I found this article in the Vancouver Sun last week, and felt that it does a good job of explaining the sentiment that I am feeling in the market as well. Enjoy the Read!

It was published in the Vancouver Sun on February 11th and was written by Derrick Penner

I’m not entirely sure if the conclusion that “now is a good time to buy” is synonymous with “prices will rise” but that seems to be the thrust of the article. I’m not so sure myself, and despite market sentiment turning more positive, it’s tough to say prices will rise. I personally don’t think they well as offers continue to come in FAR below asking price in many cases.

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VANCOUVER — A growing number of British Columbians think this is a good time to buy a home, though most say it isn’t a good time to sell, a new Ipsos Reid poll has found.

The poll found that some 71 per cent of respondents said it is a somewhat good or very good time to buy real estate.

In November, only 60 per cent of respondents told Ipsos Reid it was a good time to buy.

In the latest poll, 82 per cent said now is not a good time to sell a home.

Hanson Lok, senior research manager at Ipsos Reid in Vancouver, said as market conditions improve for buyers, there also seems to be a growing number of British Columbians gathering on the sidelines to contemplate buying new homes.

Three in 10 respondents said they were considering a purchase in the next two years, up from 20 per cent when the same question was asked in November.

“We are seeing a greater number of first-time home buyers in particular looking to take advantage of more affordable homes, incentives from the government and lower costs of borrowing,” Lok said in a news release.

The new poll also found that British Columbians’ expectations for falling prices have been muted since November.

While the B.C. Real Estate Association has forecast price declines of 13 per cent in 2009 and Canada Mortgage and Housing Corp. is predicting drops of around 10 per cent in Metro Vancouver, only 42 per cent of respondents to the recent Ipsos Reid poll said they expected prices to be lower 12 months from now.

That is down from November, when 57 per cent said prices would be lower a year later.

Across the Lower Mainland, including Metro Vancouver and the Fraser Valley, respondents’ expectations were for a further 2.3-per-cent decline in prices.

Across the rest of B.C., respondents believe prices will drop another four per cent.

Statistics Canada reported new-home price data for December showing that in Metro Vancouver, prices had fallen 2.3 per cent from the same month a year ago.

Vancouver’s price decline was the fourth steepest among cities on the downside of their cycles following Victoria, Calgary and Edmonton, which saw the steepest year-over-year drop of 8.2 per cent.

Victoria’s decline in December was about three per cent from the same month a year ago.

Nationally, the housing price index declined by one-tenth of a percentage point from November to December, which weighed on gains made in the measure over the year.

The national HPI for December was up 0.4 per cent compared with the same month a year ago.

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Portable Mortgages. Along with Assumable Mortgages, present a lot of confusion as to where they apply and what savings are really available by using them. This article will cover off the portability option, and its restrictions.

First, a portable mortgage is best described as your mortgage as luggage that you carry from property to property. As long as you don’t need larger luggage to outfit a larger home, it works wonderfully. Any deviations from this complicated analogy, and portability doesn’t help too much.

Portability in a mortgage allows you to take your current mortgage, at current rates, and transfer it to another property. So, for example, if you have a condo worth $300,000 and a mortgage of $200,000 and you sell the condo and buy a larger one, you can transfer the mortgage to your new property that you are buying. You will get to preserve the rate, amortization, and term of your mortgage all without paying a penalty to break the term. In times of rising rates, this is a great option as you get to preserve your old lower rate without penalty.

However, if you are buying a larger or more expensive property, and require a larger mortgage, then portability’s benefits become murky. For example, if you “port” your mortgage to your new home, but it is $500,000 you would be short $100,000 from the sale of your old home. Where does this $100,000 come from? Either you have to have it in CASH (savings of some sort) or you have to borrow it.

Here is where things get confusing. If you are paying 3.75% on your old $200,000 mortgage, and you need another $100,000 but rates have risen to 4.75%, then what rate are you paying?

The answer: it depends on your lender.

Some lenders (not many anymore) allow you to do a “blend and increase” whereby you get the new dollars at the current rates, but keep your old dollars at the old rates. This results in some “blended” rate in between the two. Knowing which lenders allow this and which don’t is difficult and an ever-changing piece of information that you will require a mortgage broker to assist you with.

If your lender allows blends and increases, then you are fine, right? Maybe not.

