approved, and I'm ready to make an offer with few subjects.

The listing agent will have to do two things, get me to sign a dual agency agreement, and then get the seller to do the same--all before any offer is presented. This triggers two events: 1) the agent knows they have an opportunity to get a deal done and 2) the seller gets excited that an offer is coming in and their house may sell.

I've already decided what I'm willing to pay for the home. Let's say the list price is $565K. My price on the home is $545K. I know the place has been on the market for a month and that no previous offers have been presented. I offer $530K subject to inspection (I have my own inspector, not the inspector referred by the agent). The dual agency agent must present this offer to their seller as they are now equally representing me and the seller.

The seller is likely initially disappointed by what they would consider a low-ball offer given the current market. The agent though is also representing me now too and has a duty to try to get the seller to counter to keep the negotiations open (and a financial incentive to get a deal done for themselves).

The agent brings the seller's counter offer back to me: $557K. The negotiation has started and everyone is invested in getting the deal done (at least they think I'm invested, but I'm an unemotional party to the deal who will walk before paying more than I'm willing to).

I give the agent my counter, and tell them to instruct the seller that this is my final offer and set a time limit to respond (4 hours) as there are other homes I am interested in: $545K subject to inspection, flexible on the possession date but not shorter than 15 days and not longer than 75 days.

Negotiating the deal now falls completely to the seller and the dual agency agent. The seller has an offer, but it falls short of their expectations and they know they need to pay commission too. They also know that the agent stands to gain substantially more than if there were two involved.

They were prepared to pay almost $20K in commission, and they priced that into the price of their home. They expected to walk away from the sale with somewhere in the neighbourhood of $535K to $545K. They would have liked to have seen a sale price of $550-$555K, a difference of only about $5K-$10K from the current offer; coincidentally, just about the amount of the "bonus bucks" the agent is set to earn.

Selling houses costs money. It costs money to the seller, but smart sellers price the commission into the sale price of the home. But selling houses also costs a lot of money to the agents. Having that house sit on the market longer means more dollars spent advertising, more time spent marketing, more time spent in open houses and less time spent selling other homes or with loved ones.

Do you think making that sale is worth meeting the seller somewhere in the middle to that agent?

"Tell you what, let's get this deal done. I'll drop my commission from you to $16K even. You'll get very close to your price and everyone will be happy. OK?"

I think this gets the deal done--I could be wrong.

Of course, there are a handful of variables that will influence this scenario, including the state of the market and the buyer's, the agent's and seller's abilities to negotiate. But considering the complications of the alternative, I think my money will be on handling my own negotiation when I find the right time to buy because there is more money in play and therefore more negotiation room.

Please remember, I'm not an agent, I've made some assumptions about dual agency that some posters may be able to clarify/correct in comments, I'm not currently negotiating deals and I won't buy when everyone else is nor will I engage in multiple offer scenarios so I've ruled them out of this hypothetical situation.

Please tell me your thoughts in comments, I'll be interested in hearing the discussion.

127 comments:

Just Jack said...

Your well educated, and well informed,this is a good scenario for you.

To those that are less comfortable with the process, you may wish to have an agent that you trust work with you. That extra 10K that your agent splits with his brokerage firm may be worth it. That extra 10K will cost you another $37 per month on your mortgage, based on $370 per $100,000 of mortgage.


For me, I don't need any more fingers in MY pie, I would go with the same agent. BUT, my own inspector and my own lawyer.

Robert Reynolds - GBA said...

Neat idea, I had not thought about it before.

One thing that I can compare this too in my line of work is that in most of Canada, life insurance agents are not allowed to reduce our commissions, strange but true. It is known as "Rebating" and is illegal in most of the country. BC is an exception, here rebating is legal, but you cannot rebate more than 25% of your commission. The idea behind the law is that it keeps all agents on a level playing field, it also reduces the likelihood of unnecessarily replacing life insurance policies. Nasty things can happen when you replace a policy.


I have no idea if something like this applies to Real Estate Agents but it would be worth finding out as it might kill that scenario.

Bubble 'n Fizz(le) said...

You've obviously never bought a house before. Using the same agent on both sides of the deal is as smart as using the same lawyer on both sides of the deal (and lawyers are not permitted to do that--I wonder why). If you can't trust your agent (and regardless of "agreements" to represent both sides' interests, you cannot assume they will represent you as equally as the other) you are in a poor negotiating position.

HouseHuntVictoria said...

^ I don't follow you. Why can't I trust the agent in a dual agency role? If I can't, precisely because of the dual agency role, why can I trust a buyer's agent any more so? After all the buyer's agent doesn't get paid to represent me, I don't pay them, the seller does.

If the deal goes sideways, I can deal with whichever agent represented me regardless of who else they're representing.

If I follow my rules, and the deal "feels" like it's going sideways, I walk. Ultimately, walking is the only real protection I have anyway.

Just Jack said...

I don't think you are following the conversation Bubble 'n Fizz(le).

If you have educated yourself and feel confident in your abilities, I would use the same agent.

The purpose of agents is to bring buyer and seller together. They also act as a buffer between the vendor and purchaser. The less people involved in the transaction, the more likely there will be a favourable outcome to all parties.

Using the same agent may also stop the realtor from stampeding you with a back up offer which may or may not be a true offer from a third party.

When your negotiating your appealing to the greed and fear of the realtor not the vendor.



When your negotiating, your negotiating with the realtor, not the vendor. Most of your histronics never reach the ear of the vendor, as the agents just don't pass them on.

Strategic Voter said...

That is a very interesting idea. I have always been disturbed by the conflict of interest in Buyer's Agent compensation: their commission is based on the selling price. I suspect that this strategy will only really work in a buyer's market, but that is what we have ahead of us for a few years to come. Love to hear how it works out for someone.

HouseHuntVictoria said...

Rob,

Real estate commissions are entirely negotiable. That's why you see the 1% and other non full-service brokerages around. I've heard of agents agreeing to sell a house for flat fees that work out to less than the standard 6% and 3%, I've also heard of agents charging 7% and 4% too.

I'm not sure if there is anything in their agreements that prevent them from negotiating on commission after the listing agreements are signed, but I doubt it.

Can anyone in the know tell us?

Marko said...

I have built, bought and sold 14properties in the last 3 years. From talking to 101 agents that have tried to solicit my business, double ending a deal happens 1 in 20 home sales.

When buying I ALWAYS call the listing agent. In the 8 properties I have purchased, in 7, yes 7 scenarios the agent has cut his or her comission to make the deal happen, in three cases it was more than 25% so they must have infringed upon this BC LAW.

I have found that when agents have a chance to double side a deal they will talk the seller into selling by spinning the facts. (i.e. market condition could get worse, simialr house sold for this much and it was better house etc.)

That why when I list I always use discount comission. I sold a $800,000 home two months ago and for $4000 in selling agent's comission (3% and 1.5% would have been $13,500). Buying agent comission was 3% and 1.5% (The minute you lower this, agents simply won't bring their customers even if you house is the best deal ~ they want to get paid).

Because a double-end transcation only happens about 1 in 20 deals, it is a MUCH SMARTER idea for agents to collect listings and let other agents bring the customers. Ones that can get listings for full comission basically have to do no work, let another agent bring the buyer and collect 3% and 1.5%.

My experience: Always call listing agent when buying, list with a discount comission realtor when selling because there is a 95% change another agent brings your buyer. Always keep buyer's agent comission at 3% and 1.5%.

Bob leftcoaster said...

HHV, I agree that this happens for many cases of dual agency.

We sold our property through a dual agency situation a year ago. We chose our agent because he had made many previous sales in our development. After signing on with him, he informed us that he was also working with buyer who would be interested in my property. He went though the details of dual agency quickly. When the bargaining started to slow, our agent offered to reduce his fee from the standard Ontario 5% to 4.5% plus $1000 discount.

We felt quite comfortable during the entire process because the agent was interested in getting the deal done asap.

Robert Reynolds - GBA said...

HHV

Different industry, different regulations. I am partly paid by commissions so thought I would share how my industry works. After thinking about the 1% real estate agents I guess they can do what they want. There might be something in the individual agent contract with their brokerage perhaps?

Just Janice said...

I did the whole dual agency thing when I bought a condo 6 years ago (sold 4 years ago) and seemed to be much better able to 'bargain' under the circumstances. I did use my own lawyer and inspector though...

It all depends how much time you have to comb through the listings you wish to look at...but unless you are highly paid and time constrained the buyer's agent is likely redundant.

Roger said...

Using the listing agent in a "dual agency" agreement is a good idea with the following caveats:

- buyer must be familiar with the steps involved in purchasing a property and does not need "hand holding".
- buyer is able to keep their buying motives and their bottom line to themselves (i.e. good poker player)
- buyer has done extensive market research and knows what houses are worth in the area. Landcor evaluation reports on the property for $30 can help.
- buyer has their own home inspector and tells the inspector not to discuss the inspection with anyone else during or after the inspection. Listing agent should not see the report.
- buyer knows which subject clauses they need to add to the offer. You do not want advice from the listing agent in this area. Typical clauses - click here.
- buyer uses their own lawyer. This is crucial to protect your interests.

