I get this question every day from every buyer looking to enter the market. It is a question that is very tough for one person to answer, although I suspect that the answer to this question is, “YES!”

A comment in a recent newsletter by Alan Long, President of Mandate National Mortgage Corporation was, in my opinion, spot on. I am reproducing it here for your reading:

“As a lender in Vancouver for 25 years, I have experienced three major real estate cycles / corrections. While no one can predict when the market will slowdown or downturn will start or when the upturn/reversal commences, the common phrase uttered by most investors/developers while the bull market continues is “This time it is different.” Certainly the current up cycle is different in duration and strength due to factors such as demographics, strong employment and robust construction related to the 2010 Olympics. However, there is always a “Tipping Point” whereby the overall market psychology slowly begins to change and the supply and demand economics once again comes into play. This can be initiated by the movement in interest rates, overbuilding or prospect of inflation (i.e. rising food and energy prices).

As Buyers gradually become priced out of the market, demand slows down as they wait on the sidelines. In the meantime, developers continue to acquire land for future subdivisions, houses and multi-family projects. Eventually, there becomes an over supply on the market and the game of musical chairs begins. As of June 30, 2008, the chatter I am hearing from the developers and investors is the downturn or softness has begun to lower the list prices of their building inventory as the traffic diminishes; are vacation trips and free cars to buyers soon to follow? So the downtrend commences and no one knows how much or how far the correction will fall or continue. Lenders now become extremely cautious and either reduce their loan commitment, increase the pre-sale requirement or simply elect to cease lending until they feel comfortable with the market again.”

<End of Article>

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Alan does a very good job of summarizing exactly what I am hearing from my investors, builders, and developers as well. The market IS softening. In fact, if you has a realtor to pull the number of sales of condos in the downtown area over $650,000 in the last 3 months, you will be shocked to see that the number is ZERO (with one sale pending as I type this). Last year at this time the inventory was “flying off the shelves” and lenders were happy to extend. Then the sub prime crisis really hit full gear in the US and we started losing some of the US based lenders, financing tightened up, lending programs were repealed or cut back, and we are where we are. In the words of a local (now departed) sports star, “it is what it is.”

And what that “IT” is, is a market slowdown. Now this is not a scare column telling buyers to run for the hills, but rather to use their due diligence, shop around, ensure they are buying prime real estate in a prime area that they intend to live, and in the long term everyone will continue to be fine. If you are a buyer and a flipper, this is definitely a poor time to jump into that game. If you are a buyer considering buying a first home (key word: HOME) then this is a great time to cherry pick some real estate that has declined in asking price and live there for a few years and reap the rewards that home ownership provides in the long haul.

According to RBC Economics, slower demand for housing is going to reduce the growth rate of prices from 12% last year (and 18% in 2006) to a mere 8% this year. However, that is still 8%!!!! Think about a $400,000 condo appreciating by 8% and you have a capital gain of $32,000 happening without doing anything buy making your mortgage payments.

IS THIS THE RESULT OF THE US SUB PRIME DEBACLE?

This is another question I take all the time. The short answer is, “yes” but not in the way may people (including the mainstream media) keep talking. Canada did have a sub prime mortgage market, but we never threw prudence and common sense out window like several US banks did. Even at the height of the Canadian sub prime market, the market penetration was still (I think) only around 5% and expected to grow to 15%. Instead, the US sub prime crunch happened, and as a result we either lost the sub prime lenders, or they changed their coat to that of a “Prime” or “A” lender and offer essentially the same product as the banks. The market is being driven down by a couple of related factors:

1. Lack of confidence in the prospective buyers as they see the horror stories coming out of the US and thus the number of buyers is reduced as people elect to wait on the sidelines.

2. Lack of money available for higher-risk (sub prime) clients. This was money (and lending programs) that did exist before, but is no longer available and therefore the number of buyers is reduced.

3. Tightened lending criteria at the major banks and “A” lenders. Even the safest, soundest, rock solid clients face tougher guidelines and more stringent documentation requirements. This further eliminates the number of eligible buyers.

The common thread? A declining number of qualified buyers.

With the announcement that 0% down mortgages and 40 year mortgages are going to disappear, what conclusion can we likely draw? That this will FURTHER reduce the number of qualified buyers. As the number of buyers (demand) declines, and the number of properties for sale (supply) increases, we have a two pronged attack on home prices.

Bottom Line: Real estate isn’t going anywhere. It isn’t going to drop off the investment map, and it isn’t going to be a bad long term play no matter what the market does. If you intend to buy and live in a place for a few years (I would suggest a 5 year plan) then you will, in all likelihood, be better off in 5 years than you are today. However, if you are on the fence about purchasing and not sure that your financial situation (or relationship situation) are solid enough that a 5 year plan is feasible, then I would recommend waiting until you are more confident in your situation.

