Last weekend Brent and I attended one of the Real Estate Investment Networks’ ACRES weekends. It’s always a good refresher weekend and the people I meet there always amaze and inspire me.

We often take out a booth to share our listings and our services as REALTORS®. However, since Brent joined me this July, we’ve been quite busy on the multi-family side of the business.  To help promote a few listings I did up 20″x30″ posters of a couple apartment buildings which are available. There’s always lots of discussion on what information goes into a proforma (financial summary) for a property and what investors can/should plug into REIN’s Property Analyzer for cash flow analysis. Here’s some assumptions you should consider, and some you should be aware of.

Inflation – Remember, the Bank of Canada aims to have inflation running between 2-2.2%, so for any costs that change, that’s my baseline.

Purchase Price – you should know your local market (or work with a buyers’ agent who does) well enough to know what the value of a property is before you look at the list (asking) price. Getting a discount with respect to list price does nothing but feed your ego. Know what properties have sold for, and be able to explain that to the sellers, personally, through your agent or in a cover letter. For some areas in Edmonton, I know the ballpark, so for quick analysis I just take 1-2% off the list price because for properly listed prices, that’s what things sell for. Again, there’s no substute for good data on sold properties and an agent who knows the area and the history.

Repairs and Renovations – I always assume at least $2,000 will be spend in the first few months. That’s both spent tidying up little things they sellers just did a quick fix for and also for normalizing the properties or making tenants happy. I usually get asked what I mean by ‘normalizing’. Ideally, all my properties have the same faucets, appliances, flooring, locks/door knobs, light fixtures, etc. That makes it faster, easier and cheaper to repair things when they break.

Current Rent – If you’re buying something that already has tenants in it, either single family or multi-family then this number comes from the vendor and should be confirmed before going unconditional and buying the property. If it’s vacant then you need to know what it’ll rent for today. Again, market knowledge is king and part of the reason I’m a fan of buying several units in a complex which you already know. To help make things easier for Edmonton investors, I’ve surveyed several property managers and investors to create a rental market survey that you can download for free.

Projected Rent – The projected rent comes in two flavours. First, this is how much you can rent it for or raise the rent to when you are next raising the rent or filling a vacancy. The second is where rents will go in the next few years. CMHC publishes some information and limited projections. For example, spring 2011 has the average 2-bedroom at $1030, with a projected 2012 price at $1060, or a 3% increase. If nothing else, I use a 2-2.2% increase, which is the Bank of Canada’s mandated range of inflation.

Vacancy – CMHC publishes lots of stats, but I also use my own historical vacancy because I have better than average property management. For apartments I use 4% and for single-family I use 5%.

Utilities – For all my single family properties I have the tenants pay the utilities. If I’m on the hook I look for actual historical amounts from the vendors, while for multi-family that’ll be included in the financial information provided during the due diligence period.

Property Management – As a rule I use 10% for single family through to 4-plexes. For multi family I use ~6% up to 8 doors, and 4-5% beyond that.

Financing – I use prime plus 1%. That’ll put us somewhere between the VRM and fixed costs. I also use a 30 year amortization, since that’s what I look for myself.

Multi-Family Specific Assumptions

Expenses – CMHC will use ~$3,600/suite/year in their projections unless you can prove that the real costs are lower than that. It’s still a good ballpark. Costs will be higher on older buildings, higher on concrete/steel construction that wood frame, and higher on poorly maintained buildings.

CAP Rate - Capitalization rates are always tough to figure out and one of the reasons we pay for private sources of sold commercial data. Today (Fall 2011) in Edmonton sellers are asking 4.5-6%, while CMHC is financing a maximum of ~7%.

Ownership and Tax - For multi-family buildings in Edmonton I always assume that the property is held in a company and will be subject to the top tax rate, which in Alberta is 17%. I also assume that the goal of the investor is long term buy and hold unless we’ve discussed otherwise. That way we have a base to determine how to handle slightly more complex items like maximizing the use of terminal losses if you decide to tear the building down and rebuild after several years.

There’s a projection for everything, but be sure to use realistic numbers. Also, it’s always a good idea to do a 5-year cash-flow model to get an idea of the impact of time on your investment.