There is a further complication: what is the amortization length of your mortgage left? If, for example, you originally took a 25 year term, and 2 years into the mortgage you need the additional dollars, that leaves only 23 years amortization. If you can’t “qualify” with your bank for the dollars at the short amortization, then you can’t do the blend and increase. If you can qualify, then you don’t have anything to worry about, but your payments will be higher than they need to be.

A further option is a “blend and extend” whereby you get a blended rate between new and old, and extend your term. In some cases you can even extend your amortization back out to 25 or even 35 years. Most lenders USED TO allow this, but in this tightening market, many are not doing blends and increases, blends, or blend and extends. You have to talk to a qualified mortgage broker to determine who is, and who is not doing ports and blends as discussed.

So how useful is portability? In my opinion it ranks right up there with assumability, which falls in the “nice, but not that great” category of mortgage “frills” that are available.

It is rare that a client can do a straight port without needing more money, less money, or a longer amortization. And with rates falling through the floor, and banks taking a beating everywhere, look for further curtailments of this program as banks try to capture profit through enforcing penalties on their clients.

Happy investing!

In this time of historically low interest rates, with prime rate constantly descending, many clients have realized that their mortgage is at or below prime rate. Such rates and products are no longer available, and those mortgages that do exist have an intrinsic value to them.

Most mortgages are “assumable” meaning that a qualified purchaser can take it over from a person selling their property. While this is often touted as a great product and great ability with the chance to save lots of money, the difficult practical application of it makes it a “who cares” option, in my opinion.

In this article we are going to review how assumable mortgages work, and when they DO actually help. They ARE helpful, but only in very isolated situations.

So what is an assumable mortgage? The mortgage can be transferred from a seller to a buyer and allow the buyer to retain the same terms, rate, and amortization without facing a penalty. Just the ability to avoid a penalty is helpful, but if rates have risen, preserving the original rate can be a huge cost savings for a buyer that makes a particular home financially more attractive than others.

For example, if a house is for sale for $400,000 with a $300,000 mortgage at prime – 0.75% (a product widely available in the past, but not any longer), this yields a net rate of 2.25% (!). Clearly, if there are two houses, with all other things being equal, but one has an assumable mortgage with such a low rate, this mortgage has a value. In fact, in times past, it was not uncommon for clients to sell their house with their mortgage for more than market value! However, we haven’t really seen this for several years because it made no sense to “assume” or “take over” someone’s mortgage. Well, times have changed, and with many mortgages out there at prime – 0.75% (2.25% today) or prime – 0.90% (2.10%) that was offered recently, buyers are looking to assume those mortgages to take advantage of the lower rates. The best rates available today on similar products are at 3.80% to 4.00% meaning there can be a huge savings if you can assume one of the existing mortgages that are no longer available.

In practice, I’ve never seen this work properly, and here is why:

Let’s continue our example above, with a $400,000 selling price and there is a $300,000 mortgage at prime – 0.90% (2.10%). The buyer asks if the mortgage is assumable, and the seller says, “yes.” It sounds like a match made in heaven.

However, the buyer has to assume the mortgage as it sits. Banks won’t give more money out at the old rates, so the buyer will need to have the $100,000 of cash down payment in order to assume the mortgage plus closing costs also in cash. You cannot increase or decrease the amount of the mortgage, or you are breaking the mortgage and will lose the rate an incur a penalty.  The fact that the mortgage amount can’t be changed is the single largest impediment to assuming a mortgage.

Second, just because a mortgage is assumable, doesn’t mean you automatically get to assume it. Far from it! You need to QUALIFY for it according to the issuing bank’s guidelines and criteria for credit TODAY – not the rules used to originally qualify for it. This means you have to show sufficient income, credit, and ability to pay the mortgage.

So, assuming a mortgage requires that you don’t change the amount of the mortgage, AND you have to qualify for it. Not very flexible, is it?

Some banks allow you to “blend” the rate. This means that if you need $350,000 but the existing mortgage is $300,000 then you get to keep the rate on the $300,000 but pay today’s rates on the $50,000 of extra money. So, in our example above, you would end up with a rate somewhere between the 2.10% on the $300,000 of assumed mortgage and 3.80% on the $50,000 of extra money.