I have been in dual agency agreement situations and had good experiences. Agents provided full disclosure on the property as far as property condition, defects and comparable properties in the area. I was at the head of the queue because they were double ending (important in a multiple offer situation). In one case when I decided not to make an offer I was asked if I wanted to reconsider and was told that an offer currently on the table was subject to the sale of another home (unethical on agent's part).

HouseHuntVictoria said...

Thanks for that extensive list Roger, I've already saved a local copy. Mind if I link it under resources on the main page?

Roger said...

HHV,

Feel free to post in reference section. You may want to use your own URL in case it gets deleted on my server. No need to reference source - it is a cut and paste from various places.

Vic said...

I would never go in without my own agent. In a fast market he may have a personal edge with the agent from a past deal and may get a far better read on the sellers situation and the other bidders that may make you walk when you are in love with the place.

In a slow market with room to low ball, you may be able to find out how desperate the seller may be on time limits etc. The money you save on the deal will far outway any savings on the commision.


I have a relative who went with the listing agent once and got severely hosed and the pain lasted a long time. They were young and naive and he sucked them in hook line and sinker with no legal recourse against the agent nor the listing company.

Marko said...

I really don't understand why

a) People still use agents
b) Why they make so much money

With access to information these days (maps, listings, sale figures, etc.) what is an agent going to tell you can't research on your own? I've sold houses privately and with agents. The process is much easier privately because there are only two parties involved when dealing with respective lawyers.

I am a builder, and I laugh when agents try to solicit my business with a 6% and 3% comission. The listing agent basically puts the house on MLS and waits for someone to bring a buyer. 90% of them know nothing about new home construction, 99% of them cannot point out all the detials in the house I can. 95% of them are really really uneducated. One agent told me he owned a 3000 sq/ft home with a heatpump and the heatpump saved him $5000 a year, when in fact I know it can't save more than $500 in our climate. It is unfortunate when young buyers come across agents like this because they can really give them bad advise. Unfortunately, young buyers can be naive and aren't bothered do simple research on the internet.

In my opinion, bank tellers know more than 90% of realtors, and they make $13/hour.

Marko said...

"In a slow market with room to low ball, you may be able to find out how desperate the seller may be on time limits etc. The money you save on the deal will far outway any savings on the commision."

From personal experience you will always save more when you go in without your own agent.

Think about it...you're a realtor amd you list a home for $800,000 in a slow market. The comission is $27,000. You get an offer from an interested buyer for $750,000; however, you know the house could probably fetch $765,000. Are you really going to try and convince the sellers not sell so another realtor can bring buyers along and your comission will go from $27,000to $13,500. You are more likely going to tell them...market might get worse, there aren't many buyers out there in a slow market, house down the street sold for $730,000 (of course you won't tell them that it needed a new roof).

PainInThe said...

Let see. Depends upon whether or not you want an honest inspection of the property. Or not.

Get a buyer's agent, and treat them well, very well, and you'll have the best inspector on the island go through your purchase with a fine-toothed comb.

Not someone on the take to the agents to pass the house for a quick sale.

I've been watching the one HGTV show about the guy who does basement suites. It is ASTOUNDING how many basement suites in newly bought houses were absolute deathtraps, and that's not an exaggeration. Nowhere near code, things like brand new studs and wallboard right on top of walls leaking like fountains. Obviously fixed as cheaply as possible without any contractor or building inspector just to unload.

SOMEONE paid off someone who called themselves an "inspector" to pass those inspections on those sales.

Word to the wise.

Just Jack said...

Or you could hire yourself an appraiser who will do a cursory inspection of the property, along with measurments of the property. An analysis of current market conditions with comparable sales along with their opinion of value.

Interestingly, although some people do not want to use a realtor, they do want the realtor to do the preliminary work of listing the home.

Fewer people rely on private listings from the newspaper or places like Homesellers. As for realtors knowing about new construction. How much do they really need to know, they're salespeople. Does a car salesman have to know how a combustion engine works in order to sell a BMW? They only need to know how to sell the dream.


People need basic information that is provided by the realtor. And if you don't believe me, try and estimate the neighbours house five doors down from you that is not listed. Without that basic information, you simply can not do it and that goes for builders too.

Ask yourself, how much more would someone pay for a 30 year old 1,200 square feet rancher on a 9,000 square feet lot

than

a 40 year old 1,000 square feet basement entry home on a 6,000 square feet lot.

Or would you pay more - or less.

Aint so easy, is it.

Roger said...

Just Jack said:

Or you could hire yourself an appraiser who will do a cursory inspection of the property, along with measurements of the property. An analysis of current market conditions with comparable sales along with their opinion of value.

You can get most of this from Landcor in 10 minutes for $30...

Online Real Estate Analysis..

---------------------------

PainInThe said:

Get a buyer's agent, and treat them well, very well, and you'll have the best inspector on the island go through your purchase with a fine-toothed comb.


A buyer does not want an inspector that is recommended by the buying or listing agent. Both agents want the deal to go through so they can get their commission. Buyers should pick their own inspector and stipulate that the results of the inspection should not be verbally discussed with the owner or either agent. The inspection report should be sent directly to the buyer for review. Make up your own mind about the inspection results without "help" from your agent. The inspector can provide any assistance you require as far as costs to repair any deficiencies.

Roger said...

Marko,

Nice to see you posting here. You have an interesting perspective as a builder. Good advice for buyers and sellers.

Just Jack said...

The information from Landcor is BC Assessment data. Physical information about the property is dated and may be obsolete as it is from the last time an assessor inspected the property. Anyone here ever had a BC assessor through their property say in the the last 10 years? For $30, all your getting is a trended BC assessment value. If the home owner had upgraded the interior or the foundation has collapsed in the last year, it would not be considered in the value. And besides, if you have questions - who are you going to talk to.

Would you buy a home without seeing it? Landcor values it without anyone ever seeing it. At $30, Landcor is cheap and provides entertainment value. But, I would never lend my money based on its values, BUT I would lend your money on it.

Roger said...

Just Jack,

In my post I said most of this information. Landcor is the only firm I know that has access to Land Title sales history as well as BC Assessment information. You get both in the report.

I agree that a full appraisal by a licensed appraiser is best but time constraints may preclude this option.

At least with the Landcor report you get most of the information that a buyers agent might give you. You get all the comparable sales info for the area and the sales history of the house you are looking at buying. But as you say you might get an inaccurate estimate of the property under consideration. If you are buying a house or condo in a development that is only a few years old, with similar floorplans, it might be a reasonable estimate. In Oak Bay the estimated value is not very useful. An experienced buyers agent that specializes in a given area would also give a reasonable estimate and that is one of the benefits of using their services.

One is also free to ask the listing agent to tell you what comparables were used to arrive at the listing price. They may also let you see the Current Market Analysis for the property. The listing agent is free to provide any information that is not confidential between the seller and the agent.

It all comes back to the original question posed by HHV - Is a buyer's agent redundant? I believe this is true if the buyer:
- is not a novice needing guidance or assistance with making an offer.
- is prepared to spend some money on a Landcor report to get recent neighbourhood sales and price history of the home.
- retains a good lawyer that can go over the title search documents with them prior to lifting the subject condition.
- is a skillful negotiator and feels comfortable dealing with the listing agent.
- has done extensive research on the area and knows what is good value.

I agree with Vic that an inexperienced FTB can get really burned by purchasing in a dual agency arrangement. But an experienced buyer that has done their homework can get a better price and receive preferential treatment in a multiple offer situation.

Just Janice said...

If the market is 'so hot' that you can't touch it without an agent (ie. properties gone before they're even on MLS) - do you really want to buy??

Do you really want to buy something when you can't have the time to do the research and inspections as other people may be dumb enough to put in an offer without conditions?

Bottome line, RE agents are salespeople, they might have a bit of an inside edge on the market, but when it comes to buying or selling - you really don't need two. Take the time, educate yourself, hire a really good home inspector and a good lawyer (who actually can comb through the details of your deal). RE agents sometimes don't even know the basics of zoning, sometimes don't appropriately research the title of the property for covenants, etc., and sometimes wind up selling you way more than you bargained for. Adding more of them to the mix does not make the situation better.

Now, when it comes to selling - I can definitely see the value added.

Either way though - there's no way I'd buy RE in Victoria right now (excepting a multi-million dollar lotto win - but in that case I'd have enough money to be a little stupid with it)...

Just Jack said...

With Landcor, you are getting some information, but most of the information is just boiler plate. Landcor gives a list of the last dozen sales in the area. If your in a built up area of similar homes like Surrey, then the data should be appropriate. But, in Victoria, you have a crack house beside a Mcmansion. Both will be listed in the Landcor report and neither would have any significance to the home your looking at. The sales are there to pad up the report. The program is just running basic stats, not even at the level of a Case-Shiller type analysis.