Related posts:

1. Buying Multi-Family – Sellers’ Market Tips It’s 2011 and Edmonton’s still a funny market when it...

I’m sure you’ve all heard about the Federal Government’s January 17th change to CMHC mortgage rules by now (and I missed blogging about it, shame on me). They take effect on March 18th, and there’s one great strategy I’ll share to get some killer deals if you’re out shopping for more real estate right now. Here’s the gist of the mortgage rule changes (via CMT):

1. A 30-year maximum amortization on insured mortgages over 80% LTV
2. An 85% LTV limit on insured refinances
3. Elimination of government insurance on secured lines of credit (aka., HELOCs)

Now there’s going to be some consequences out of this, as always, both intended and unintended. Don Campbell from REIN had a great discussion on his Facebook wall about what those might be, and I’ll summarize them here.

Bank of Canada rate won’t have to rise as quickly

A bunch of ‘panic’ sellers will hit the market in Jan/Feb

A number of home buyers will push to close before new rules (not understanding that most banks will adopt rules immediately)

‎Combined with the recent CREA/MLS agreement will lead to increased listings

Cash flowing properties will become even more important

More Speculators will be kept out of market – capping price increases on new [construction]

More renters will stay renting

Now, notice the two points of Don’s which I’ve bolded. This means there’ll be people, both listed right now, and who will list even more quickly, who want to get their current home sold and their new home bought before March 18th. If you can find the right people, have your financing sorted, can close quickly and (most importantly) have a good Realtor and Lawyer who can get you through this, there’s a great opportunity to solve some people’s problems, and get a good discount for doing it.

The basic idea is this: buy their house with as short a closing as possible. Transfer the title and do all the normal stuff you do to take possession, but let the sellers stay in the property until (for example) March 1st. This gives them up to an additional 6-7 weeks in which to find and buy their new home. I spoke with a mortgage broker this afternoon and the mini-rush hasn’t pushed their time-lines much, so even if you need financing, you should be able to close in 10-14 days, if you have a good broker and lawyer.

Here’s the breakdown:

Step 1: Find good sellers motivated by the new rules

Your Realtor can help you do this by searching for attributes like recently changed listings which dropped their possession requirements or added negotiable. Price drops or comments in the private (Realtor only) notes like commission bonuses can also flag people who are hoping to get out now and use the 35 year amortization for their new property.

Step 2: Establish rapport, understand where they’re going

Your job (and your Realtor’s job) is to find people who were going to be tight qualifying for the house they want to buy, and wanted to get through with the new financing before they’re limited to a 30 year amortization. You’re going to help them solve that problem by buying their house with a quick close, but not forcing them to move. The balance is between the best discount you can get for solving their problem, but still leaving enough on the table for them to be able to buy the new house they want.

Step 3: Write offer with lease-back agreement

You’ll need to get your lawyer on board up front, but this isn’t an uncommon practice and shouldn’t be hard (or expensive) to do. You absolutely want to make sure you’ve got your legal butt covered, in case (for example) the house burns down the day after closing. You’ve gotta be clear about the cost of staying, who has insurance, damage deposit etc, and also make sure the lenders are cool with what’s going on.

Step 4: Do it!

This part is pretty self explanatory. You write the offer, it gets accepted. You close. They go shopping. They offer and close, then move. Everyone’s happy and you’ve both been able to take advantage of the last of the 35 year mortgages!

If you have any questions, or want to work with a Realtor who gets this stuff, leave a comment, use the contact form or feel free to give me a call. 780-488-4000.

Warning: This one can be tricky and should be used by experienced homebuyers, investors and always consult the appropriate industry professionals. In this case this includes your Realtor, Mortgage Broker or Banker and always your Lawyer.

(HT to Wade Fenner who put the bug in my ear about this earlier today.)

No related posts.

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And we’re back from the break! This time it’s Patrick Shaver from UDI. When will people learn to stop using bad pictures on their powerpoint slides.

This is mostly residential housing info, but looking at growth in the Capital Region for 2011. Keep in mind that he’s a developer, representing developers and they have to develop what people want (affordability, density, location and amenities).

Patrick thinks that people want single family houses, or as he says “Fee Simple is King” in 2011. They want a front door and a patch of grass at the back. Housing Types – they’re looking at the 36-40′ lots, or a detached house on a 30′ lot. There’s a lot of good duplexes coming out with a good combination of attached garages. He thinks we’ll see more townhouses that are street facing.