Again, the banks don’t really WANT you to get the rate, so most of them have suspended blending of rates and either don’t allow it at all, or you have to qualify using “posted” rates (much higher) making it effectively impossible, or at best difficult, to assume the mortgage.

The time where assumable mortgages ARE helpful is in terms of family planning. For example, if two younger people buy a home and need their parents to co-sign for them, and then three years later want to have their parents removed from the mortgage, they can assume it from themselves and their parents. That sounds confusing. However, if part A, B, and C own a property, and A and B want to take C off, it is usually done by A and B assuming the mortgage from A, B, and C. People think of it as a “transfer” but this is usually an assumption in practice.

Another time transfers help is when there is a divorce and one person takes over the property from the other. In these cases, assumability is very helpful.

The bottom line: you still need to “qualify” according to current bank guidelines, and you can’t borrow additional dollars. This makes assumptions a great idea in principle, but difficult on execution.

The only time that assumptions really work out is when the person who is assuming the mortgage doesn’t need additional money, and can qualify for the mortgage just like anyone else.

Happy investing!

Not a week goes by that someone doesn’t call me and want to finance a large house that has a lot of rental potential, but can’t get financing. “The bank says it’s commercial, but it’s not!” they often exclaim, “it’s just a large house with carriage house in the back!”

My first question: “how many units are there in the property?”

Their answer: “Units? do you mean suites?”

“Yes”

Their answer: “There is five but two of them technically share a kitchen.”

In the words of Shakespeare, “Therein lies the rub…”

Most people don’t know what classifies a property as Residential or Commercial, but there are a few things you can do to sort it out ahead of time.

First off, commercial mortgages (with most banks) require 35% down, so when people hear a property is commercial (and the rates are often the same as residential – maybe better) they get upset because it means it will require a LOT more down payment. Most applicants that call me about a large house with multiple suites, often want to buy it with only 5% down in the hopes of acquiring a large piece of real estate without the large monthly payments coming from their pocket. Much better to have the tenants pay your mortgage, right?

If only it were so easy.

What are the differences between commercial and residential mortgages:

1. Commercial mortgages require a larger down payment – typically 35% (some exceptions apply depending on property)

2. Commercial mortgages require commercial appraisals which cost around $2,500 and take up to a month to get

3. Commercial mortgage usually require an environmental report that costs around $2,300 and takes around a month to get

4. Commercial mortgages often have higher rates – though some ultra low rates are available – property depending

5. Commercial mortgages are often NOT acquired by just walking into your local bank – talk to a broker

So those are the reasons people shy away from commercial mortgages. Commercial “anything” seems to cost a lot more than non-commercial: commercial flooring, commercial lighting, commercial fixtures, etc…

Here are a few things you can do to determine if a property is commercial or residential:

1. What is the zoning? If it is zoned commercial or multi-family, chances are, it will require a commercial mortgage

2. Where is it located and what are the surrounding buildings? More on this below…

3. Most importantly, if it is a property that people live in, how many units or suites are in the property. More below on this as well…

LOCATION

Location and surrounding are important. Most cities have a “city plan” for an area or a development plan and they know the way they want to properties to slowly evolve in the future. For example, the downtown east side of Vancouver favours high density, multi-family, preferrably low-income, housing OR commercial. However, some areas of Strathcona feature more industrial and heavy industrial properties with some old residential properties mixed in. So if you want to buy one of those old homes because the property has “development potential,” that is great! But you will likely need a commercial mortgage if all the surrounding properties are commercial / industrial. In other words, just the specific characterization of the subject property (the one you want to buy) is not the only thing that matters.

NUMBER OF UNITS OR SUITES

This is the NUMBER ONE type of commercial property I get inquiries about: a large house with 4 suites and a carriage house in the back with 2 suites (or some combination of 5+ suites). All but ONE bank say that anything over 4 units is commerical and requires commercial underwriting and approval (appraisal, down payment, environmental, etc…).

Why four suites? I haven’t the foggiest of ideas why they settled on that number, but all but ONE bank in the city says that if it has more than four units, it is commercial. Who is that bank / lender / trust company? I only disclose that info to my clients as that is the value that I bring to the table as a mortgage broker, and I won’t give away ALL the secrets!

