Kids with huge mortgages:be happy. Debt-free parents: worry

[This blog. I'm sure I read that a post a year was all it took to get a huge readership. Turns out it was once a day. I'm going to try one more time to get closer to once-a-"something closer to a day than a year". What better way to restart than an attempt to scare the bejeebies out of some of you? ...]

This article recently appeared in the Globe "Is it the right time to sell..."

For the better part of a decade, Lee and I have been unhelpfully telling people that all we know is that we don't know, and that a real estate market correction, while inevitable, is a crapshoot in terms of the all-important "when?" and "how big?".

If you haven't heard the rant at all or recently, it goes like this: On any given day I can find a well-researched article in the Report On Business by a very smart respected expert that clearly proves the market is going to crash ... now.  And about 3 pages before or after is an equally well researched article by a very smart respected expert proving that everything is fine ... relax.

Six or seven years ago I would have advised caution; I was not totally stupid or totally disrespected and I did have some middling expertise, and I was totally wrong.

Our current thinking is that whatever happens, whenever it happens, will be fairly gentle -- maybe a flattening rather than an actual fall.  But I could be wrong again ... the most worrisome point being that a lot of those smart experts now agree with that theory.

So why is this latest article worthy of note?  It suggests the same story:  real estate goes up and down over time, but over time the overall direction is up. It suggests there has to be a correction and maybe soon, but if you hang on you'll be fine.

But the author touches on an interpretation that I haven't seen talked about much, and which somewhat counters a fear that is being talked about all the time.

Younger folk are taking on massive amounts of debt to get into what may be a too-hot market. Danger Danger Danger!  Well, so long as they can handle an increase in interest rates without losing the house they will be fine in a few years, maybe a decade.  Hang tough and let that price curve get back to its historic upward run.

Meanwhile their baby-boomer parents think life is golden.  They bought a house back in the day for what is now their credit card limit. Now it's worth one or two zillion dollars. Once the last kid leaves for the last time and retirement is imminent, they can cash in on the 4 bedroom detached, buy the nice two bedroom condo and live the good life on the equity that is now a huge gob of cash in their investment accounts.

Financial planning types occasionally scare the crap out of their clients by noting the massive difference that a bust/boom in the first few years of retirement can make to the whole rest of your life.  A 10 or 15% drop in the value of your finances in the first year or two can be hard or impossible to replace if you aren't careful.

The point: If the equity of your house is important to your retirement years, you might want to lock that in rather than just waiting until your hips hurt and you don't like the stairs anymore.

Think about it as a regular investment. If you invested half your savings in a stock (Apple or Blackberry, take your pick based on your optimistic/pessimistic tendencies) and it doubled in a few years and you were getting close to retirement, would you hang on to it or take some profits and diversify a bit?

If that home equity is just gravy to pay for an extra cruise each year, then continue as you were and move whenever you are ready.  But if it is key to your envisioned lifestyle, manage it as the important financial asset that it is.

UPDATE: And CBC hopped onto this issue, but with a bit of an emphasis on Halifax and some other markets that may have already peaked and a few senior owners having an "uh-oh" moment.

Scuzzy Real Estate Agents?

Used to be that Realtors® alternated with used car salespeople for the low rung on the trusted-profession ladder.  But I have felt for several years that our industry has become much better.  Far from perfect.  But a lot better.  This morning it occurred to me, as I was "enjoying" the latest story of professional sliminess on the news, that among the more recent stories of misbehaviour I hadn't heard real estate mentioned for quite some time.

We have a Bitcoin (whatever that is) broker going bankrupt because they misplaced $465 million.  A Scotiabank "financial advisor" promised a conservative investor (who was actually an undercover reporter) a 30-40% annual return.  Googling "lawer jokes" gets 26,500,000 results.  And I have it on good authority that when medical professionals get together for coffee or beer the top discussion is how, in a busy and crowded operating room, Dr. Doodnaught managed to perform his repulsive acts of sexual assault.

So be careful out there.  Not just in real estate, do your homework until you have real confidence that the professionals you hire are capable ... AND TRUSTWORTHY.

If it's too good to be true …

Here is a CBC article with an illustrative article about a real estate fraud. Note that variations are more common than one might think. Renters, buyers, sellers should all take care.  Everybody wants a great deal, but you also don't want to find out you just fell for a softened version of the Nigerian Prince.