Take the information for what it is. But don't rely on it without verification.


Just Janice has an interesting point about winning the lotto and buying a million dollar home. Is that not what has happened in this market for home owners over the last few years. They won the real estate lotto and are buying up in the market. Of course, when you are dumping your winnings back into the same game, you really have not won.

You only win, if you leave the Casino before the money is gone.

Roger said...

Just Jack,

Are you saying that a buyer using dual agency always needs to have an appraiser evaluate the property?

I know you are patiently waiting for prices to fall before you buy. But what is your advice to someone that has decided that buying now is what is right for them? Should they use a buyers agent or go dual agency?

Marko said...

As much as I dislike realtors and the amount they charge they really have a monopoly when it comes to home sales.

I had a new home listed in Echo Valley, Bear Mountain privately for $549,000. I had an open house every weekend and approximately 300 people through the house. I even had two very interested buyers; however, they brought their realtors later on and ended up not buying. The realtors had "better deals" for them, aka transactions that pay commission.

I listed on MLS with a discount realtor for $599,000 and the house sold in 7 days for $590,000 with multiple offers on it.

A lot of people are afraid to buy privately. Realtors do not help the situation. When I had my house listed privately I found out one realtor told his clients that my house was not on MLS and not worth seeing because none of the realtors would take it because of extremely poor build quality. AKA realtors don't want to show homes where they don't make money no matter how good of a deal it is.

To sell you really have to list on MLS due to the monopoly, not the fact that your realtor knows anything more than you do other than how to enter your home into the MLS database.

Just Jack said...

No, not at all Roger, you don't need an appraiser at all.

If your confident in your abilities then make the deal.

For those, that are hesitant and not sure, perhaps an unbiased opinion of value may be the way to go. There is a chance that the bank will order an appraisal and ding you for the fee anyway. Why not, order the appraisal yourself.

You could probably take or email the appraisal report to various lenders and shop for the best terms and rates yourself - that's what brokers do.

I don't think there is any harm in having someone who is dispassionate about the property taking a look at the home. Ask the appraiser for a range in value or where you should bid. Most appraisers are going to nail you with around 300 bucks for the appraisal, maybe its not worth the money to some who are in tune with the market.


As for dual agency, again it depends on the person. If your confident in your abilities, I would go dual agency. If your not, then having your own realtor may be a better choice. Of course the realtor does not come free either and will likely end up costing a couple of thousand bucks for their time.

As for the "monopoly". You bet an agent will discourage a private listing. It takes a special person to help a stranger when that help is losing him/her the bread that feeds the family.

With the MLS, your paying for exposure. If you want to beat the system take the realtors course or have someone in your family take the course. Marko, if you have bought and sold 14 homes over the last 3 years then thats a LOT of bread in commissions.

Anyways, that's my 2 cents worth. Next year this will cost you 12 percent more.

Olives said...

If I won the lottery I'd probably just rent a fancier house, maybe with an ocean view :)

Just Jack said...

If I won the lotto.

I would refurbish a 1970's Airstream trailer to tour the world in, and learn to speak latin.

Illegitmi non carborundum

HouseHuntVictoria said...

Just Jack,

At what stage of the buying process would you engage an arms length appraiser? I'm all for this, but can you imagine actually getting the seller to agree to an offer subject to appraisal? To me, that would be the same as an offer subject to changing my mind.

I think the $300 is money well spent, but you can proactively, and easily, obtain a $30 Landcorp info sheet on the property prior to making your offer and use that information to help you decide what is a fair offer. Of course, the info may end up being completely useless, but at least it cost you less than dinner.

Getting an appraisal will take time, perhaps even longer than a week, right? Is it realistic to include this as a subject clause on an offer?

Vic said...

BC Bankruptcies up 72% in BC


http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br02248.html


Nationally up 54%


http://www.theprovince.com/business/Personal+bankruptcies+climb+cent+June/1881934/story.html

Just Jack said...

Victoria and Vancouver agents do the hard sell tactics. Which is to keep the prospective purchaser hot and jumping.

Stampede the buyer with a back up offer that just came in and short subject removal dates. Have the buyer runing around town to get a bank appointment. Never let the buyer have an opportunity to think about what they are doing. Never let the buyer cool down.

AND IT WORKS!

A deal breaker would be "subject to a satisfactory appraisal" NOPE, not going to happen.

Really good protection for you. NOPE, not going to happen.

Would provide you with peace of mind and solid information on probably your largest purchase in your lifetime. NOPE, not in this lifetime are you ever going to get that subject clause accepted.

Perhaps if this market implodes and people start to look at what caused the largest world wide bubble in real estate, they might just find that it was these computer programs that could give a value in under 10 minutes based on a postal code, that it was hard sell tactics by the agents and brokers and easy cheap money.

It has only been in the last decade where it has been possible
to get financing in under an hour or buy a second home over the phone using your home equity line of credit. We have had had bubbles in the past, but never this large or this sustained - could it all be due to our desire to have a house in the time it takes to get a McHappy Meal?

Yes, I would like some McNuggets, a Bear Mountain condo, and a side order of fries to go, please.


Perhaps, new legislation that requires a mandatory 10 day cooling off period when buying real estate. In other words you can back out of a deal in 10 days with no questions or penalties. Fines for brokers and agents who put pressure on appraisers to "make the mortgage". How about fines on the mortgage brokers who originated loans on false information just to make a commission and pass the paper onto someone else. How about due dilligence for brokers, appraisers, agents and bankers.

How about some massive public fines to scare the hell out of these people.

How about consumer protection. You have more rights when buying a coffee pot than buying real estate.

Nope, not going to happen. Too much money to be made.

But back to your original question, you might not be able to get the report in under a week, but you can get a verbal answer from the appraiser. Most appraisers will not do this, unless you have paid them in advance and asked for a verbal in your original service order.


Now excuse me, but I have to go light my effigy of Joe Flaherty in my back yard now.

jesse said...

People use buying agents because there are huge dollars at stake if a mistake is made. I strongly disagree with a buy-side commission -- the deal is the same whether the house is $300K or $3MM.

Considering most people only buy -- what -- maybe 3 times in their lives they cannot be experts like Marko hence the desire to use a Realtor that purportedly "knows" the market and the laws. The problem is them taking commissions on the buy side. It makes zero sense to give a buying agent an incentive to get a higher price.

And yes commissions are 100% negotiable, down to paying a fixed fee for service like in the UK. If nothing is moving and you have money I have no doubt a Realtor will go for fixed fee in a heartbeat or they're throwing $ out the window. After all you can easily find another Realtor if they don't like it. Considering how much work is involved it's a no-brainer IMO, especially on the $1MM+ properties where a standard commission is bone stupid.

Ryan said...

"If I won the lottery I'd probably just rent a fancier house, maybe with an ocean view"

That's what I'd do. I would need to win a really huge lottery before $500,000+ isn't still a lot of money to lose just to own a few years sooner.

Just Jack said...

I think people use buying agents because they think they're free. Somehow, the purchaser thinks it is the seller that pays the commission.

My opinion is simple, if you're the one writing the cheque, you're the one paying the commission. Marko has a house, you have money. The agent gets money for his/her service. They don't get three windows and a door.

Marko negotiates a lower rate of commission from the agent. All the agent is doing is buying himself a job at a lower wage.

What Marko has negotiated has nothing to do with what you pay for the house. You pay market value.

Vic said...

Incase you missed it on Global, bidding war insanity in Vancouver, bidding $200,000 over list. A couple of places in the $900,000 range selling for $1.1 million. We are talking some serious loose marbles here,the top has to be in.

Marko said...

"If you want to beat the system take the realtors course or have someone in your family take the course."

Not worth my time. I have always gone with 4% and 2% listing. My selling agent gets 1% and .5% and the buyer's agent the regular 3% and 1.5%. Taking a course would not save me a great amount as I would still have to pay the buyers agent's commission. The minute you lower this commission (i.e. 2% and 1%), trust me, your house certainly won't be getting shown as much as the other 10 brand new homes in the subdivision. You're essentially always stuck paying that 3% and 1.5% to bring in agents with their clients.

At the end of the day, I ALWAYS try to sell my home privately first at market value minus commission. Essentially I am giving away the buyer $20,000 + in commission. Out of the 6 homes I've sold, only 2 have gone privately. The rest, I raised the price 30 to 40k, put it on MLS, and sure enough they sold.

Just as an example. I built two IDENTICAL detached duplexes in Langford in 2008, one I sold privately for $448,000 and the other one with an agent for $468,000. In the end, I made almost the same amount on both; however, one buyer paid a lot less.

PainInThe said...
This comment has been removed by the author.
PainInThe said...

"Buyers should pick their own inspector"

Choosing your own inspector is no guarantee that once any agent involved finds out who it is, isn't going to slip more than you're paying to the inspector and cut him or her into the deal at your expense.