The fact is, no matter how long you’ve banked with them, how good the bankers treat you, or even the fact they know you by name and you’ve had 12 mortgages with them in the past 10 years means NOTHING compared to the security they take on your loan. The property is KEY! Borrowers often overlook it just because there are lots of other houses on the street and they exclaim, “they can’t all have commercial mortgages!” And they may be right! However, the reality is a lot of those older homes were purchased many many years ago and are occupied by seniors who rent out large portions of the house in order to earn income and often have the properties without a mortgage.

So, bottom line: if it has more than 4 suites, it likely will be a commercial deal.

EXCEPTIONS

Sometimes, if a property is a large fourplex but has two illegal, or unauthorized suites, we can keep the unauthorized suites out of the equation and the lender will treat it as a residential property. I say “sometimes” because that depends heavily on th borrower’s taxable income as often the deal requires the additional income from the two illegal suites to make sense to the bank, and if they don’t include the suites, they don’t include in the income. Ergo, the client must make money from another source. This is a very tricky exception to try and ask for, and it requires the coordinated efforts of a willing lender, a solid applicant, and a good appraiser to make these deals work. I have the connections to make these possible, so give me a call if your house fits this description or is being treated as a commercial property when you don’t think it should be treated as such.

SHARED FACILITIES (Kitchens and Bathrooms)

Whenever a house shares facilities, usually lenders will call it a “rooming house” and those are possibly the dirtiest words in commercial financing right now. Rooming houses are the hardest properties to finance in the city, period. I’ve financed properties that had environmental disasters, oil spills, fires, chemical storage, mechanic shops, but I have NEVER had as much trouble getting financing as I have with a Rooming House. The reasons for this are more political than practical, and stem from the fact that most lenders “securitize” and sell off their mortgages. However, the buyers of these mortgages will usually only buy CMHC insured mortgages (government backed and guaranteed). We can thank the US Sub Prime market for making them so squeamish… When the mortgage isn’t government backed or “insured”  the lenders often won’t do the deal because they know they can’t “Securitize” and sell off the mortgage for a profit and then re-lend their dollars. This is a rather complicated, behind the scenes topic, but the main thrust of my point is that Rooming Houses are VERY difficult to finance.

I have worked on rooming houses with 32 rooms, 18 rooms, and 42 rooms, and the made sometimes $20,000 a month profit, even after the mortgage payments! To the buyer, it sounds like a great deal! However, the banks won’t do the mortgages so the rates end up being 14% (or higher) with massive lender fees and only available through private lenders. This wasn’t always the case, but the mortgage market, like the seasons of the year, changes in predictable patterns. When the mortgage market was taken advantage of (sub prime in the US) now the lenders have tightened up and Rooming Houses are a very very difficult property to finance.

Borrowers or applicants are often heard to exclaim, “but it will make $5,000 a month profit!” but when we work out the 14% loan instead of the 4.39% they saw on the TD website, it actually doesn’t work out so well. You usual need 50% down, lots of other assets, and a damned good broker to get these deals done. I have a lot of experience in this field as I have fought and worked on countless of these files and know most of the rooming houses in Vancouver by name and location.

So, if you are considering a rooming house, make sure to give yourself 45 days of “subject removal” time and make sure you have a huge down payment (35% MINIMUM) as this is the only way these properties are being purchased.

I recently undertook an exercise whereby I went down to the downtown east side in Vancouver, and took down the names and addresses of 26 rooming houses and pulled the title on those properties. I found SEVERAL lenders I had never heard of, and after doing some further investigation tracked down the actual people behind these companies and now am doing a mortgage with one on a rooming house! This list of lenders is one of my competitive advantages over other brokers, and if you know someone wanting rooming house financing, I am their guy.

Until then, happy hunting!

I came across this article in the Vancouver Sun this week and it predicted a 13% pullback in prices. Given we’ve already seen some 10%+ declines, this is bad news for home owners, but good news for first time buyers hoping to get into the market. The article is pretty good. Read more below.

It was published February 3rd, 2009 by Derrick Penner.

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British Columbia is tipping into a recession that will see average house prices fall by 13 per cent in 2009, rather than the nine per cent initially forecast, the B.C. Real Estate Association reported Monday.

Association chief economist Cameron Muir, in his forecast updated from last fall, foresees average prices falling to $396,600 in 2009, with overall sales declining to “levels we haven’t seen since the mid-1980s.”