Once again I am re-producing an article from the Vancouver Sun for your reading pleasure with my commentary after it. It was published in the Vancouver Sun on June 23rd, 2008 under the title, “JOINT HOME OWNERSHIP OPENS UP SOME PITFALLS”

RELATIONSHIPS: Get a pro to set terms down on paper

By Ray Turchansky for Canwest News Service
- Edmonton Journal

An increasing number of young people are entering the housing market by buying jointly with a friend or relative. Families banding together to buy a cottage or rental property has become another trend.

Statistics Canada reported that 70,000 young adults bought homes with a friend, sibling, parent, or other family member during 2006, a movement likely to continue as house prices stay high.

But while joint venture real-estate ownership can be highly successful, it can also be as treacherous as teaching a friend or family member how to drive a car. According to Investor’s Group financial planner Murray Pituley of Regina, the difficulty comes in separating the personal relationship from the financial one.

He said many co-owners don’t consider possible twists in life.

“What if one of the dies; what if one of them gets married; what if one of them takes a job transfer and moves out of province? You have to set out in advance what those what-ifs could be and try to document them into a co-ownership agreement. It could be a simple thing like who pays for some of the expenses.

“The best dollars on professional fees are spent up front to get things structured properly… sooner or later, things are going to have to unravel.”

Pituley said ownership structure is critical.

He said parents might have their name on the title and mortgage, but claim a child is the beneficial owner and entitle to the principal residence exemption. However, Canada Revenue Agency might argue that the parents bought the house to “flip” it and the children were little more than maintenance people, in which case the parents would have to pay capital gains.

“That’s where the legal advice comes into play. You can get similar-sounding situations with different tax results.”

In recent years there has beena rush to get into real estate, with a sense that prices always climb.

“If I were a parent helping a child get into real estate, I would be looking at where the market is at. Where did it come from and where is it expected to go? If you bought at the top end and you’ve got a high percentage of the purchase price mortgaged and the real-estate price drops, it’s something to be concerned about.”

He cautioned parents to step back and remember their own needs first.

“What happens if a child goes bankrupt or has a marriage breakdown or the parent wants a little extra to go on holiday or buy a car?”

How hands-on does a parent want to be, or need to be in the event of an overflowing toilet at midnight?

Getting involved in the purchase of a house for a child working or going to school in another city presents other problems.

“Sometimes it’s tough to separate business from family. If you have concerns about a child in advance, you probably shouldn’t go in and help them out with a house in first place.”

As for buying a cottage or rental property with friends, many articles suggest it be done through a corporation to reduce taxes.

“A corporation can’t have a principal residence,” Pituley said. “A corporation would make sense if it’s a real estate development and a business.”

The annual legal and accounting corporation costs might outweigh tax benefits.

<END OF ARTICLE>

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This article provides a very topical and unhelpful explanation of the risks and rewards of joint venture purchases. I have a number of people come to me, often advised by very adept and intelligent professionals, seeking to start a real estate empire through joint venture purchases. This technique DOES work, and CAN BE very lucrative. However, nothing with reward comes without a little risk in the investing game.

First off, what IS a joint venture purchase?

It is where two or more partners agree to purchase a property together. This can take the form of three applicants purchase a property and living in it, three people purchasing a property and renting it out, or, more commonly, three people starting a corporation, and the corporation buying a property for investment purposes. While this sounds great, and tax savings are always nice, there are very difficult consideration should one of the partners go (or already be) bankrupt, pass away, get divorced, sell their shares, disrupt the partnership, or any other manner of things. For this reason, a co-ownership agreement should be drafted by a lawyer BEFORE the contract is written to buy the property. Make sure that it accounts for all of these contingencies and how the profits (or god forbid, losses!) are to be spread around. Make sure it accounts for death, heredity, divorce, etc… If a spouse and a partner split, that spouse may have a claim on the partner’s share in the company (and therefore in YOUR investment!!!). These need to be addressed through legal counsel up front… BEFORE YOU WRITE A CONTRACT TO PURCHASE A PROPERTY!!!! Many people leave this until after the contract is written and then play “Scramble” to try and get a mortgage approved as they didn’t have their ducks in a row. Talk to me about what steps to take if this is your strategy.

Many times people will bring in a “capital partner” or someone that puts up the down payment (often from dubious or borrowed sources) and then the other partner(s) go on title and sign a contract alloting some of the interest in the property to the person who put up the money. This is sound in principle, but make sure the money and person you are contracting with has “clean hands.” If a contract agrees to something, and that something happens to be illegal, the courts will not enforce it and may turn it over in certain situations. Again, legal advise UP FRONT BEFORE YOU WRITE A CONTRACT TO PURCHASE is the key here.