Especially if you've never dealt with an inspector before and aren't likely to have to deal with them for a decade or so, when the realtor will be dealing with them at least once a year and maybe more, with the promise of more bribes.

You NEED someone on your side, and that might take a bit of ingenuity on your part as how to best secure that.

My advice stands.

PainInThe said...

Who needs an appraiser?

Take the tax appraisal amount, lower it by 50%, and you have the TRUE value of the property.

By mid 2010.

Douglas said...

I am not a bull or a bear...just an observer. I have bought and sold 11 houses in the past 12 years (all but two sold without a realtor by the way!) The first two sold with a realtor made me swear off realtors forever!

To me, it seems highly unlikely that we will see a massive drop in realestate prices, unless interest rates skyrocket. Then, anyone holding a large mortgage simply won't have a choice.

omc said...

It's nice to see some new, and experienced, faces around here. Your input is most welcome.

Douglas,

I agree with you, but ask you to look at the present interest rates vs the predicted future 6.2% average. The change in payments destroys all of the "affordability" in the market. Pretty much all economic predictions are a 90% chance of rates raising significantly in the next 9 months. My wife and I are waiting to see what happens, and I don't consider ourselves bears either, or at least perma bears.

Olives said...

I don't think a change in interest rates is necessary (although granted if they increase this is going to cause problems regardless) - a change in mood is what really matters. There has been a noticeable shift in mood since March, allowing all markets to gain in sync, including real estate, however the underlying credit and debt problems remain and I expect this mood will change to the negative again at some point, bringing all markets back down - whether or not interest rates are still as low at that point.

I read last night that the derivatives exposure has doubled in the past two years and is now estimated at a Quadrillion dollars.

Vic said...

Olives,

Agreed, as we know it's all psychology, the loonies are on the path. As you can read on Garth's blog,Octomom families living below the poverty line are being given mortgages that we will one day be paying for...oops, we already are as they are supplemented $12,000 a year by us.


And as I was reading the other day the quote was "the slowest moving train wreck in history".

Just Janice said...

Realtors do not know the law, lawyers do. If you need to know the law, go with a lawyer (they're probably cheaper for better quality information - ie. 8 hours of time will cost you $2000 to $2600). Plus I think the law society has higher standards than the real estate board.

I've heard tales of realtors not providing the right information (ie. disclosing covenants about the use, or accurately portraying the property with regards to zoning, legality, or conformity) and then leaving the buyers to sue for it later.

I'd say wait for the market when you can offer a fair price, with subject to's that protect your interests (ie: financing is frequently and may be subject to appraisal, so putting your offer subject to financing can be as good as subject to appraisal). I'd say you could probably just put a larger deposit up to show you're serious to compensate. If the realtor doesn't like it, accuse him of being unethical for not respecting your need for due diligence on the deal. They don't like being called 'unethical'...

Still wouldn't buy now...patience is perhaps the most valuable commodity right now...

Olives said...

The Futronomics blog today covers the very topic of mood and socionomics (sorry JustJack).

Just Jack said...

Sorry Olives

I do beleive that perception is a major factor in all markets.

However, when I listen to the elliot wave theorists, I envison them with a mortar and pestle grinding up wolf bane and eye of newt, and throwing the entrails of a duck against the wall to prove their point.

Olives said...

Well if you are ever looking for a good deal on some eye of newt, let me know and I'll steer you in the right direction...

Roger said...

Marko,

I enjoy your posts - very informative. It looks like your fellow builders do not have same confidence in the real estate market as RE agents and buyers. Building starts are way down this year. Up Island is a disaster. It will get worse as we get closer to the dreaded HST next July.

Vancouver Island Housing Starts..

Roger said...

No wonder builders don't have the same confidence as RE agents and buyers....

Times Colonist reports Victoria home prices decline in June - third steepest drop among Canadian cities..

OTTAWA — New home prices in Canada fell for the ninth straight month in June despite predictions the slide would finally come to an end, Statistics Canada said Wednesday.

Vancouver saw the biggest decline, down 0.9 per cent, followed by Edmonton at 0.8 per cent and Victoria at 0.5 per cent.

Marko said...

Roger,

The decrease in housing starts is the only thing that saved me a lot of other builders. Due to the dramatic decrease, especially at the start of the year, inventory of new homes has remained very low. I thought I was doomed when I started a new home in November; however, two things happened.

1) It cost me 15% less to build due to falling labour rates.

2) When I came on market there was very limited inventory of quality homes under $650,000, my home sold in 7 days.

It is very difficult to be smart in the short term. I am building a 4700 sq/ft home right now that I will try to sell for $960,000 next year. If the market weakens by next year I could easily be out $200,000. That's life. My gut feeling is that it won't happen because building starts are still down and likey to remain down while there is always demand for new homes. The building costs plus the lot will cost me an estimated $800,000. When I factor in that I probably won't get full price, and commission, I have little room for margin. I certainly wouldn't sell the home for $700,000. I would rent out the 2 bedroom suit for $1200/month and the rest of the home for $2500/month. That way I could wait out poor market conditions. A number of builders did this in Jan/Feb when they couldn't sell. I could be wrong, but I think a lot of people on this board are dreaming by thinking that prices will correct by more than 20%.

People have misconceptions that builders are rich. I've built approximately 2 houses a year for the last 3 years and I've never made more than $100,000 in one year despite risking a lot of money and putting a lot of labour into every project. It is expensive to build. Even with the huge crash in commodity prices I am only paying 3-5% less for building materials than I was last year. My wife is a nurse, and for 2 out of the last 3 years she has made more money than me. Lets put it that way.

Roger said...

Marko,

I think there will still be demand for new high end houses until July 1st next year. There will be a scramble to avoid the HST. But sales after that date will be sluggish until the public gets over the anger of the new tax.

Gordo has still not announced the transition rules for new construction. There will be a "grandfather" date announced for contracts and the new HST will not be paid even if possession is taken after July 1st. Builders will also have rules on their ITCs for projects straddling July 1st 2010.

When you sell your houses privately how do you advertise the open houses? TC, Craiglslist??

As far as price drops go what do you think will happen next year when fixed and variable mortgage rates go up and the new tax is introduced?

Marko said...

"When you sell your houses privately how do you advertise the open houses? TC, Craiglslist??"

As far as price drops go what do you think will happen next year when fixed and variable mortgage rates go up and the new tax is introduced?"

Hey Roger,

I advertise on usedvictoria.com, craigslist.com, TC from time to time, and www.propertyguys.com when they run free promotions. I also have all my open houses at the exact same time neighbouring realtors do; therefore, I have always experienced high traffic at my private open houses.

It is really difficult to say what will happen. Interest rates going up are a huge negative because it is the 40% of first time buyers that are driving the market. If you can sell you your 1950's rancher in Langford for $450,000 to a first time buyer suddenly $650,000 for a brand new luxury 3000 sq/ft house isn't that big of a deal. You take first time buyers out of the equation, everything slows down because people aren't upgrading. First time buyers are very sensitive to interest rates. HST will not help new home sales either.

Looking at the empirical it would suggest a reduction in new home prices next year.

However, from 20 years in construction, honestly it is very difficult to predict what will happen otherwise I would be very rich.

If I was smart I would have started 10 new homes in Jan 2009, built them all for 10 to 15% less than the previous year, saved approximatley $10,000 on each house in building fees Langford wasn't charging at the time, and sold them in July for the same prices they were selling last year.

Let me give you an example. You are a pharmacist and a nurse moving to Victoria from Winnipeg with an annual income of lets say 150-170k. You don't want to live in Langford and you would like a brand new home in town close to schools and your work to avoid commuting. What are you options? 1 brand new home in Fernwood, 1 in James Bay, 3 in Oak Bay that are out of your price range, and 4 in Gordon Head but they are all under 2000 sq/ft. You will have to pony up, or you will have to buy an older home and go through the nightmare of renos.

There simply isn't inventory at reasonable prices. Two homes in Echo Valley on Bear Mountain have sold in the last 2 weeks in construction. They aren't even framed yet! Even if you took all the honest bulders' profits away from him or her a $600,000 home would be $550,000. Price can come down, but as you can see by the numbers, as soon as prices go down a bit or there is some uncertainty people stop building. HST tax will futher impact the 58% decrease in starts. Will there be 58% less demand next year? I don't know. But the only way I can put food on the table is by continuing to build. However if prices drop 10% I am not going to build people homes for free.

Vic said...

"I could be wrong, but I think a lot of people on this board are dreaming by thinking that prices will correct by more than 20%. "



marko,

how long have you been building houses ?


Also curious how big are the lots you build a house on that is 4700 Sq Ft ?



If they are overbidding $200,000 in Vancouver could tough time also not cause prices to go 20% the other way ? I am just thinking of buyer psychology and past history of real estate markets here that says nothing lasts forever.

I would think the high end you build in could be the first to suffer the first/worst.

Bob leftcoaster said...