How do we build higher density? High employment areas, urban villages in suburbs or infill areas. Young professionals, couples with kids, and empty nesters, but also those motivated by price.

Capital Region Board developed a growth plan in 2009, ratified by the provincial government last year (2010). They’ve laid out priority growth areas where they’ll focus infrastructure. They’re also making sure there’s focus on creating denser areas, and there’ are some interesting rural areas where they’re trying to create ‘clustered residential’.

The evolution of the ASP/NSP (area or neighbourhood structure plans) has moved to create denser areas, from 52 persons per net residential hectare to 80+ today and moving to 95 in the city.

Predictions:
- Edmonton to lead the region, but challenged by affordability (due to higher construction costs relatively speaking).
- Higher demand and price for large lot single family
- Higher density in some Edmonton Areas (Downtown, West Downtown, University, some suburban pods like around Heritage with slower absorption)

Current developing areas in Edmonton:
– West, south west and south east, with a good strip on north up against the north leg of the Anthony Henday.
- South is the only expandable option which doesn’t run into other municipalities.

We’re more decentralized, but so is the employment and growth.
- St Albert and Sherwood Park – development is essentially the same as a suburb. Sherwood Park has a lot of variety in product. St. Albert has less smaller SF and doesn’t allow lane product.
- Leduc has some great product variety, and is part of the priority growth curve.
- Fort Saskatchwan is doing well, and the North West Upgrader is going ahead they’ll see some good growth.

Growth occurs here due to:
- Localized demand
- Availability of servicing
- Diversity of housing
- Cost of servicing
- Attitude of municipalities

The 5-year trend forecast for housing starts is going to be modest increases, which levels off. 2010 will be better growth (which makes sense because starts are a lagging economic indicator).

People are looking for more amenities, sustainable/smart/low impact developments.

Patrick was a good speaker, and kept it nice and brief.

We’re getting down to it, with Ian Glassford, CFO of Servus Credit Union. He’s a bit of a quick talker, but reasonably entertaining.

Ian’s very dubious about the possibility of a double dip, but it’s a very divergent economy. The developed economies are a little weak, but there’s lot of positive items. The US, India and China are moving forwards and growing, which can pull the world along.

The IMF Global Outlook lines up with what Servus thinks, with a slower, more stable growth and emergence from the recession. The 2009 doom and gloom was pretty well founded, with advanced economies at -3.2%. Imagine if the sovereign debt crisis hit then, instead of now. The US is still a basket-case, with terrible real estate markets and a crazy banking sector. When you break it down, Germany is carrying the EU’s growth and backstopping the promises of bailouts for Portugal and Ireland. If Germany gets into trouble, the promises become untenable.

Concerned about Government debt (globally), where slow growth plus slightly higher rates doesn’t really help reduce deficits. This can push some of the slower developed countries further down. We are globally dependant on a handful of countries (China, India, Germany). He does point out that in a bad employment and economic situation increased the risk of ‘dysfunctional behaviour’ by US politicians. That’s part of why he thinks we’re seeing acceptance of a cheaper US dollar. That allows (among other things) easier trade of their goods and eventual repayment of their foreign debts with cheaper dollars.

Ian thinks that Canada can beat the IMF forecast (2.7% GDP) if:
– Commodities hold in
- Rates stay low
- Dollar doesn’t get too strong
- But we’ll hit a ceiling until the US gets it’s act together

Patrick’s made the interesting comment for an economist that he doesn’t understand the Chinese economy and that he has a vague concern that they’re stockpiling commodities (which would kind of make sense).
The Bank of Canada gets the risk from the dollar and rates. My favourite quote of the day: Rates that are too low for too long create stupidity.

