I read an article today talking about the fact that Canada is facing the lowest inflation in 56 years, but analysts did nothing but yawn at the news. They claimed that energy costs were artificially driving the inflation numbers low. At the same time, every realtor I deal with calls me with a new set of clients that are going into an offer where there are multiple offers, and they are asking if the clients can write “subject free offers” without the financing clause so that their offer is more attractive to the seller.

What is going on? This type of crazy manic behaviour by buyers hasn’t been seen since the summer of 2007 (the height of the real estate peak), and it’s scaring me.

I think buyers are getting caught up in the “real estate never goes down” mentality that gripped the city of Vancouver from 2003 – 2007, and I think those same buyers should talk to people that bought from 2007-2008 and see if these 20% over asking price offers make any sense.

A couple of examples:

One of my well-to-do clients was looking at a fantastic house at $995,000 in Vancouver. It contained two suites that generated $1,950 of rental income in addition to the main floor that he intended to occupy. $995,000 seemed like a reasonable price, but he got word of multiple offers, and asked if he was pre-approved to $1.1M in the event that the bidding went higher. With that amount of rental income potential in addition to living space, it was likely it would go beyond asking price. So, what do you figure it went for?

He backed out at $1.1M and the place eventually sold for $1.2M… a full 20% over asking price.

TWENTY PERCENT!

Think about that for a second: 20% over asking price is downright silly, in my opinion.

“But with the rental income, it’s so much more affordable!” people yell at me.

Sure it is. With today’s interest rates a LOT of properties look affordable. However, if the borrowers would do the math at 5.50% and 6.50% (rates that were here only 1 year ago) they would see that when their term expires, this property might not be so affordable, and hence, not so valuable.

Now, I’ve been criticized by other brokers for being to “demand” focused. The truth is, I AM demand focused. While supply always plays a roll, it is NOT supply that is driving this market. It is crazed, manic, emotional buying by borrowers that are being egged on by the media which keeps saying that the “Canadian House Market is Back!” and no one pays attention to the fact that the stats used by the media are WAY out of date. By the time the mass media hears that the market is heating up, it’s usually WAY too late to get into that growth sate. Otherwise, wouldn’t everyone be doing it? Of course…

So, costs of living (aside from housing) are falling, interest rates are low, costs of all goods are falling, interest rates are low, energy prices are falling, and interests rates are low… anything sound odd about this? The Bank of Canada has their foot on the monetary pedal, and STILL prices of everything in the country seem to be falling EXCEPT real estate.

We are faced with two possible scenarios:

1. Real estate is somehow still undervalued (despite record low interest rates, and a meteoric rise in prices in the past 3 months)

2. Real estate is overvalued, but that historically low interest rates are making it appear cheaper than it is (or cheaper than it will be in in 5 years when most mortgage terms expire)

What appears most likely to you? That $1,000,000 for a house in Vancouver is “fair market value?” or that things are starting to get away from reality again?

“When the average family cannot afford the average home, trouble will follow!” I’ve been screaming this for 2 years, and no one listened until January-December when the pain was being felt. Now, all signs point to over-valuation again, and buyers are lining up.

If I could find a way to “short” the Vancouver real estate market, I’d do it in a heartbeat. Unfortunately, it’s not that easy.

Until next time, happy investing!

p.s. I’m getting out of this city for a week to get my bearings and see if the real estate market looks any better up in Alaska, and there will be no updates during that time. In the interim, read Garth Turner’s blog at http://www.greaterfool.ca Garth is a communicator, author, lecturer, columnist, TV personality, entrepreneur, MP and populist. Better yet, read his book “After the Crash.” Another source of great info that I read is the Daily Reckoning at http://dailyreckoning.com and these authors pretty much called the great collapse in 2008 and were crying for it for the prior 2 years during the run up in their book “Financial Reckoning Day.” Enjoy!

Many times I spend weeks, months, and even years working with clients to get them into a position to buy a home. They finally get an accepted offer, and I finally get it approved after countless hours of financial debt counseling, emails back and forth, lender discussions, and phone calls, only to have them get some advice from a friend that sends them into a tailspin of doubt.