"Fake real estate ads prey on buyer desire for home deal"

A less expensive version occurred recently on our turf.  A listing of ours, word for word, showed up on a site flogging homes in foreclosure that you could buy for half of market value.  The actual home was on MLS and debt-free. The tease is to get people to subscribe in order to get the addresses.

Know who you are dealing with. And if it's too good to be true ...

Not All Junk is necessarily Junk

Why do you get all that crap in your mailbox from agents?

Because, for a rep to be in your mind for that day when you actually need real estate service, they have to do things that help you think of them at that critical time. Some of the big teams handle that by putting something in your mailbox virtually every week.  It may annoy you at the time, but they do it because it works.  Luckily, most of us can't afford to do that even if we wanted to.

When Lee and I hand-deliver material (calendars in our neighbourhood, for example) I always pause at the signs on doors and mailboxes that read "No Junk Mail".  We would always respect people's wishes, but I would also never put something in your mailbox that I thought was junk.

Yes, our material often contains a percentage of self-promotion. I could argue that our shameless bumpff is useful information on area services and therefore not "junk".  But I won't, because that probably would be an argument and, for some, is exactly what they mean by "junk mail".

But we always have something else that we truly believe is good information.  There are the "Just Listed" cards.  We don't broadcast these far and wide, but try to focus them in the immediate area of the listing.  The idea is that people who like their neighbourhood are often keeping an eye out for friends or family who are interested in moving to the area.  At a minimum, almost everyone is interested in what is happening in their 'hood.

Our other mailings have been known to be newsletters, or coupons for a local cafe ... something of value.  Our recent approach has been to put a high-quality photograph of a local scene on the entire front of a postcard.  Typically we have bought the rights from local professional photographers.  People put them on their fridge, they frame them, they call and ask for more.

Here's the latest one:

You can see the rest here: www.leadingthewayhome.com/postcards.htm

Notice I haven't mentioned the standard card full of "Solds".  We don't do that and I've never fully understood it. I guess it shows that an agent has some experience and is intended to show that they are busy and successful. But you can say that in a sentence.

We just got one in our own mailbox that piqued my interest and inspired this post.  It caught my attention as a tri-fold brochure rather than the usual postcard. I can't get too snooty since the front cover was a lovely and interesting new listing (albeit a long way from my area, with no detail other than price and general neighbourhood).  But was also different because I didn't recognize the agent or the brokerage and yet it was loaded with 18 "solds".  Even after discounting the oddities that hailed an hour and a half drive from my community there were quite a few local addresses.

Since I was online anyway, I checked a couple of the addresses on MLS.  I sniffed on finding the first one was over 2 years old.  Well, he hadn't said "Just" sold.  But the second one dated from 2003!

Anyway, there you are.  A little story, why you get all that stuff, and why I believe that not all junk mail is junk.  Some of it is useful or valuable or entertaining ... at least "Junque"!

Remember the wisdom of George Carlin, who wondered why his s**t was stuff, but other people's stuff was s**t.

Zoocasa ... doesn't that mean Animal House?

OK that was nasty. Sorry, I just couldn't resist the wordplay.

Zoocasa just announced a rebate program for people who get an agent via their service.  Herewith my take on the deal, given the currently available information.

Sorry for the lack of graphics ... I wanted to get this one out quickly.

My usual plea: yes, I'm an agent and occasionally a bit of a cynic; but I try to be objective and open-minded and I try to keep up with changes that have, do, or will influence our industry.

This Zoocasa deal strikes me as less than ready for prime time.  These guys, in my opinion, actually have a bit of a track record for getting ahead of themselves.  When they first started up, we actually signed on.  The deal was that we would get exclusive advertising space when you searched a certain geographic area.  Their job was to get all or most brokers to sign on to share their listings so that Zoocasa would become the go-to site for listing searches, with all kinds of extra features.  Didn't really happen.

So now they are becoming a licensed brokerage so they can possibly get at more of the listings.  That may work. If all brokers and reps agree to share all their listings with this type of data scraper.  There is a trend this way, but it's not there yet.

And finally, the new exciting rebate program which promises, among other things, 15% rebate on your commission fees and a slate of "hand-picked" top tier agents that you can screen for local expertise language and more.

Oy.