Interest Rates – Short Term
– Modest upward pressure on rates
- Conditions won’t support meaningful movement until 2012
- The bank used to say a 3% increase in the dollar has the same drag on the economy as a 1% increase in rates. That’s an older formula, but the principle still applies.
- A .5%-.75% hike isn’t unreasonable. We’ve already been through a 0.75% hike, and we can handle it.
- Watch capacity utilization, which might cause faster action by the BofC

Interest Rates – Medium Term 1-2 years out
– There is still ‘considerable monetary stimulus in place’, which is the same as ‘my foot is still on the gas’. Pulling it back would be a 1-2%, but it’s not likely to move until there’s action on inflation
- EQ2 was to get money out of the US banks hands, by pushing yields so low that the banks had to lend it and get it out.
- 5 year rates will move in anticipation, but it’s still a ways out.

How does the US get out of debt? The classic solution is with inflation, which is a worry 2-5 years out.

Housing!
– Ho-hum is Ian’s prediction.
- Housing is more about where you live now, which is better. It gets people out of thinking of their house as making or losing money, and into where they live.

Ian’s going through his 2008 slides to compare what they thought would happen which would cause an Orderly Correction. It does seem to apply, and there’s some interesting math I can provide more for you if you’re curious (just leave a comment).
- Alberta should fare better than most, with a recovery well underway, and a Central Bank which recognizes the importance of a supportive rate environment.

Here’s Richard Goatcher from CMHC

- Employment stats: Full-time exceeding part-time job creation. We’re looking at 5.7% unemployment this year, which is back to a strong demand and helps confidence.
- Edmonton’s 2010 job growth was just barely positive, and the 2011 forecast is ~15,000 which is 2%. 2012 is when the economy really starts to get rolling.
- Interest Rates – Later, rather than sooner.
- Carrying costs – minor changes, with costs staying below the peak 2007 levels.
- MLS Sales – we’re a little slow compared to the past 10 years. 2011 will be up a little bit over 2010 sales, starting off slow and seeing some more movement through the mid-end of the year.
- Listing Supply – We’re still above the 2003-2005 times, and sales to active listing ratio is in buyer’s market territory around 14% right now.
- Average price last year was $329 and now we’re at $308. They’re going to see an average annual price change of 1%, but the front half of the year will be the up to balance the down in the last half of the year.
- There’s some interesting stuff in his slide deck about housing starts, but that’s not an important number at the moment. It’s more about inventory adjustment than market movement. Again, leave a comment and I’ll send a copy of his slide deck over.
- Edmonton Average House Price predictions – Year over year will be essentially the same, but month over month will vary substantially.
- Rental housing inventory which still remains very low (and has since 2005)
- Vacancy rates are coming back down, forecast to drop below 3.5%. (You typically need to see vacancy below 2% to see rental increases over inflation).
- Rents held in 2010 at just over $1,000 for a 2-bedroom on average, but we’ll move up by 2% or so in 2011.

CMHC’s prediction in a nutshell: Next year will be better than this year. 2011 will see slight progression and modest gains. 2012 will really get things moving.

Ron Hutchinson is putting in a quick plug to get Realtors to contact their MP’s and discourage them from increasing down-payments or lowering amortization limits.

MLS Edmonton Housing Price Forecast

Here’s the main event, with RAE President Chris Mooney reviewing the resale housing market for 2011.
- Things moved very quickly in 2010, and the rush caused a swell and drop back in inventory towards the end of the year.
- Prices and sales keep going up and down, rolling along, causing people to react to it like a dodgeball game.
- We’ll start going up towards the end of the year and the next potentially hitting 2007 prices.
- National sales stats get skewed by bigger centres (Vancouver Toronto), and Edmonton seems to move out of step with the national numbers.

Numbers!
- DOM is about 13 days longer in 2010 compared to 2009.
- Inventory is back down around 6,000, which is a little more than what we’d like, but still fine.
- There’s some more interesting numbers about 2010 in review, which I’ll spin into a new post in a little bit.

2011 Real Estate Forecasts!
– Rural and Recreational – Good inventory and DOM will be >100. People are still suckered in by purchasing more US property.
- Commercial/Industrial/Business – Trending upwards with values over $300 Million. Remember, lots of commercial isn’t reported because they sell privately, using a Realtor but without using ICX.
- Multi-Family – Most multi-family sales will remain as rentals. Unabsorbed condos will enter the rental pool, with entry level prices depressed and being a buyer’s opportunity. Forecast low volume but steady.
- Residential Single Family forecast – Prices will increase 3% in 2011. Inventory will hit 7,000 in the spring and go back to normal in the second half of the year. Sales will be up slightly from 10,400 to 11,000.
- Condos – Sales and prices to remain static, with new completions keeping prices in check.
- MLS System Overall – Total sales up from 18.293 to 19,500 and the total value to be up to $7 billion (last seen in 2008).

