I know that most people who follow me and read this blog are probably not students of the Garth Turner school of economics, but a lot of the things that he brings up each day in his blog are certainly concerns for smart-thinking investors who are looking at the condo market right now.
Garth has been preaching doom and gloom for the real estate market in Canada for many years.
1. Garth Says: Pre-Construction Condos Are Being Bought with 5% Deposits
>>The truth is you need at least 15% – 20% deposits.
Non-resident buyers have to put up a minimum of 25% as a deposit. And this is just the up front money, there is another 5-10% required at final closing when the building completes in 3-5 years!
This is one of the most persistent myths in the condo market. Perhaps it is a remnant from the last condo boom of the 1980s when you actually could buy with only 5% deposit, prices were increasing by double digits, and people were selling their units for massive profits just months after buying them. The condo market was like the wild west back then.
The market is completely different now. Builders can sell units with 5% down if they want to, but these sales will not count in the eyes of the banks to go towards reaching the 70% sold mark to achieve construction financing so that is why when you do see the rare 5% deposit program, it is after sales have already hit 70%+ and usually construction has started and prices have increased so much that flipping a unit for a profit before completion is nearly a mathematical impossibility.
2. Garth Says: Most Investors Flip Their Units As Assignments
>>The truth is most assignment listings NEVER sell.
They sit on the market for months and then the building registers and the buyer is forced to close on the unit. There are many reasons for this including developers tight restrictions and when and how you can assign your unit, and the difficulty in finding educated buyers and agents who even know what an assignment is and how to complete one. I first wrote about the fact that assignment sales are highly complex and challenging about 3 years ago.
I always caution my investors up front when buying pre-construction that assignment should not be your only exit strategy. Always be prepared to close on the unit and hopefully hold it for at least a year after closing before selling.
Bottom line: many investors might like to think they can easily flip their units before closing for a profit, but only a very select few actually do it.
3. Garth Says: Valuations Are Being Pummeled Downward By Assignments
>>The truth is assignment sales have little to no effect on market values.
Because most assignments are NOT sold on the MLS, therefore they are not tracked by the statisticians and industry data crunchers. If no one knows what they are selling for, how can they affect market value?
You could buy a condo for $300K in a brand new building where the same unit sold for $270K last week by assignment but you would have no idea because it happened behind closed doors. The assignments that do sell on MLS (those that are tracked and will affect market values) tend to sell for higher…because they are on MLS (increased exposure, visibility etc)!
This myth is strongly correlated to the “prices are going to fall by 15/20/25/50%” theory on the Toronto condo market. Prices will not fall unless sellers get desperate and start lowering their prices. Sellers will not get desperate unless one of three things happen:
1) they can’t close on the condo (credit dries up, they can’t get a mortgage). Credit would have to tighten up significantly for this to happen. If this happens we are all screwed. c.f. The USA over the last few years.
2) they lose their job (recession hits, widespread job loss). If a recession hits, again, everyone is screwed, not just the condo flippers.
3) they are losing massive amounts of money each month renting the condo out. This scenario is highly unlikely. Money is cheap and rents are rising. Think about it: even in a worst-case scenario, you are an investor in a negative cash flow situation of $100-$200/month renting out your condo-are you going to drop your price by $30-$50K just to save yourself $1-2K in negative cash flow?? Of course not. You will ride it out and wait for prices to come back up then sell. In the mean time someone else is paying your mortgage and building equity. Bonus points if you also realize you are saving taxes on the loss each month!
4. Garth Says: No One Can Make Money As a Landlord At $700 Per Square Foot
>>The truth is plenty of people will make money at $700 per square foot.
I remember just 3 years ago when people said that no one would make money at $600PSF. Well, now look at the market. Rents have gone up significantly (and prices have too), mortgage rates are lower than ever, and bidding wars on rentals are happening every day. Those ‘idiots’ who bought at $600PSF waaaaaaay back in 2009 are clearing positive cash flow each month with 80% of the asset as debt.
People will make money on $700PSF. Just give it time. Heck, some are already making money at $700PSF if they bought the right type of unit in the right location!
5. Garth Says: 15,000 Assignment Sales in Toronto Per Year
>>The truth is this figure is completely ridiculous.
There is no way that there are anything close to 15,000 assignment sales in Toronto each year. The best way to think illustrate the absurdity of this figure is this: in 2012 there will be about 15,000 new condo completions to hit the market. Are we supposed to believe that every single one of them will sell as an assignment right before closing?
If there were really 15,000 condo assignment sales every year in Toronto, who is selling all these assignments? I’m certainly not! (Assignments make up less than 10% of my personal business) My colleagues and friends who are the top condo agents in the city are certainly not!
No one knows for sure how many condo assignments are sold each year but for a given newly completed building I would guess that no more than 10% of the units on average will sell as assignments. If we take the figure of 15,000 new condo completions per year in Toronto then that means around 1500 assignments per year maximum.
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