From what I gather, I should stay out at least until September 2010. New home sales will move quickly from Feb to June due to the buyers fearing interest rate hikes and HST introduction. July and August will continue with steady resales. Provincial cuts will be felt by the late spring, reducing the amount of people buying their first home or those moving up. This means a great first half year for the market followed by a significant YOY drops August on.

There may be an opportunity to make money if you buy cheap in December and list by May. Ante up, players!

Olives said...

"If I was smart I would have started 10 new homes in Jan 2009, built them all for 10 to 15% less than the previous year, saved approximatley $10,000 on each house in building fees Langford wasn't charging at the time, and sold them in July for the same prices they were selling last year. "


Hmmm...The Times-Colonist articles says prices for new homes are down 7 percent from last June.

Roger???????

msr said...

Marko,

You say you won't build houses for free which is perfectly rational.

But I'd like to compare Victoria to Ottawa. Given that the average house price in Ottawa in around $300K and the average in Vic is $600K. How can these price differences be sustained? Can the price of housing be justified by raw material/labour costs? Are the input costs in Ottawa just *that* much lower than here?

I suppose it could be argued that there is a net population shift from Eastern Canada to Western Canada such that the older cities are shrinking or not growing. This would support prices below replacement cost but that is necessarily temporary.

Just Jack said...

It all depends on the elasticity of demand. Was this last run up in sales due to pent up demand or was demand "created" with lower interest rates.

The economist for Scotibank called it pent up demand. She's the expert.

I call it created. The low interest rates dredged the bottom of the barrel of prospective purchasers. If 70 percent of Victorians own their home, who is left to buy?

Soon, realtors will be hanging around elementary schools looking for buyers. It will be like a bad episode of an after school television special. You'll be cleaning out your teenage daughters room and find a stack of purchase aggrements hidden in the drawer. "REEFERlections MADNESS"

HouseHuntVictoria said...

"REEFERlections MADNESS"--that's just plain awesome.

Land cost is the variable driving up local prices, msr. Land is basically cheap anywhere outside of BC, apparently because they're making more of it elsewhere.

Vic said...

" REEFERlections MADNESS " is too funny JJ.

You have to ask yourself who in their right mind would bid $200,000 over price on a $900,000 place on frigging Main St in Van ?

It was reported it there were 9 parties involved too. Have these people lost their minds ? are we talking drug money ? high end hooker hotel for the Olympics ? I mean who has an extra 200 G's to keep this going to the point where agents were even stunned ? Are these deals all BS and they will default when it comes to laying down the cash ? Something smells is all I can say.


Crazy markets make people do strange things but this is too much like a rig job to me. Why isn't these same outragous bidding wars happening here ? If it was, then the ole TC would be pumping it til the cows came home.

Just Janice said...

Marko - you're somewhat of a 'bit player' in the construction market - the larger players build hundreds of homes each year, building one or two is almost more of a 'boutique' business.

I'm sure builders everywhere else thought that there would be no way that houses would contract 50% (ie. Phoenix) - they did. And builders will build as long as there is a profit to be had, so if land costs, labour and supplies all go down, your income may also go down but you might be able to do more with whatever income you have (it's not really money until it's spent!). 20% correction within the next 3 years - I'd take that bet in a heart beat.

Marko said...

Why are house so expensive in Victoria? First of all, go to MLS, select "Land" and then "Building Lot." Essentially, there is nothing in Victoria under $350,000. In Langford, you are looking at least $220,000 + for a reasonable 5000 sq/ft lot. Trust me, developers are not ripping anyone off with these prices. This isn't a desert where you can put up lots for $10,000. Blasting, filling, trucking, sewer, roads etc, etc. All extremely expensive.

Lots have always been really expensive in Victoria. This will never change. I paid $200,000 for a lot in Cordova Bay 10 years ago when you could buy a solid house in Gordon Head for $250,000.

Now add costs to get building permits ( $10,000 to $15,000), cost to hook up sewer ($5000), cost to frame, cost for electrical etc. etc. People forget that all new homes as of 2006 must have rain screen techonoly ($3000 more then pre 2006 on an average home). Updates have been made to building codes which cost money. I've never been able to build a house for under $110 sq/ft and I do about 15% of the work myself.

New homes will never correct more than 20%. You know why? Because if they did there would be no new lots nor new homes. Even if they correct 10% or more from here who is going to build? Housing starts won't be 58% down, they will be 98% down.

As far as being a 'bit' player in construction, who in Victoria builds hundreds of residental houses? Name me one subdivision in Victoria where more than 50 homes have gone up this year? Bear Mountain Corp. has built less than 10 resident homes this year. Construction has picked up, it's summer, and there were only 89 SFH starts this month. Around 300 SFH for the entire year so far. I would really like to meet these "players" who are building hundreds of houses. Time to do the math, apparently 3 builders are building all of Victoria...

Vic said...

"New homes will never correct more than 20%. You know why? Because if they did there would be no new lots nor new homes. Even if they correct 10% or more from here who is going to build? Housing starts won't be 58% down, they will be 98% down."



I'm not sure about that assumption Marko,in 1982 they crashed 30 - 50%,lots got cheaper,labor got way cheaper as well as lumber costs not including your permit costs,those would never go down. I could buy a lot in Whistler for $20,000 (one of my worst mistakes). You could get carpenters for $8 an hour when you usually had to pay $12 or more during the boom, they were starving. If the US dollar tanks then expect further decreases in costs. I'm not a builder but I do know when crashes happen, then damn near everything gets cheaper too.

Just Jack said...

Why would we need more building?

Like you said Marko, you cut your labour costs by 15%. That's 15 percent less a worker now has to buy a home. That worker now has to move to cheaper accommodation, buddy up with a friend, move home to mom and dad or leave Victoria. Now multiply your experience by the number of builders in town. Add in realtors, brokers, washing machine sales people and the guy that works at the local seven eleven.

Unemployment goes up, wages go down, suites go vacant, bankruptcies increase.

Its a cycle

A boutique business may be the best way to go. You build a small but good base of people.

I certainly would not want to be as big as CITA Construction, the number of hammer and nails that they buy each week would probably be my salary. With their over head costs they would have no choice but to be ruthless to their workers.

You see, in an upswing in the market, new home construction leads the way, pushing prices higher. But in a downswing, people are looking for cheaper, that means non new homes. There is a lot of under five year old homes for sale in the Westshore and builders have to compete with this change in buyers preference.

Marko said...

"Like you said Marko, you cut your labour costs by 15%. That's 15 percent less a worker now has to buy a home."

That was only for one project; therefore, my statement that I would have been smart to build 10 homes in Jaunary and finsih by summer. My labour costs are back up to were they were one year ago. Combine an a long term shortage of skilled workers, along with a slight pick-up in construction, and people moving out of construction, prices go up. For example, the electrican who I hired on the last house for an excellent price is not doing residental construction anymore. He got a job for VIHA, another one I know picked up a job in the shipyard.

People who are skilled and hardworking are not going to take big pay cuts speaking from experience.

There are 58% less housing starts, does that mean 58% of builders are starving? No, absolutely not. People just move into other businesses.

Have home prices gone up compared to peoples incomes in that last 10 years? Yes. Maybe that is just the new reality and here to stay. People living with their parents until marriage and even after has been reality in most European countries for a very long time.

Overall, short-term I don't know, those of you who know whats going to happen are going to be very rich/already are very rich. I just know long-term real etate has been a good investment for me personally and lot of other as well.

maniac78 said...

All I know is that if this continues I'll be leaving this crap trap town for sure.

Vic said...

"People who are skilled and hardworking are not going to take big pay cuts speaking from experience. "


When no one is building homes or large buildings then they won't have a choice. When the cupboards are bare then what other option is there ? If you were building 20 years ago then how did you not see this happen in the last recession ?

I saw many people give up their trades or cut their wages bigtime. If they started their own business they were all fighting for the same customers and the gouging prices of today were cut by 30%. Only the union shops did not lower their wages and their businesses suffered. So far the real recession hasn't even hit Victoria.

Just Janice said...

A person who builds 2 homes a year is a 'bit player' who contributes less than 0.72% to the local SFH market this year and less than 0.47% of the local SFH market last year (assuming the January to June housing start numbers for Victoria from CMHC can be doubled to get an annual total). Small has no 'market power' and as a result no say in what the market does or does not do and will be at the mercy of the larger market. When people have a choice between taking a pay cut to get work, or making nothing if EI has expired, or making more than what EI pays but not as much as they used to and maybe not even in their field - they will take what they can get. The bills don't stop and holding out for the 'good old days' forever just isn't a winning strategy. At some point the new reality is what takes over, even if it's not what it once was. You intimated that you made about a $100k last year, that's an exceptionally good wage, and probably out of line with what it historically would be. Think about the last 10 years, in 1999 what did you make? Then adjust it by 2% each year for inflation, and by 0.5% for experience. Are you making more than what you would have reasonably expected to make under this scenario? Is there any real reason for the difference (increase in education or productivity?).