How many times have I heard these statements:

“I was talking to my friend, and he told me that they did <insert solution here> and it saved them a lot of interest…”

or

“My mom, who was a realtor for 20 years, says that I should be taking <insert product here>…”

I counsel my clients that this type of advice, while always done with their best interests at heart, is usually uninformed at best. If I can think of a way to save a client money, closing costs, transfer taxes, or the like, I’ll certainly let them know! It’s my job! I have a fiduciary duty to act in my clients’ best financial interests, and I work very hard to do so. Also, this is my job. My ONLY job. I am aware of all the tricks of the trade for saving money, and if something is viable, I’ll pipe up and tell my client about it.

Here is an example I ran into recently:

I was working with some non-resident clients looking to buy property in Vancouver. The applicants were very solid: good jobs, good credit, and a solid net worth. When they were talking to friends, their friends (who were RESIDENTS of Canada) kept telling them not to do what I was telling them, and that they should be taking a different mortgage product. My borrowers then called me about it, explained the logical reason why they wanted that product (they were right!) but were disappointed and suspicious when I told them I couldn’t get it for them due to their residency status.

“But my friends said they’ve done this several times and their banker recommended it!”

To which I reply:

“Yes, but they are residents of Canada, and as such have greater access to many special programs, promotions, and favourable tax treatment.”

As non-residents there are many products and strategies that don’t apply simply due to tax treaties that Canada has with the applicants’ country of residence, and general conservativism of Canadian banks (how can they sue the borrowers if they are in Shanghai and not making payments?). When I explained this to the borrowers, they understood the limitations, and did some further research which showed dramatic differences in theirs and their friends’ financial situations rendering their friends advice, nothing more than a nuisance.

The bottom line is this: EVERY situation is unique. There are HUNDREDS of mortgage products, countless strategies and schemes to save money, and I guarantee I’ve seen every one of them in one form or another: both the good ones and the bad ones.  If I can see a way to save you money, and see a way that it can be done for someone in your unique financial position, I’ll be sure to tell you.

Even worse is the person whose friend says, “but ‘my mortgage broker got it done’ for me before…” when they are talking about ANY mortgage done before September 2008 when the financial markets were different and lenders has TOTALLY different programs available to them.

I hate hearing that: “… my mortgage broker got it done..” which says nothing towards providing proper, legal, appropriate advice that is tailored to the clients’ needs that saves them money now, and in the long term.

If I was getting some dental work done, I wouldn’t pipe up when my friend told me his dentist did his filling differently. After all, we have totally different mouths and problems!

The same is true for finances. When you engage the services of a professional mortgage broker, you are using them not just to get the best rate, but to provide unbiased guidance and well informed advice as to what the best way for you to proceed is given your UNIQUE FINANCIAL SITUATION.

Beware the armchair critic… or worse, someone providing advice that has never bought and sold real estate.

Given that rates were at the lowest point EVER back in May/June (around 90 days ago in some cases) several people are starting to face their pre-approved rates expiring. Today’s rates are around 0.50% – 0.75% higher than they were previously so, naturally, clients are asking me if they can extend the pre-approval period.

The answer: No.

The bank gives you 90 or 120 days (depending on the bank) where they will hold the rates for you. If rates fall, you get the lower rates. If rates rise, you get the lower rates. They put you in win-win situation. However, they will not extend that period of time by even ONE day.

So, if your broker tells you that you have 90 or 120 days to find a place, or for your rate to be held, you will need to actually close on the transaction by that date, not just write an offer.

I want to write this out again because it is important, and a cause for confusion amongst applicants regularly: you need to CLOSE (money changed hands) by the rate expiry date on your pre-approval, not just write an offer.

Notice that I didn’t make any mention of “possession” in that sentence. Typically, for example, completion will be on the 1st of the month, with possession on the 2nd. It is the “completion date” that matters for your pre approval. Many times, people complete on, say, the 1st, and don’t take possession (get the keys) until the 15th of the month. This can happen for a variety of reaons: have to honour their current lease, trying to close quickly to preserve the rate but the sellers don’t want to move that fast.

So, talk to your broker and realtor (they should be a pair that works together) about setting the completion date within your pre-approval rate hold period, and then set the possession accordingly. It may save you tens of thousands of dollars to take the time and go through the effort.

Questions? Email me directly at smith.rowan@mortgagecentre.com

Thanks for reading!