Housing sales, according to the BCREA forecast, will decline nine per cent from 2008 levels to 62,650 sales in 2009 before bouncing back to 68,923 units in 2010.

Know-It-All Housing starts, Muir is forecasting, will plummet 45 per cent in 2009 to 19,000 units, with some possibility of recovery after 2010 as inventories of unsold homes shrink.

In the fall, Muir had forecast a nine-per-cent decrease in prices in 2009, but “that was before the financial meltdown and a significantly larger correction in equity markets,” he said in an interview.

“As well, we’ve seen the economy weaken and expect now the economy in B.C. will slip into a recession this year following Canada and the U.S.”

Muir predicts that B.C.’s recession “is going to be a bit more shallow, but it’s going to be a recession nonetheless,” and that is taking a toll on households, particularly potential homebuyers who are watching their net worths decline with shrinking property values.

However, the BCREA forecast depends on the overall economy shrinking by only half a percentage point in 2009. Other private-sector forecasts have estimated the contraction will be larger.

Central 1 Credit Union is forecasting the contraction of B.C.’s economy will be about one percentage point from 2008.

In December, Benjamin Tal, a senior economist with CIBC World Markets, told a gathering of mortgage brokers that since Canada’s recession was triggered by the meltdown in the U.S. housing market, Canada won’t begin climbing out of it until American real estate bottoms out and starts to recover.

The beginning of that recovery, he said, might not come until the middle of 2010.

In the BCREA forecast, Metro Vancouver is expected to see the second steepest drop in home prices in the province with an average price of $508,000 in 2009, down 14 per cent from 2008. Sales in the region are expected to decline 10 per cent over the year to 22,700 units, the forecast says.

The Kootenays should see the steepest decline in prices during 2009, some 15 per cent to $244,000, with unit sales down 10 per cent to 2,040.

Victoria average prices should decline 10 per cent to $435,000 in 2009, with unit sales to fall eight per cent to 5,680. Vancouver Island average prices should decline 12 per cent to $290,000 in 2009 with unit sales falling nine per cent to 6,200 sales.

“At this point, we don’t see any miracle recovery in the housing market,” Muir said, but he does see prices stabilizing in 2010, with a modest recovery in sales.

That recovery, he said, will be underpinned by factors such as government stimulus packages and increased consumer confidence as house prices become more affordable while mortgage rates remain low.

Muir expects that if his economic projections hold up, inventories of unsold new homes will shrink, triggering a rebound in new-home building after 2010.

If home sales and new-home starts increase through 2011 and 2012, Muir said, that should mean “prices not only stabilize but edge up again if we look over the next five years.”

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The past 7 years have seen the rise of many real estate “investors.” Any rising market will see many people enter the arena as they invest and attempt to make a living. This phenomenon is not new at all. However, the rising real estate market, and the fact that the market gave access to tremendous “leverage” opportunities saw many more “investors” enter the arena than other markets.

However, I want to clarify what a Real Estate “Investor” is and what a Real Estate “Gambler” is, and how they present themselves, and their investments, in a very different manner.

The most common form of investment that I have seen, is people buying pre-sale real estate. What is “Pre-Sale Real Estate?” many people have asked.

When a developer (typically a condominium developer) is building their structure, they will oftentimes PRE-SELL a large percentage of their units. This means they are accepting a price, at today’s market value, for their unit that will be built in the future. Usually, developers don’t pre-sell an entire building, but rather they pre-sell just enough of a building to allow them to complete construction and then sell the last units at the market value at completion.

For example, if a 100 unit condo building is being constructed, they may sell 65 of the 100 units as “pre-sales.” If we assume that this took place in June 2005, with a construction completion target of June 2007, we can assume that the value of the units will rise in that two year period of time.

So, if a unit was selling in June 2005 through the developer at $200,000, and a buyer entered into a contract with the developer on a pre-sale basis, this means that in June 2007 they can sell the unit for the then-market value. In the past 7 or 8 years, this was a license to make money. Many self-styled “investors” entered into many of these pre-sale contracts. Oftentimes, they benefited greatly in the rise of the value of the unit from the time they entered into the contract, to the time the unit was completed.