Hand-picked.  I'm not sure how these initial bodies were selected, but I'll bet the farm that once this thing is fully launched, the first and primary criteria will be the agent's willingness to pay the Zoocasa fees for being listed in their roster.  The stated standards around experience, feedback, performance, etc will quickly default to something like "I don't see anything really awful here".  Prove me wrong, Zoocasa, but as an experienced rep I have seen many many organizations whose business is "providing leads".

One news article suggested they were starting with 200 agents with more to come.  I don't doubt there are more to come, but the site currently lists about 40 agents in total.

Their system for helping you choose screens for geography, language and type of home.  Other than a few new-construction specialists and maybe a few downtown condo specialists the "type" screen is meaningless.
Other sites, such as royallepage.ca will allow you to sort and screen agents on these and more criteria.

I tried entering a few streets in the Beach in Toronto (just east of downtown).  Of the 7 recommended agents that popped up for my Beach street, 3 didn't appear to be based even in the actual City of Toronto (2 were in Brampton!), one included the Beach in her areas of expertise -- along with Aurora and Newmarket, and only one of these top-tier agents had I actually heard of.

Personally, I think you would be way better off getting a few names from trusted local sources and interviewing for the agent that will work best with and for you.

Now, about the rebate.  Again personally, I think you should select the right agent and pay them market value to do a great job for you.  But if you want to negotiate a 7.5% discount, have at it.  Honestly, your odds are pretty good that you can get at least your second choice for that.

I know, the articles and Zoocasa say 15%.  But that is 15% of the listing broker's end, which is typically only half of the total commission. (The other half goes to the Broker who brings in the offer and represents the buyer).  Even the 7.5% is a little exaggerated since it isn't all cash. A chunk is coupons/giftcard things.

So on a $575,000 listing, if you go through Zoocasa's limited set of agent's you can reduce a typical commission from $28,750 (yes, I know it's a lot of money, but that's a story for another day), to $26,594 in cash and giftcards.  I know that's real money, but it doesn't seem like that huge a saving unless you can be sure it is also getting you the best advice, service, marketing, negotiation, follow-up, etc.

Since these agents don't work for Zoocasa (they are agents for the Brokers you've actually heard of), you might wisely wonder how they come up with the money to give back to you.  According to one article, they take it out of the 1/3 of the listing commission that they charge the agent for handing over your name!  That is presumably in addition to fees for signing on to the service.

Yup.  We start with a normal 5% listing agreement wherein you pay the Broker $14,375 for his efforts (remember, the other half goes to the buyer's brokerage), that agent forks over nearly $5,000 of that to Zoocasa, who then give you about $1876 and some cards.

My questions: Why did you need Zoocasa to find an agent, and why did the agent need to give away a third of their commission to find you?

There is nothing evil here, just another company trying a variation on the business model of getting paid for referrals.  But like almost anything of this nature, there are questions, issues, tradeoffs, and more.  Read past the "rebate" headline and make sure you go the route that will get you the best person, service and price.

Assignment: Rent vs Buy? Agree AND Disagree

I may have to go back to school.  I would love to take on Frank Tristiani's student assignment.

Rob Carrick, the Globe and Mail's personal finance columnist, has been on a bit of a run these days with several columns trying to get people to think more favourably about renting vs. buying.  His latest article (read it here) discusses a McMaster prof who runs his students through a comparison assignment every year.  Frank Tristiani, the prof, says "Over six years, no one has been able to substantiate buying as creating more wealth over the long term”.

His sample analysis involves buying vs. renting in Hamilton and leads to a renter being a half million bucks better off in 25 years.

That is a challenge.  First of all, some disclosure.  If you are reading this, you know I'm an agent.  So you are probably expecting some half-baked biased rant about buying always being better, especially right now ... call me and I'll help.  On the other hand, if you've read a couple of these, you know that isn't how we work.  More significantly, we rent! Wait. A Realtor who rents.  According to a couple of our competing agents when we made this move -- we must be retiring, in financial trouble, and/or have lost confidence in the market.  None of those are true.  The truth is the subject of a whole other discussion about life planning, some of which is covered elsewhere in this blog (starts right about here)

Back to the column.  Rob's article and Tristiani's assignment are great.  Tristiani is a finance guy who wants his students to apply some finance logic to what is a major financial decision.  Good idea.  And Rob himself points out a few of the arguable assumptions in the analysis -- like long term mortgage rates and investment returns.

