Surfing the waves in real estate

BY JAY BRIJPAUL

Recently I saw the resurgence of multiple offers. A home was listed on the Toronto Multiple Listing website for just one day and there were thirty-five showings within six hours. The home was not underpriced. I presented an offer on behalf of my client for twenty thousand dollars above the asking price. There were eighteen other offers and we did not make it to the final race. Recently, Stats Canada reported that if an average buyer should buy a home in Toronto today, then they would need three quarters of their family income to carry the cost.

With the drastic increase on home prices, the cost of rental accommodations shot up. The average rental for a two-bedroom condo is now over $2,000. Rental price for a house is about $3,000 plus utilities. There is a shortage of rental properties and investors are cashing in.

Richard, a first-time investor, bought a home in Pickering last September for $600,000. He borrowed the required 20% down payment from his current home as a home equity line of credit. The other 80%was financed by the lender. His tenant pays $2,800.00 plus utilities every month, a little short of Richard’s carrying cost of $3,000. This is great since Richard literally financed the property fully and we did not take the principal reduction on his mortgage into account. His investment property climbed by ten percent in just five months. Richard is $60,000 wealthier in five months and he has generated an income stream of $33,600 annually. In a few years, his mortgage owing will decrease and the rent will increase. Richard explains that the interest paid on his line of credit and his mortgage and property tax on the rental property is tax deductible.  He is a careful investor and is happy with just one rental property.

With inflation, the buying power of the dollar drops. Over the past ten years, Canada’s inflation rate stayed at about 2% yearly and as such in ten years, prices should only climb by 20%. However, real estate prices have more than doubled, defying the current inflation rate. The rapid rise in real estate in the GTA is because of low supply and high demand. Immigration is a major contributing factor. Most people choose to live within proximity to work and many buyers do not want to travel long distances. This trend is happening only in the big cities while the suburbs are suffering.  To surf the waves, we must get on top; we must be prepared.

First time buyers should be pre-qualified before shopping. This way, they can buy within their price range. Rebecca wanted to buy a home with an in-law suite. Her purchase price must not exceed $600,000. Her job requirement poses a major restriction and she settles for a condo in the city. Her rational is that instead of paying rent, she can contribute towards her own home. Joan, another first-time buyer, chooses to relocate to the suburbs where she can enjoy a home with all the amenities of a million-dollar Toronto home for a price tag of $600,000. She has the flexibility to work from home.

In a market where properties are scarce, it’s best to buy first before selling. Manpreet sold his home in October with an end of January closing. He then proceeded to search for another property. The market changed direction and prices climbed substantially. His loss was enormous because prices climbed at a rate of $15,000 per month. Sue, on the other hand, bought first and then decided to sell. The property she bought went up by $50,000 in a few months and her current property gained a whopping $30,000 in value. Time is on her side.

With bidding, many buyers are losing out once their offers are subject to financing and inspection. Sellers tend to go with unconditional offers. This is a dangerous strategy for buyers with limited down payments. Shushan was pre-qualified by the bank for $850,000. There were six other offers on the home he purchased. His realtor advised that an unconditional offer is the best way to secure the property. The sellers accepted the offer but prior to the closing date, Shushan’s lender reported that the property was appraised for $800,000. Shushan had 20 % or an equivalent of $170,000 as his down payment. The bank financed 80% of $800,000–that’s $640,000. Now, Shushan needs $210,000 ($850,000- $640,000) to complete the transaction. In desperation, he arranged a private second mortgage for $40,000 at 12 % which costs him an extra $421.00 monthly.

It’s difficult to predict the outcome in real estate. What is certain is that it is becoming increasingly difficult to own a home. With high rent, it is tough to save for a down payment. First time buyers should look at alternative ways to get out of the rental trap. Homeowners should use some of the equity in their current home to re-invest in a second home. Do not overextend because the wind may change.