For example, a unit bought in June 2005 for $200,000 was often worth $350,000 in June 2007! Who gets this profit? If the unit was pre-sold at $200,000 then the BUYER gets the profit! Many times, pre-sales only require a deposit of 5% – 20% (depending on the project). So, it was possible for someone to put $20,000 (for example) on a $200,000 condo, wait 2 years, and sell the condo for $350,000. Thus only investing $20,000 and getting a $150,000 profit. This is a an annualized return of over 750% in just two years! Where else could you get these returns? The answer: not many places.

For this reason, many people were buying pre-sales assuming that prices will always be higher in the future. From 2002 to 2005 (with projects completing in that time period) it was almost a no-miss situation. Nearly any unit you bought at pre-sale would be worth a lot more when the building was built. In fact, many self-styled “investors” often bought the pre-sale and then sold the rights to the contract (on assignment) to another buyer at a much higher price. This meant they didn’t even have to close on the initial contract. They just got to ride the market higher and higher.

I saw many, many “investors” spring up during this period of time. They were “investing” in real estate by purchasing pre-sales and selling them at a higher market value. The truth was, they made a lot of money in a rising market, and they were very “lucky.” Yes… lucky… there is an old saying in investing, “a rising tide floats all boats,” and in this case, anyone that bought a presale from 2000 – 2005 was almost guaranteed to make money. It was often seen as a “can’t miss investment” (you will note I put “quotes” around the word “investment” every time I use it in the context of a pre-sale).

So, people got to take advantage of the rising market (at the expense of the developer that actually built the unit) when they entered into these contracts.

Well, now the market has changed.

Many of the units that people bought through a pre-sale are not worth the money they paid! Or, financing is not being made available to them due to the market changes. Never was this more visible than in the case of high-end condos (such as Shangri-la in Vancouver) where the cost per square foot rose from an already inflated $1,000 per square foot at pre-sale time, to almost $1,800 at completion!

With market changes, many units are not worth what people originally paid. So, if the unit was $250,000 in 2005, and it is now only worth $225,000, what happens to the shortfall?

Well, the buyer has to come up with it out of pocket, or risk losing their initial deposit (From 5% to 20% in most cases).

Several of these “investors” have contacted me recently, and asked for financing, and it simply hasn’t been available. This is the risk that buying by pre-sale presents. In some cases, it is a license to print money, and people end up getting properties in 2007 at 2005 prices, and thus get to keep the difference at the developer’s expense.

With the market falling, several people are just walking away from their deposits. Their logic is that they lose their deposit, but don’t have to buy the property at inflated prices. Recently, developers have been suing those buyers in an effort to recover the money they SHOULD have gotten.

Here is the logic: If you, the buyer, get to buy a home in 2005 and before even taking possession, sell it for 2007 prices and keep the profit (at the developer’s expense), then why should you be able to walk away from the deposit? If you get to benefit from the rising market, then you also shoulder the risk that prices may fall, and you may be faced to complete on a project that is worth less than what you paid. It’s only fair. I find it highly unlikely that the government will step in and save you if you walk away from your deposit. The contracts are written by the developer’s lawyer to ensure that if you walk away, and there is a loss to the developer, you will likely get to share in that loss (to be sued for it).

Now, every contract and every development is different, but if you face a pre-sale contract that is some 40 pages thick, plus a disclosure, you can bet that the developer is well protected from you walking away. Don’t expect them to be left holding the bag. You can’t have your cake, and eat it to (get to benefit from price increases, but walk away from loses).

I’m tired of running into people that call themselves “investors” when all they have done in the past few years is buy pre-sales, and benefit from a rising market that saw them do nothing, but put up the initial deposit. Typically, these investors have “tax efficient” income as well, where they declare little of these earnings and pay little taxes. The hallmark of these “investors” when they call me about their pre-sale they can’t complete on is they keeping asking me, “what will it take to ‘get it done?’” They never try and understand the process, the reason behind their difficulty, and instead, simply want to “get it done.” As a goal oriented person, I understand wanting to “get it done,” but as an investor, I also understand that it my job to look into the process, understand the risks, and learn about what I’m investing in.

True, there are many people that are very shrewd and have done very well in this market and through this pre-sale process, but there are equally many (if not more) people that have GAMBLED on this type of investment. Some have made money, but now, with the market softening (I prefer the word crumbling), they are being forced to complete on units worth less than they paid.