The Edmonton housing market is stable and ‘normal’. The year will have higher DOM and inventory through Q2, and inventory will drop in Q3-Q4 with DOM falling back to 45 days. Buyers have time to make a good decision, and sellers can sell, but require patience, site improvements (staging) and appropriate pricing.

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I’m blogging this morning from the EREB 2011 Housing market forecast at the Shaw Conference Center. It took me a bit to get here, and Lord only knows where I’m parked, but I’m here. The schedule of events for today:

• Welcome and Opening – Ron Hutchinson, EVP, REALTORS® Association of Edmonton
• Edmonton’s Strength – Garth Warner, President and CEO, Servus Credit Union
• Edmonton Business and Commercial Climate – John Rose, Chief Economist, City of Edmonton

[Ed Note: If you've surfed here looking for the price of your own home, you can signup for a free market evaluation on my main site.]

Then we get a bit of a break, and hopefully I’ll get to publish this (they’ve canned the free Edmonton wi-fi apparently) by tethering my iPhone.

Then after the break (circa 10:15 or so):

• Development Trends – Patrick Shaver, President, Urban Development Institute (UDI)
• Edmonton Housing Analysis – Richard Goatcher, Senior Market Analyst, CMHC
• MLS System Market Forecast – Chris Mooney, President, REALTORS® Association of Edmonton

And we’re away to the races, right on time! I didn’t catch this gents’ name, but he’s an EVP for the Realtor’s Association. Apparently this is the 23rd annual forecast.

Ok, we’re about to get rolling with Garth Warner from Servus. He’s babbling about goal setting and new year’s resolutions. While he’s a good speaker, it’s a good reminder to avoid the cheesy jokes when doing public speaking. There’s a lot of thank you’s and rambling, so I’ll spare your eyeballs reading any more out Garth’s optimism.

That was slightly painful.

Now we’re on with John Rose from the City of Edmonton. He’s a little more upbeat, and just compared his job to being the Angel of Death for the last year or two.

The Global Economic Environment has been improving since mid 2009, but with some caveats. Mild concerns about a global double dip, and some fragile global financial market issues. The possibility of reducing stimulus too quickly and other policy mistakes might cause a bit of a bump, but not a full-dip collapse. Beyond the EU monetary issues, there’s a small risk that the US mortgage debt crisis will have more impacts and that’s related to the mortgage rate issues.

Natural Gas is likely to remain low (forecast to stay below $5). Oil is going to remain in the high $80′s or low $90′s for the foreseeable future, but over $100 oil is unlikely. It’s still a very solid price point and good news for us here.

GDP-wise, Alberta was lagging, likely because natural gas didn’t respond to the recovery as expected. The CMA (core) Edmonton was more likely around 3.2% GDP growth, and we weathered the storm quite well.

The dollar being at parity, and he’s expecting we’ll stay around $1.00-1.05 USD for the while ago. It’s fuelled by weakness on the US side more than strength on ours. That’s bad news on two sides: first, it causes competitiveness concerns, and second, it puts upwards pressure on commodity prices. Interest rates, John thinks the Bank of Canada is softening us up, since rates have no where to go but up. He things we’ll see fairly dramatic increases in the second half of 2011, about 0.75% this year, and in 2012 as much as 2%.

Edmonton specifically, has inflation which is essentially 0. Employment is back below 6% (currently at 5.8%), and the good economic prospects stimulating net in-migration. CPI (inflation) is essentially flat, and has been since 2008, which is good news in that costs are in control and prices are moving up modestly and providing stability.

Unemployment is trending down and Canada has recovered all the jobs lost during the recession, as has the city of Edmonton. We’re actually creating jobs at twice the rate of Alberta (which isn’t doing too bad at all). It’s going to take the US at least 4 years to get back to their pre-recession levels, and that doesn’t even take new entrants into account. 6 of every 10 jobs created in Alberta were in the Edmonton area. There’s some remarkable strength in the Edmonton area.