Now consider that many professionals make less than you do. A senior economist with the government with 6 years post-secondary training and 7 or more years of experience makes about $80,000 per year (yes they get benefits and pension, but with the difference between you and them, surely you can afford something that makes up for that). The average lawyer likely does not break $100,000 within the first 7 years of practice. Both of these 'professionals' also likely have considerable student loans. Furthermore, their wages likely haven't increased in the same way that yours has in the last ten years. Were these people making more than you 10 years ago? Why should they make less than you know?

You and every homeowner out there might not want to here that there is a real and significant risk of a housing correction on a large scale - but there is and it is real. After the longest and largest housing 'run-up' in history, why wouldn't there be the longest and largest housing 'wind-down' in history?

Point being things have a tendency to revert to their relative lon-term, norms. The relative norm is for housing to be about 3-4 times annual average household income.

You say you'd just become a landlord if you could not sell for the price you want, but as is often the case, it will likely prove 'easier said than done'. Furthermore, it could prove to be the worse move you could make, holding inventory that is depreciating with rents that don't cover the carrying costs of interest, property taxes and maintenance.

Victoria will revert to it's traditional status as being somewhat more expensive than the average, but way less pricey than Vancouver, and to do that when the average is also moving down, will require quite a substantial correction.

HouseHuntVictoria said...

^ um, Just Janice, this time it's different. Sorry, couldn't resist ;-)

Roger said...

On many occasions I have heard new buyers tell others that they should jump in now because even if prices drop they will pay more due to higher mortgage rates. In effect they are saying that there is nothing to be gained by waiting.

This is a misleading argument that can be easily disproven with a mortgage calculator or a spreadsheet. Here is an example. Lets say a buyer purchases a condo today and takes out a 400K fixed mortgage at 4.1% for 5 years. What would happen if the purchase was delayed 2 years and an identical condo in the building was now 10% less (a small drop) and mortgage rates had increased substantially to reach 6.1% for a 3 year term?

Today's buyer would have a lower monthly payment than they would if they had waited 2 years but that is very shortsighted. In 2014 when they both renew a patient buyer would now have a lower monthly payment and less debt due to a smaller outstanding mortgage balance.

Click here for details..

A prudent renter would also be saving more for the down payment and investing their existing savings which would make waiting even more beneficial.

Conclusion - Focusing on today's monthly payment can be detrimental to long term financial success

Just Janice said...

I seem to have spelling mistakes left, right and centre in my above post (sorry, didn't read through first)...

Roger said...

I was reading the news wire and came across this article this morning...

Financial illiteracy is drawing families into debt..

According to a May survey by the Certified General Accountants Association of Canada (CGA-Canada), Canadian household debt has hit a record $1.3 trillion - up sharply from $1 trillion a year ago, $900 billion in mortgages, the remaining $400 billion in consumer debt.

a somewhat alarming 21 per cent of debtors acknowledging they're in over their heads and no longer solvent. Perhaps even more alarming is that 79 per cent expressed confidence they can manage existing debt well or even take on more.

However, this time we're in far worse shape. By 1995 the average Canadian savings rate fell to 9.2 per cent of after-tax income, by 2003 to just 1.4 per cent, recently falling into negative territory - people spending more on credit than they were earning.

Vic said...

Just Janice,

very well said.

Just Janice said...

Good article Roger. It truly is different this time, isn't it?

I wonder if there are any historical measures of household indebtedness and savings rates from the 30's. All be it the social safety net isn't what it is now, but the same net is a heck of a lot worse than it was in the eighties or nineties. Personally, if I were to lose my job, EI would pay me about $447.40 per week before tax and likely about $400.00 after tax ($1600 per month), this is only 40% of what I typically see as take home pay. At that level I would be unable to make both my rent and car payments alone ($1600 per month combined), never mind eat or do anything else. (It's a good thing I'm married) Without savings, things would go from bad to worse pretty fast.

This will not end well...funny how expensive a quick course in finances really can be.

Marko said...

"You intimated that you made about a $100k last year, that's an exceptionally good wage, and probably out of line with what it historically would be."

I've never made more than $100k. Secondly, I have no retirement plan, no benefits, no vacation. Every time I go into a project I am risking my life savings. Forth of all, I have more than $70k in equipment (bobcat, tools, storage, etc.)

You can't compare my salary to a nurse or police officer making $75k a year, with 6 weeks vacations, benefits, massive retirement plan, and 100% job security. I make no where near close to what other professions make when you factor everything in.

"You say you'd just become a landlord if you could not sell for the price you want, but as is often the case, it will likely prove 'easier said than done'."

The recent credit crisis has weeded out a lot of builders without captial. Most builders who are approved for construction morgages have a significant portion invested. Therefore, if they build a $600,000 their morgage is potentially only $300,000. That is why no one was giving away houses in Dec/Jan/Feb/March. Builders simply took them off the market. Most homes in the $600,000 range builders couldn't sell during the winter were renting between $2800 and $3200. That can cover a nice morgage. However, I must admit things were different in the Langford Condo market due to huge inventories. I've built 2 homes in the 1990's that I couldn't sell without taking a loss, ended up moving into one and save on taxes, one we rented while I got a job at Butchard Gardens. All things put aside, with less than 500 SFH homes going up in Victoria this year, even with a slowdown, what's that? 300,000 immigrants come to Canada every year...70% of them will buy homes at some point.

"Point being things have a tendency to revert to their relative lon-term, norms. The relative norm is for housing to be about 3-4 times annual average household income."

I highly disagree with this. In 1958 my father moved from Eastern Europe to Victoria. He worked in the foresty industry, bought a nice home in James Bay and paid it off in 7 years at 26. Things change.

I think in the long-term things will only get worse. Can we really expect the a person working for Ford in Ontario to be make $30/hour putting cars together when he counterpart for Hyundai is making $10/hour and his counterpart in China is making $1/hour.

As I said, if I was smart as some of the people on this board calling for a 20% + correction, I would be extremely rich.

omc said...

Before we beat up Marko over his wage, I have to say I don't disagree with him. I spent 10 years in construction and it is boom and bust. You have to really bust your butt in the good times and be prepared for the down turns. You do end up risking a bunch of money also.

I am now one of those overly educated proffessionals with my gov't salary right in the range you are comparing to and I wouldn't change places with him. Pension, stress, extended health, security and have you ever done any extended work outside in the bad weather?

That said, when I left construction in 99 houses weren't 1/2 the price they are now. Lots of room left for correction, a fair bit in the land price alone. If the market corrected 20%, and I am not predicting it will, you wouldn't build for a while while. Just like before.

Vic said...

"I think in the long-term things will only get worse. Can we really expect the a person working for Ford in Ontario to be make $30/hour putting cars together when he counterpart for Hyundai is making $10/hour and his counterpart in China is making $1/hour."



Exactly the point,the wages will have to decrease and as things get worse house prices can only go down,not up.

If the low level fruit on the food chain cannot afford/qualify for a mortgage what do you think happens to house prices ? The whole machine grinds to a halt and the daffodil picking jobs won't need immigrants shipped in,there will be many here already to do it as in past decades of real recession.


I believe you are missing the point that we are at the top of the business cycle and the end of the baby boom generation and immigrants did not prevent the last two boom/bust cycles from happening.

I am very surprised you haven't put anything away for a pension nor made any investments with all this steady work marko.

Roger said...

Update to my last post. I do not have a crystal ball and like most of you try to make educated guesses about future housing prices and interest rates. I ran a number of different scenarios (optimistic and pessimistic) and put them in a pdf file for easy comparison. Comments and feedback welcome.

Buy or Wait..

Roger said...

I have been reading an online discussion with FTB's who consider renting is just throwing your money away while paying a mortgage is building equity. This is one of those "half truths" that encourage people to take on debt. Sure owners build some equity but they throw a lot of money away on interest in the early years. How much? Here is one example..

Throwing it away on bank interest..

Marko said...

"Exactly the point, the wages will have to decrease and as things get worse house prices can only go down,not up."

I think deflation is highly unlikely given massive government stimulus. My point was that in the long term Canadians will have to accept lower incomes in comparsion to housing costs.

I live in 2500 sq/ft home with my wife and daughter; however, in my opinion we live in luxury. My cousin in Germany who is a doctor married to another doctor lives in a 1500 sq/ft house with two kids.

Prices in Victoria have doubled; however, two professionals can still afford a home in one of the best cities in Canada, which is one of the best countries in the world.

People here seem really focused on the run up in prices in the last 10 years. There could be a structural reason for them, not just a boom factor.

Things have changed, you can't graduate highschool anymore and go get a job the forest industry, buy a house a year later and pay it off by 30. These days many bachelor degrees mean nothing in the way of employement.

It is funny how much car prices have come down in the last 20 years compared to incomes...but no one is complaining about that! I can't believe how much I paid (in relation to my income) for a Corolla back in 1990.

Just Janice said...