But ...
I think there are a few huge "arguable assumptions" in Trisiani's sample analysis that Carrick did not mention or didn't give enough space.  If you are using the above link to read the article, be sure to click on the "infographic" mentioned on the left side.  This table was in the original article and you probably need it to follow along.  I've also included it at the bottom of this post.

• Carrick notes that the analysis applies to "renters with steely savings discipline".  I'll say. A bunch of the gain requires the renter to assiduously invest the difference in costs each month. I'd probably bet you the present value of that half million that you couldn't find me 3 people in Hamilton who could, would or have done that. Tristiani notes that owners aren't good savers either -- OK, so's your mother, but it doesn't really answer the issue.  The way I read it, this alone would account for all or most of the wealth difference over 25 years.
• Here's a little one.  I have no idea what research went into coming up with $1500/month (apparently with all utilities included) as the comparable to a $400,000 house.  Based on my Toronto experience, it seems low.
• A much bigger sleeper assumption on the rent is that rent will only go up at 1.5% per year over 25 years, despite the other assumption that inflation is 3% per year.  Since he also assumes that you make zero real capital gain on owning (house prices are also assumed to only rise with inflation) ... Never mind the rent vs. buy debate, whatever you do if you believe this: Don't buy an investment property.  I'm not convinced that landlords are going to eat half of their inflationary costs over 25 years just because they are nice people. 
• Here's another huge one. A quiet little assumption in there is that maintenance on a home comes to 4% of the value of the home per year.  Holy crap.  Either you bought a falling-down dump or you just like to tear your house apart and rebuild it every year or two.  He does include utilities and taxes in "maintenance", but I ran the numbers for our old house for the last 8 years and couldn't get it to 2%.  A quick google surf came up with estimates of 1% (before the utilities).  The Feds have a worksheet for you to do your own calculation  (you can play with it here) . This alone also would account for the wealth difference after 25 years

There could be more but I think that's enough to convince me (and maybe you) that the decision is not nearly this big and probably not even in this direction.

Both Carrick and Tristiani note that there are lifestyle and personal preference/value issues that are not covered by the analysis.  And I absolutely agree that you should do the numbers before you make the decision.

So don't just read the headline, skim the article and glance at the table. FIGURE IT OUT. Then decide, with the financial analysis as one of several major variables.

A final example, more an analogy, from my everyday job.  Imagine yourself looking at two good houses.  One is going to be a maintenance headache, at least for a while, but it has an absolutely gorgeous [fill in your blank].  We don't encourage people to buy the low-maintenance option and we certainly don't promote the one with the gorgeous whatchamacallit.  We do try to help you figure out how much you are paying for pretty or cool or functional or whatever-it-is.  Then decide.

[And finally... One reason that I keep falling off the wagon (the wagon which is this blog) is that I'm pretty sure the number of people who read it rounds to nada.  At least the ones who say so, or follow, or "like".  When I force friends and family to read them, they usually say nice things.  I think they migh not be lying, since there usually follows a decent and related discussion.  So, if this was even vaguely worthwhile, say so, tell someone, share, like, follow, something.  Thanks]

And really finally, as promised, here is the sample analysis that I just kind of dissed:

Great House ... Great New Price

Apologies to those who come here for real estate info without the accompanying flogging of specific homes.  I am about to flog a specific home.

We are just pulling out all the stops to get this property sold.  The bottom line issue is that this is a GREAT house that we can't seem to get anyone to come and look at.

One possible reason is that we (innocently) had the price too high.  Fixed that.

So here's the story.
[Or just ignore the pitch and head for the website with its virtual tour, feature sheet etc: www.LeadingTheWayHome.com/brooklawn ]

The owners moved to this house when their active boys made the previous house a little small.  Not only did they raise a couple of fine young men in this house, they renovated, improved, updated and maintained the thing to the ultimate degree with top-of-the-line everything.

It's a 3 bedroom home with a lovely upper level family room, a fully finished basement.  The features are endless, but I must point out the stunning chef's kitchen and the excellent landscaping that will re-appear with Springtime.

The location is south of Kingston Road at St.Clair.  The Bluffs and other parkland are steps away.  A bus comes to the corner.  A few minutes puts you on the highway to anywhere. Good schools are a walk away.

We underestimated two (or three) things.