Are we risking another boom and bust cycle? No, the huge growth in 2004-2005 was driven as much by natural gas and conventional oil as it was oil sands growth, and the juice just isn’t there.

He did a three baseline forecast. Baseline (55% probability), High (15%) and Low (30%), used to create the average numbers to drive his forecast. He’s not a fan of the US market at all, and they’ve seen some exceptionally poor performance. The growth outlook is around 3% now, to 3.5-4% in 2012 with a taper off to a 2.2% level out to 2018. The slow down is largely due to demographics, and an ageing labour force.

The Edmonton CMA is going to do well, and the City will be able to expand faster further out, having a slightly younger demographic. There’s another great graphic for the City vs the CMA GDP growth forecast that I’ll try to grab later and edit this post.

Summary:
- Low interest rates won’t last, longer term rates will move up to the more traditional levels, and short term rates have nowhere to go but up.
- Inflation is relatively low, tracking the national rate of 2%, and then moving up to the 3%.
- Modest but solid and sustainable growth out to 2019, and not so much risk of the boom-bust cycle.
- Some downside risk due to the US being sluggish and taking a while to get their stuff sorted.

That’s it for the moment, it’s break time!

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Surprising no one, the Bank of Canada chose not to raise interest rates yesterday, maintaining the benchmark overnight rate at 1%, which makes the banks’ prime rate 3%.

From the BoC press release:

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

Aptly summarized by Canada Mortgage Trends:

• Global economic “risks have increased”
• “…pressures affecting prices remain largely unchanged”
• Today’s decision “leaves considerable monetary stimulus in place”
• “In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust.”
• “…net exports were weaker than projected and continued to exert a significant drag on growth”

This is good news for investors and people considering a new home purchase. The fundamentals underlying the recovery in Canada are very strong, and global forces causing the recovery to stretch out a bit will help keep interest rates down longer, with less pressure on inflation.

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Inspired by this weeks’s entertainment, I got thinking about the commonalities of real estate, economics and investment blogs, whatever their slant.

I think there’s a lot we can agree on.

Your house is not a damn ATM

If you put a HELOC (home equity line of credit) on your home, be damn careful what you use it for. Spending it on consumer goods, excessive renovations and entertainment are right out (forget about the 52″ plasma). Reasonable renovations and smart, careful investments can count, but you need to be cautious and a HELOC should never be your sole source of investment funds (see the next point).

Canadians need to save more

Our national savings rate went from better than 10% of after tax income in the early 90′s to only a few percent. We’re not as bad as our friends down south, but this is going to be a potential long term problem for many Canadians as we get older.

Live within your means

This shouldn’t surprise anyone, but it’s not quotes often enough. David Chilton, author of the Wealthy Barber, probably the best book on financial planning for retirement ever written, lives in a house of less than 1,000 sq ft (see the great interview on CBC’s The Hour here). I drive a used VW, live in an older townhouse and don’t really carry any consumer debt. I don’t really see that changing too much, except sizing up as my family grows.

Give money away

No one ever went broke by donating money to charity and it’s an important habit to get into particularly when you don’t have any money. 10% is a great goal, and you should also donate your time. If you want to make sure you’re hitting your 10% goal, try adding up your volunteer time at minimum wage or $10/hr and see what that does. Giving your time and talents to those who need your help when you barely have anything to give teaches us about what’s possible (and trust in God, but that’s another post).

Diversification can be a good safety net

There’s no doubt that your asset mix should reflect your goals and the time in your life. When you’re young (like me) and have few obligations, but high earning potential, you can handle more risk. When you’re getting to be 50-60 you should be looking for some more stable, fixed income assets with a lower risk profile. You should use the advice of a good financial planner. One big caveat on diversification though – as Warren Buffett says, “Wide diversification is only required when investors do not understand what they are doing.” Invest in what you know, and if you’re really serious about investing and building a business, keep to what you know. This leads us to:

Diversification is for the weak

Warren Buffett doesn’t buy tech companies because he doesn’t understand them. I avoid complex market plays (shorts, etc) because I’m not as familiar with them. I buy stocks I know and trust like Coca Cola, Cogent (makes some great fingerprinting hardware) but the majority of my active investing goes into real estate. I gained a lot of knowledge by osmosis, working on a team managing other people’s properties and because I made a point of learning as much as I could. The 3 years since I bought my first property have also been full of some great lessons.
If you really understand tech stocks, or mining, or real estate, put your money there. The nice thing about real estate is everyone has at least a little familiarity with it and we’re all capable of learning. What each person needs to decide (with some help) is what mix of diversification vs. single minded focus is right for them.