I'm done with the Marko Mauling - but I will rebut that by saying that you said that there's about 50k profit in each house and you build 2 per year then that's 100k per year. Keep in mind that those who are employed as opposed to being self employed do not have many of the same advantages (ie. write offs)...but they do enjoy some other advantages. In the current climate no job is 100% secure, and your retirement is what you make of it.

Either way we seem to have wandered way off topic...

Marko said...

"there's about 50k profit in each house"

What you aren't factoring in is the amount of money I invest into each house and the risk I take.

The $400,000 plus of my own money that I put into each project I could get a 10% return in some other investment which wouldn't involve me working.

Therefore, how much am I really making due to my actual labour, less than 60k for about 2500 working hours a year.

Marko said...

PS, I wouldn't have more than $50,000 to invest into projects if it wasn't for my wife's nursing income.

Just Janice said...

Is it just me or does anybody else find it odd that the CREA does not publish house price numbers going back more than a couple of years? It's actually really hard to find national level statistics on average house prices going back 2000/2001....arrgggg...

I want to do an analysis: National Average 2000/2001 to 2008/09, Vancouver Average 2000/2001 to 2008/09, Victoria average 2000/2001 to 2008/09...

Average incomes for the same localities and the same times and average rents for the same localities and the same times....

And I can't find the data I neeed!!!! ARRRRRGGGGGHHH!!!!

Roger said...

Just Janice,

Have you tried CMHC? Some reports are free. Good stats click here..

Roger said...

Does real estate on Vancouver Island always go up?

Answer - pdf file..

msr said...

Marko,

What do you think of the quality of local construction of late? What do you think of construction quality in most of the illegal suites in Victoria?

Do you think that the work done is good enough or do you think most of it is a complete tear-out?

Vic said...

I think deflation is highly unlikely given massive government stimulus. My point was that in the long term Canadians will have to accept lower incomes in comparsion to housing costs. "


I think you must mean Victoria/Vancouver not Canadians. The rest of this country is mostly reasonable, we aren't. Funny how you can't fathom any type of correction if things are going to get worse, but I guess if I built houses for my basic survival I would not be able to think anything else.

I heard the European housing comparisons last 2 recessions and I still haven't seen this ever play out here unless it was some custom that some do by choice.

Roger said...

Looks like I reinvented the wheel with my Rent Vs. Buy Calculator. A local RE firm makes the decision quick and easy...

Rent vs. Buy Calculator..

Marko said...

"What do you think of the quality of local construction of late? What do you think of construction quality in most of the illegal suites in Victoria?"

I think new home construction quality is fair. Unlike 15 years ago, I have to be certified, I have to pay for a license, and I (and other builders) are forced to sell new homes with a 10 year warranty ($$). It is in my best interest to maintain quality. Most buyers are educated and look for quality. Buyers want hardwood floors, granite, quality kitchens etc. Tons of improvements have been made to the building code and tons of changes are coming up (seismic upgrades, new exterior vapor barrier mandates, plumbing, electrical). Unfortunately on a 2500 sq/ft home the new rainscreen requirements with the exterior vapor barrier with the seismic upgrades in framing will add approximately $7000 to building costs. This is $7000 you won't be able to visually see. Extra costs will be added to electrical and plumbing as well.

I think suites in Victoria were made legal a couple of years ago. I don't know if Oak Bay and Sannich have moved forward with that as well. I am not involved in renos, but most new suites are legal and have to be done to code to pass inspection. For example, any lot over 5863 sq/ft in Langford you can put in a legal suite up to 963 sq/ft.

I think suites are extremely important in Victoria. There is very low return on money renting new condos; therefore, without government help no one is going to build affordable condos specifically for renting when they can sell luxury condos for a bigger return. Therefore, I think the city should do more to encourage SFH suites in order to maintain affordable rents for people.

Just Jack said...

I think we could build affordable housing in Victoria. There are many ways that more rental suites could be added to Victoria.

Just one way, is to have the municipality allow a greater number of units for a rental building in relation to a condominium building. Then you would strata title bundles Not individuals) of suites say numbers of 3, 5, 10 units and sell them off to investors.

omc said...

Roger, your rent vs buy calculator you found isn't much less effective than some of those a I have found online. I have done the calculations and i need an appreciation of over 4% per year if the interest rates are only 5% to break even with my low rent. Some still say I will make a horrendous amount of money buying, even at a 0% appecaition in 3 years.

omc said...


A more balanced view on the market from the globe and mail

Just Jack said...

It does not matter anymore, I am out of the market. I will not risk my savings on residential housing. Very few quality homes come on the market. New house materials are offshore crud. And the pay back period is way too long.

In relation to monthly payments this is one of the more affordable markets to purchase in. The difference is that in this market you are leasing a home from the bank until your term expires. What your risking is your down payment if you have to sell in the next few years. The overage rent, taxes and repairs that you have to spend as an owner. And the possibility that you will outgrow the home you bought but can not move until you have paid down the mortgage. And if you have taken out a 35 year mortgage that will take a dozen years and one marriage.

Roger said...

If you are using the Buy vs. Wait Calculator you might want to download a new copy. I have updated the documentation.

One user was having trouble understanding the meaning of the green and red boxes on the output page. A green box around a positive balance means Buying Later is a better option. A red box around a negative balance means Buying Now is a better option.

The spreadsheet is for BC buyers that are subject to property transfer tax (PTT). If you are a first time buyer or do not live in BC just set the cell to zero or to an appropriate area for your circumstances or province.

HST is not included in the spreadsheet because the legislation has not been finalized and all the details have not been made available to the public. Perhaps HHV will have a post sometime on the impact of HST on real estate.

Also the sample output pdf is for illustrative purposes only. It is not a prediction of the future and just shows how the program works with the default parameters. Users are free to set the parameters to whatever they feels is appropriate.

Vic said...

hhv,

hope you don't mind me plugging my stock blog here. I have been tinkering with it for a few months now and though it's not where I want it to be, it's a start.

It's all about high risk junior stocks and all other market chatter,and yes, gold as well for those who are leaning that way. But I won't listen to the "soup line" BS so trolls beware, I will be ruthless.

You'll need a Gmail account as well for posting.

PS I am no certified investment pro so I take no responsibility for any losses on any posters recomendations.



http://theclosingbellcafe.blogspot.com/

Roger said...

Vic,

Look forward to reading posts on your blog...

Robert Reynolds,

What happened to your blog? Went to check out the latest on insurance and it was gone..

Just Jack said...

HHV

Don't get sucked in to the trying to educate people who have recently bought or own houses. They HAVE to believe they have done the right thing (it's all they have) and they will continue to fight you on it. Just get zen with it and let it go. Our time will come.

S2

HouseHuntVictoria said...

S2,

Cheers for that. I'm a defender of truth. Like a real estate super hero or something like that (at least in my own mind anyway!)

All kidding aside, that was a defend the absent exchange... no one should be given a free pass for a garbage attack on Roger's work. He put a ton of time into getting that calculator working right.

Just Jack said...

True, true.

Roger's work is outstanding and his bio is amazing.

Thanks for posting that Roger and thanks again HHV for your blog.

S2

GoneTooFar said...
This comment has been removed by the author.
GoneTooFar said...

I have been lurking on the sidelines but today was too much for me. The VREB has gone too far this time. Their latest ad in the Times Colonist is worse than the usual "spinorama".

Take a look at this scanned copy. I added my comments. Maybe someone will write a letter to the TC - like me or you. Please pass it around if you think the comments strike a balance to this ad.

VREB Ad in the TC

msr said...

GoneTooFar,

Good find. The whole ad is list of at-best questionable advice and at-worst downright wrong.

The ad suggests that most first time buyers take out 25 year mortgages instead of 35 year mortgages.

It even suggests that a house will appreciate considerably in 25 years. While I don't doubt that the curb price will go up in 25 years I very much doubt that this takes into account holding costs of the house. Besides, any return over 25 years will appear considerable.

Roger said...

msr said:

The ad suggests that most first time buyers take out 25 year mortgages instead of 35 year mortgages.

I tend to look at it a little differently. It is very carefully worded to specifically sidestep the mortgage amortization. They know full well that most FTB's are taking out 35 year mortgages and don't want to take away from that. But 35 years is a long time to make payments. So what they do is talk generally about 25 years from now. They could hardly say:

"If you are 35 now and just buying your first home you will likely be mortgage free when you are 70"

They also use the word likely in several places. This word was chosen because it means high probability of an event occurring but leaves some wiggle room if challenged.

I agree with the rest of the posters comments about the ad. Looks like VREB has stooped to a new low. If I was a real estate agent in Victoria I would be embarrassed about my board right now.

Just Jack said...

Breathe in, breathe out, Ommmm Ommmm
Zen man.

S2

Just Jack said...

Breathe in, breathe out, Ommmm Ommmm
Zen man.

S2

Roger said...

Scratching my head today about a phrase I hear all the time - "throwing your money away"

I rent my apartment and have a nice to place to stay in downtown Victoria. I pay my landlord money every month in exchange for the exclusive use of the apartment I live in. Seems like a fair exchange to me.