Where is the difference between gambling and investing? In my opinion, the difference between an gambler and investor, is in both their ability to complete the transaction (regardless of loss) and in the level of their study and due diligence in the investment as well as their understanding of the underlying factors that guide their market. Many of those “investors” would NEVER have gotten into those contracts if they did their due diligence and studied the market trends that were well established a couple years ago. However, many people will continue to benefit from pre-sales, and in this market, I call them lucky – just like the poker player that gets dealt a full house with aces high. Sure, it was possible, but was it LIKELY?

Before you enter a pre-sale contract, study the market trends, and FINANCING trends, as ultimately most people need financing, and it is financing that determines market direction.

Until next time, happy investing!

Many purchasers gasp when I tell them what their property transfer tax bill is going to be on the purchase of their new home. The amount is often staggering, and all for the pleasure of owning property in our fine province of British Columbia. In fact, people have been so surprised by it, that I have decided to write up an article on how to calculate what your tax will be, if it will apply, and if there is any way around it.

Note, this article is not intended to be legal advice, nor should you rely solely upon it when calculating your transfer tax on a purchase (especially when transferring amongst family members). However, it will provide the guidelines and a structure to guide your decision making process. Please consult with your solicitor or tax professional if you require a to-the-penny calculation or judgment as to your eligibility for tax avoidance.

HOW MUCH IS THE PROPERTY TRANSFER TAX?

The guidelines for calculating transfer tax is as follows:

1% of the first $200,000 of purchase price (before GST, if applicable)
2% of the balance of purchase price

So, for a $450,000 home purchase, the tax would be:
$2,000 1% of first $200,000
$5,000 2% of the Balance
$7,000 TOTAL TRANSFER TAX

WHEN DOES PROPERTY TRANSFER TAX APPLY?

Property transfer tax is applicable on all property transfers within BC. The only way to avoid it is to be a first time home buyer or be transferring to and from a parent (siblings do not apply). In order to qualify for the First Time Homebuyer Exemption, you must meet the following criteria:

1. The purchaser must be a Canadian Citizen, Landed Immigrant, or Permanent Resident

2. The purchaser must have resided within BC for 1 year prior to the purchase

3. The purchaser must not have owned an interest in a principal residence at any time, anywhere in the world

4. Purchase must be up to, but not more, than $425,000 (amounts up to $450,000 face a sliding scale – reduced amount – but still pay some of the tax)

5. The purchaser must occupy the property within 92 days of title registration (you always pay the tax on rentals)

So, if you meet these criteria, you can avoid the transfer tax.

CAN THIS BE ADDED TO MY MORTGAGE?

The short answer is “No,” but let me explain. The minimum amount you can put down is 5%, and if you are only putting 5% down, and do not qualify for the exemption, then no, you cannot add it to your mortgage. Why? Because this would be the same as putting less than 5% down.

For example, if you are buying a $300,000 condo and are not a first time home buyer, and are putting 5% down, this would be $15,000 of down payment. The tax would be $4,000. You cannot “add it to the mortgage” because you are already putting only 5% down. The $4,000 tax would have to be paid out of pocket. O,therwise you would be putting only $11,000 down. So you would need to have $19,000 available at the closing date. This would be the 5% down payment ($15,000) plus the tax ($4,000).

However, if you are putting 10% down ($30,000) then yes, you can “add it to the mortgage” but this is the same as keeping the $4,000 out of the down payment and only putting $26,000 down (with $4,000 kept aside for the tax). In other words, you need cash or equity. You cannot do a 0% down mortgage, and also finance the tax (unless you meet the criteria above).

Where this is tricky is if you are putting 20% down to avoid any CMHC fees. Sure, you can put less than 20% down if you want to “add it to the mortgage,” but then you will trigger the payment of CMHC fees. So again, you will have to come up with it out of pocket.

Bottom line: this is a cost that is not addable to the mortgage unless you reduce the down payment, and you cannot reduce it below 5% (and still get best discounted rates). If you are putting 20% down, and need to finance the tax, be aware that this will also result in staggering CMHC fees.

If this doesn’t many any sense, or if you want clarification of your unique financial situation, please give me a call at 604-657-6775 for a personal and direct response.