All this being said, Joint Venture purchases DO offer the ability for people who couldn’t otherwise do so to get into a market that never seems to stop rising – although I suspect a turn downward is just around the corner if not already upon us!

Joint ventures also allow people to purchase many “doors” (properties) more than they could on their own, thus providing the illusion that they control more real estate than they really do. In a rapidly rising market like we have had for the past 7 years, joint ventures are a great option and many people have made a fortune using them. However, should the market go into a protracted slide, it is my personal opinion that we will see a lot more lawsuits and a lot less profits being spread around.

Bottom line: have an agreement in place to provide for all of life’s unexpected events. Have life and disability insurance in place as well. Deal with a broker knowledgeable in working with joint venture purchases (give me a call). The sky is the limit when we band together and the market rises, but the ground comes rushing up awfully fast when it falls.

So we get questions all the time about title fraud, how it is done, how to avoid it, and what the real risks are. I am going to reprint an article from the Vancouver Sun that explains a few issues regarding title insurance and then my commentary follows.

The article was originally published in the Vancouver Sun on June 20th, 2008 and was under the title, “CON ARTISTS SELL HOMES WITHOUT OWNERS KNOWING”

By Gillian Shaw
Vancouver Sun

When the annual assessment for Normal Gettel’s home didn’t arrive in the mail this year, he phoned the BC Assessment Authority.

“They said, ‘You don’t own the property any more,’ ” said Gettel, a printer who retired from his job at Pacific PRess in the 1990s, a few years after he had paid off the mortgage on his Richmond bungalow.

“I went to the land titles office. They pulled it up and said, ‘You don’t know the property any more.’”

“I said, ‘I hate to differ with you, but I didn’t sell it.’ ” The title told a different story. According to the property documents, not only had Gettel sold his property, assessed at $600,000-plus last July, but the buyer had also immediately put a $400,0 mortgage from CIBC on it.

The buy never showed up to claim the property.

The mortgage, at $2,600 a month, is in default, and Gettel can’t even pay his property taxes because, according to legal records, he doesn’t own the place.

So far Gettel, who is in his 70s and suffers from Chronic obstructive pulmonary disease, has paid his lawyer $10,000, and the case hasn’t even made it to court, although Gettel’s lawyer has filed a notice of pending litigation.

It’s all part of an elaborate scheme that has surfaced recently in B.C. in which con artists are attempting to sell homes without the owner’s knowledge, leaving the homeowner off the title but with hundreds of thousands in new mortgage debt against the property.

In the latest variation of the scheme in B.C., a would-be seller contacts a notary or lawyer to carry out the sale of a home.

A buyer, who is thought to be in on the deal, applies for a mortgage on the property and if the transfer is successfully carried out, the mortgage funds are paid to the seller. The buyer and seller disappear and so does the money, often leaving the homeowner to discover the ruse only when the bank notices the mortgage payments aren’t being made and comes looking for its money.

While such fraud is not new, title insurance company First Canadian Title said B.C. has seen a jump in suspicious cases this year. And a B.C. Supreme Court decision this month ruled that while a true owner could regain title to a property if it was fraudulently transferred, mortgages taken out on the property – even if fraudulently obtained – still stand.

In that case, a plaintiff asked for restoration of title, which had been fraudulently transferred to an imposter. The plaintiff also sought the removal of two mortgages placed by the fraudster against the property.

The courted directed land titles to issue a new title reflecting the plaintiff’s ownership. However, it dismissed the plaintiff’s action seeking cancellation of mortgages.

The latest cases have prompted an alert from the Law Society of B.C. to its members.

“As far as I’m aware there have been two or three attempts in B.C. in the recent past to perpetrate frauds of this nature and our notice was to be proactive in raising the awareness of the profession so lawyers could play a role in stopping the attempted frauds,” said Susan Forbes, director of insurance with the Law Society.

“In the cases we have recently become aware of, the fraud is happening at the level where there is an actual transfer of title; it is not simply a mortgage. A fraudster posing as an owner and conveying the property to another, who is a partner in the fraud.”

Gettel has been told someone claiming to be him showed up at a Surrey law office to sign the property transfer papers.

The property transfer lists the market value of his home at $607,600.

The next line, “consideration” – the transfer price – reads: “$1.00 AND NATURAL LOVE AND AFFECTION.”

The person listed as the buyer, Oleg Balan, took out a $400,000 mortgage on the property, but that appears to be the last the bank heard of him.

Gettel received a copy of a lawyer’s letter to Balan dated February 1, 2008 in which a lawyer for CIBC Mortgages Inc. demanded payment in full of $403,034.95 plus interest at $53.18 a day plus legal expenses of $375. The letter gave notice that CIBC Mortgages “intends to enforce its security” on Balan’s property.