But homeowners sometimes say I am "throwing my money away on rent". But aren't they renting too? In their case they are renting money which they used to buy and live in their house. In the case of a 400K mortgage @ 4% with a 35 year amortization the interest amounts to $76,000 over 5 years or $1267 per month. This money is gone forever. Are they "throwing their money away on interest"

Or are we both getting the use of something for a fair price?

Just Jack said...

Roger, the same people that say your throwing your money away on rent have a lease car or two in the driveways.

Someone buying a high ratio 35 year mortgage (notice I did not say home) is just leasing from the bank for the first 10 years, before they start to make a dent in the mortgage.

Why not rent and save up the difference for 10 years and put a big downpayment down and amortize over 25 years.

When I was single and asked when I was going to buy a home. My answer was simple. When I turn 65 and I'll buy it with cash.

Now, I'm married with a child and my priorities are different. I want investments that will give me a steady income through retirement, University for the babe, and a home.

Last week end I was biking around Victoria and I end up taking a walk along Gonzales beach at about 7:00 in the morning. I looked up at the houses and I thought that it would be nice to have one of these water front homes.

Then I thought - No, I don't want one of them, because that would mean that I would be on the same beach each morning. We are lucky to live in Canada where the people own the waterfront and everyone can walk on any beach on any day.

Vic said...

Great viewpoint Jack, part of the upside to being a renter is you aren't stuck in one spot without taking a financial hit. I have moved 3 times in the last 9 years love the freedom and breathing room to do whatever I want. Having that ball and chain effect if I had bought a mediocre place in the last few years just to say I am an owner would have been a huge mistake.

I will wait,save,and invest til the place I truly want to be in for the next 30 years plus will be paid in cash,not interest to the bank.

Roger said...

Just Jack said:

Someone buying a high ratio 35 year mortgage (notice I did not say home) is just leasing from the bank for the first 10 years, before they start to make a dent in the mortgage.

Here is what those first ten years look like...

Mortgage Calculator Output..

We are presently at record low interest rates so at renewal time one can reasonably expect to renew at a higher rate. The historical average over the last two decades is around 6%.

On a 400K mortgage at least 150K in interest has been paid over 10 years. And the borrower would still owe the bank a minimum of 338K.

Just Jack said...

$150,000 in interest over ten years plus property taxes and repairs.

mmmmmmmmm
That would be a monthly rent to the bank of $1,250 and another cheque to your local city hall and home depot. Say $1,500 per month thats just gone for ten years.

Why pay your landlords mortgage payment - when you can pay the bank directly instead! Real Estate is an investment - to the bank that is.

But hey, its not that bad. Today's high ratio debtor is going to loose the home way before 10 years when their term comes up at a higher rate. Hence they've lost both the interest (to the bank) and the mortgage paydown (to the realtor).

Super investment

Its a win win for the bank and the realtor.

Vic said...

Interesting to see Edmonton's August sales dropping off and on track back to March buyers market levels.


http://www.edmontonrealestateblog.com/

Inglishmagor said...

I like the idea of breaking down payments to what you pay a landlord for rent on a home, and what you pay the bank for rent on their money.

When you look at the rent on money + expenses for a low end home as $1500 a month, the deal you work on your rent becomes the real focus for future security. We are two people in a one bedroom place we love paying mid $700 per month. The amount we save just to match the base line of a mortgage seems incredibly skewed.

There are two beliefs I am gambling our future on.
1. Over our life time it is better to own than rent.

2. Over the next 5-10 years the money we are saving each month will outweigh the money we would have put towards the principal.

I don't begrudge anyone that has bought a home and can afford it and life. I just don't feel safe with the level of our income it would take to purchase right now.

Inglishmagor said...

Looking at what has happened in the US I do have one question for Canadas real estate future. StatsCan indicates the level of Canadians owing their own home is the highest it's been since 1971. That is taken from the 2006 survey. I'd assume the level is even higher now.

If we are at a point where more people own a home than is the norm, could we not already be in an over supplied market and just not know it? Meaning if only 63% of the population can afford to own a home but 69% of people do, then there is really an extra 5% that will be pushed back onto the market when things tighten.

I would think in a bubble like we have things can only look great or horrible. As soon as that 5% that historically can't afford to own truly can no longer afford to own there can not be a flattening out of prices. The floor can only drop out.

This does not even take into account that the increases percent of people buying have bought at a time prices are far above historical norms.

Roger said...

I was surfing by Mish's site and saw an interesting graph.

San Diego House Prices..

Kinda reminded me of my graph with a time lag...

Victoria House Prices..

Naw - can't happen here.

Just Jack said...

It's possible that we have more homes than households in Canada. While 70 percent of Canadians own their home, there are also a significant amount of Canadians that own multiple homes. With prices this high, one would think that there is a shortage of homes that drives the price higher, however, in my opinion it has been the hoarding of housing that has caused this perceived shortage. The Hunt brothers in the 1980's hoarded silver and drove up the price, eventually they could not continue buying silver and the price of silver crashed. Any market that has been manipulated by hoarding has collapsed and my opinion this market is no different.

When the stock market crashed in the early 1990's people ran from the stock market to real estate. These are the same people that have hoarded real estate. And just like the stock market, when the real estate market falls, these same people will run for the exit.

The population of Greater Victoria, at some 350,000, is too small to support these prices. Cities with populations of a million and more, like Ottawa, Calgary, Montreal have lower prices that we do. Our high prices are actually stifling employment. Because although our prices have increased the number of sales has dropped considerable from the height of 2007 sales. Which means, less fridges, stoves and carpeting and people to install them. High prices actually hurt our economy. Years ago, I joked that eventually house prices in Victoria will reach a billion dollars - but only one house a year will sell. An over simplification on my part
but things seem to be going in that direction.


Unfortunately, when you live in a bubble you can not see outside of the bubble.

Robert Reynolds - GBA said...

Roger said...

Robert Reynolds,

What happened to your blog? Went to check out the latest on insurance and it was gone..


It's still around I was mucking with it right before going on vacation for a week and I broke it :( I didn't have time to fix it before I left.

it will be back Monday

Roger said...

Thought readers might find these interesting...

Historical variable & fixed mortgage rates..

Effect of rising rates on 500K mortgage..

PainInThe said...

HOLY ZOWIE! Loving that interest rate chart, Roger.

Watch the principal on the loan DECREASE year after year... will that continue on for the life of the loan?

The longer you have the house, the LESS equity you have as long as rates keep going up?

Or does it eventually stabilize once rates level off?

WOW.

mr4am said...

Inglishmagor,

The other side of the coin is that the more people that own homes in Canada, the greater the pressure on government to not let the majority of people go broke (upside down on mortgage) overnight, and in short they may continue to intervene to do so... although this can't go on forever (I hope), and in today's world, our economy is globalized, so a sneeze in one corner of the world can bring about a tsunami of worry that will trump propping up the Canadian majority.

In regards to that supposed 5% of excess buyers, the interesting part for me is that when they sell due to financial stress, that 5% will determine the house asset value for the remaining 63%, and that's where the snow-ball effect can come in.

Mr.4AM

Roger said...

PainInThe,

You may have been misreading my chart. The left column shows the results at the end of 5 years with a 500K mortgage at 4%:

Total Payments to date: 132,240
Principal paid off: 36,504
Interest paid to date: 95,736
Outstanding mortgage balance: 463,496

In 2014, the outstanding balance is then renewed for another 5 years at whatever rate is available at that time. Rates for 5 to 8 percent are shown in the table. Let's say you think the five year fixed rate will be 6% at the time of renewal. Here are the results in 2019 after 10 years of payments:

Total Payments to date: 297,660
Principal paid off: 69,092
Interest paid to date: 228,568
Outstanding mortgage balance: 430,908

It is interesting to note that only 23% of the total payments went towards reducing the principal on the mortgage. The other 77% was "thrown away" on mortgage interest.

This shows the folly of taking on 35 year mortgages without making extra payments.

Robert Reynolds - GBA said...

My blog is back and with new posts. It can be found at its new address

http://canadianlifeandhealthinsurance.blogspot.com

and still at the old

http://hmrinsurance.blogspot.com

I broke it by accident right before going on vacation and didn't get a chance to fix it.

PainInThe said...

Ah thanks for the elaboration!

Art Vandelay said...

You have no clue whatsoever.

Dual agency means equally bad representation for both parties. But go ahead and save that mythical $2K if it makes you feel better.

The seller lists with a realtor and in that listing agreement the commission is set. Whether you bring your own agent or go the dual agency route doesn't change the commission that is owed.

Shanny Stewart said...

If you are a broker, you have two choices. First, you can reject my point of view and defend the status quo; this should work for a few more years. Disruptive innovation always starts from the edges of an industry and right now it surrounds you, but has not yet penetrated the thicket of regulations intended to keep such innovation at bay.

- Shanny@Plateau Natura

Rudy Baer said...

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