A colleague of mine passed this article on to me and I found it very interesting. With prices of pre-sales falling below what people paid for them, they are opting to simply walk away from their deposit. I had a client recently who put $20,000 on a $200,000 condo (10%) but the appraisal for the condo came in at $180,000. That would be similar to 100% financing, which isn’t available any longer, so he had to put an additional $9,000 into the deal. He decided to walk away from from his deposit rather than sink another $9K (which he didn’t have). He may be sued by the developer if this article is correct.

Frankly, I think he should be sued. The developer agreed to sell him the unit at $200,000 and he is supposed to complete. We all know that if the property had risen to $250,000 he, the buyer, would have gotten to keep the $50,000 profit even though the developer did all the work. Many people, self styled as “investors” have made a living this way for the past few years as the market has risen. They enter into the contract hoping prices will rise and they will earn a great return. Well, now the market has changed, and prices have fallen. Buyers shouldn’t expect that they can just walk away from the loss. The developer doesn’t get to share in the profits when prices go up, so why should you be able to walk away? Well, it looks like you can’t if this article is any indication. And so the fun begins…

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BY DERRICK PENNER, VANCOUVER SUN JANUARY 22, 2009

Maureen Enser, executive director of the Urban Development Institute, says the Morgan Heights lawsuit is the first case she has heard of a developer suing buyers who have walked away from pre-sale contracts.

One Metro Vancouver developer is suing pre-sale buyers in a project for trying to back out of their deals, which could be the leading edge of a trend, according to a property law expert, as buyers grapple with a real estate market where prices are falling and gains buyers were expecting have disappeared.

Amacon has filed suit against seven buyers for defaulting on their contracts to buy condominiums in its Morgan Heights development in south Surrey on purchases that were to have closed in early December.

In the writs of summons for those cases, Amacon seeks the forfeit of the buyers’ deposits and damages, which in the reading of lawyer Nick Preovolos, could be substantially higher, even if the condominium’s value has dropped by more than the amount they’ve put down.

“Walking away doesn’t solve the problem,” Preovolos said, because a developer can sue for damages, and damages would be defined as the financial difference between the current market value the developer could sell for and the price the buyer agreed to pay in his contract.

If a buyer put down a $25,000 deposit and the property sells for $100,000 less than the initial purchase price, Preovolos said the original buyer still owes the developer $75,000.

“It’s a serious liability for someone to pull out of a purchase,” Preovolos said. “They’d better have a good reason that they can argue in court.”

He added that a buyer’s inability to get a mortgage to complete the purchase because the property has lost value is not a reason that a court will accept.

Preovolos said developers are often reluctant to sue clients, because that can be damaging to their reputations. At some point though, developers will act to protect their interests if they start to risk substantial losses.

And with thousands of condominium units currently under construction across Metro Vancouver as property values slide in a slowing market, “my guess is we would be seeing more of these cases,” Preovolos said.

Amacon official Bob Cabral said the company would not comment on any case it is party to that is before the courts.

North Vancouver lawyer John Whyte represents one of seven buyers Amacon has filed suit against.

Amacon claims Whyte’s clients, Daniel and Jasbant McGarvie, defaulted on the purchase of a $445,000 condo in the Morgan Heights development when they didn’t complete the deal last Dec. 12 as specified in their contract.

And Amacon is seeking the forfeit of the $22,245 deposit they put down to secure the unit, plus other damages.

Whyte said his clients’ defence is that the couple have simply rescinded their purchase contract, as is allowed under provincial real estate regulations, because Amacon did not forward them all changes to its official disclosure statement for the Morgan Heights project.

Whyte said Amacon filed an expanded disclosure statement with the Superintendent of Real Estate, as it is required to do, but his clients did not receive the document, which contained significant new financial details about the project budget.

The McGarvies’ are now countersuing Amacon for return of the deposit, plus a $6,000 payment they made for a flooring upgrade.

Maureen Enser, executive director of the Urban Development Institute, said this is the first case she has heard of a developer suing buyers who have walked away from pre-sale contracts.

However, Enser does not believe stories of pre-sale buyers attempting to abandon their contracts and give up deposits will become rampant because there has been less speculation over the past couple of years.

More buyers, she said, have bought pre-sales because they want to live in the apartments and not because they expected to flip them at profits upon closing.

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