CIBC Spokesman Rob McLeod said the CIBC is in contact with Gettel’s lawyer and no foreclosure proceedings have been commenced or are currently contemplated. He said the RCMP is aware of the file.

Such schemes constitute a lucrative sideline to identity theft and have been carried out in other parts of Canada. A 90 year-old Ontario man ended up in court with a bank demanding he pay the $300,000 mortgage that fraud artists had taken out on his property, which was sold without his knowledge. A court eventually ruled that he didn’t ow the money.

Balan’s name has also surfaced in the sale of a Vancouver home that was recently blocked when real estate lawyer Ron Usher doubted its authenticity. In that case, another man was listed as the buyer, but the mortgage proceeds were to be paid to a company, VP Custom Trading Inc. that lists Balan as a director.

A man phoned Usher recently asing if he would act for his father on the sale of the family home. The father arrived at Usher’s office with all the details of a $665,000 offer on his east Vancouver home, for which he said he had received a $66,500 deposit.

The client gave hime a phone number, but Usher checked the address of the property and called the house.

“I’m Ron Usher, the lawyer acting on the sale of your house,” Usher said, recounting the conversation. “He said, ‘I’m not selling, and who are you?’ ”

The perpetrators had filed a change of address with the post office to intercept mail linked to the fraudulent dealings.

The would-be buyer in case also turned up as the buyer of a Burnaby property that land title records show was sold recently for $565,000. The buyer got a $518,670 mortgage on the property.

The BC Land Title and Survey Authority put a caveat on the property title after the notary who witnessed the seller’s signature on the deal notified the authority she has been told by police the person who signed the deal was not the true owner.

Gettel’s case also included instructions to the postal service to have mail redirected to a Burnaby address.

Gettel said he went to Richmond RCMP when he found out about the redirected mail, but said he was told it wasn’t something the police would look into. He said he has since talked to Richmond RCMP about his case.

Sgt. Susan Green, of the B.C. RCMP’s commercial crime section in Surrey, said the RCMP can’t release any information about specific investigations.

Ian Smith, director of land titles for B.C. and registrar in the Land Title Survey Authority’s New Westminster land title office, said such cases are very rare in B.C., but there had been several similar attempts in 2003 and 2004. This year there have been about five others that appears linked to the same perpetrators.

Smith said B.C. has safeguards in place to protect property owners from title and mortgage fraud.

He said B.C. property owners are protected through an assurance fund that compensates them if they are deprived of their title either because of an error in the administration of the land title system or through identity theft and fraud.

“With respect to the mortgage, if it was proved that it was a fraudulent mortgage as well, the bank would be left holding the bag.”

Usher also said he doesn’t know of any cases where the victims lost money in paying off mortgages that were fraudulently obtained.

“I have never seen anybody in all these cases in Ontario – and certainly I’ve heard of it here – basically an innocent owner having to pay the mortgage of the fraudster.

“It gets solved in some way. What the lawyers are arguing about here is what is the right process.”

<End of Article>

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Ok, there are several things that are mentioned here that should be noted:

1. In many cases the properties were clear title homes. By having a line of credit or something else already registered against your property, even if it is has a zero balance, makes this type of fraud more difficult. Why? Because it adds yet another level of oversight to the process of transferring title. A lawyer would have to pay out a mortgage, or line of credit, and it would require an additional step in the process. This is by no means a guarantee to avoid fraud, but having a mortgage of line of credit registered against your property could alleviate a clear title home being transferred.

2. This is primarily happening in Ontario, but there ARE several instances of this occuring within BC.

3. The redirection of the mail is a key in these frauds. For this reason, try and go paperless where possible with email statements and email correspondences with lenders as this is much harder for fraudsters to redirect.

4. Usually the fraud is caught by simple diligence. If you haven’t received your property tax assessment, but your friends and neighbors have, don’t just let it slide. Look into it! Find out what the delay is. It could be that your mail is being re-directed.

5. Shred all important paper before recycling or destroying it. Why leave free information around for fraudsters.

6. If you are purchasing a home, get Title Insurance and make sure it also protects YOU and not just the lender. In most cases title insurance will only protect the lender from fraudulent transfer unless you specifically request it to be set up otherwise.

These are the basic tips that can help reduce the chance, although never eliminate it, of losing your home due to fraud. As the fellow in the article mentions, there is no known cases of a person having to repay a fraudulent mortgage, but the devil is always in the details, and the chances are that it could be very expensive during the interim while lawyers are sorting things out. Expect to pay some legal bills, at least up front, until money from the assurance fund or title insurance company kick in.

Although we cannot eliminate fraud entirely, these steps will make you a little more secure in the fight against it.