Look Behind the Curtain

There’s a lot of sources for information and opinion. You should do a lot of research on your own, and also pay for other people’s analysis. I trust REIN’s analysis more because they don’t sell real estate. Same deal with the IMF; they couldn’t care less if you or I buy another piece of real estate. I also listen to sources like RBC for their housing affordability index. Sure, they sell mortgages, and more activity in the housing sector is good for them. I think Garth Turner buries his good points in a lot of rhetoric intended to sell more books. Does it make their opinion worthless? No, you just take it with a grain of salt.

There’s a lot we can agree on, and a lot more that bloggers, professionals and friends can be doing to help people out.

Photo credit: Stuseeger

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Sara had a great post over at the Edmonton Real Estate Blog about Mario Toneguzzi’s article Mortgage arrears soar in Alberta. What made the post really fantastic was the discussion (still ongoing three days later) which followed in the comments.

I pointed out that one thing which is likely contributing to higher arrears is the lack of assumability compared to even 5 years ago. DaBull had a great comment (not all of which I agree with) that I thought was worthy of  sharing with you folks.

During the recession of the early 80’s, mortgages where assumable and you could dollar deal your house (sell for $1.00 and have someone assume your mortgage, the buyer didn’t need to qualify). This even worked with CMHC insured mortgages. I know I bought 6 properties, 5 for $1.00 and one for $2800.00. Had to bring the mortgages and tax bill into good standing so those 6 properties really didn’t cost me just a $1.00 each, they each cost a little more. The name $1.00 deal came from the dollar required to make the contract legal.

This is why in early 80’s you will not see very high foreclosures or arrears rates. Back then people could just sell for $1.00 and walk away. The buyer was now responsible for it. The seller would just wash their hands of it and that was the end of story, thus no arrears or foreclosure showed up in the stats.

Not long after this, CMHC changed the rules when assuming CMHC insured mortgages. The original person who took out the CMHC mortgage could be held responsible for the mortgage default, no matter how may times it changed hands. This rule only applied for as long as it was insured through CMHC. Once the mortgage was below CMHC limits of 75% L/V ratio, it could be $1.00 dealt. But then who would be stupid enough to $1.00 deal a 25% equity property. Banks never needed to put this clause into their mortgage contracts because mortgages with less than 25% equity where insured by CMHC and the CHMC policy applied. Plus with 25% equity no one would need to $1.00 deal anyway. During this time all mortgages where still assumable.

In the 90’s there was another recession in Canada but not in Alberta. Things got tight here but there was no recession. Not having $1.00 deals meant arrears went up higher even though the economy was in far better shape than it was during the 80’s recession. Again the reason arrears where higher than the 80’s was there was now just one less way of getting out a mortgage. Mortgages at this time where still assumable though.
Today. There is no more $1.00 dealing, hardly any assumable mortgages and banks have rewritten term mortgage contracts to make it very expensive to break. If you want to get out of a term mortgage with your kahonies still intact you will need a good mortgage broker or real estate paralegal to decipher your contract and hopefully find a loop hole. They do exist.

Due to banks being public companies and more worried about shareholder value than customer loyalty these days. They have become very strict on enforcing these contracts. To the banks you are just the next quarterly result. The more they can bleed from you the better.
So this is why just looking at historical numbers doesn’t tell the whole story. If you only look at the numbers it would look like this current situation is the worst, when really it’s not. The rules have change, that’s all. They now favor the lender and big time. They have made it almost impossible to get out of a term mortgage contract these days. Well without extremely harsh penalties.

So again a brief summary:
In the 80’s it was easy; sell for a $1.00 wash your hands.
In the 90’s, a little harder; just have someone assume your mortgage and maybe pay you a little.
Now, extremely hard; you either have to pay and pay a kings ransom to get out or find someone that can qualify and buy your property at a reasonable price. And at this time it’s not the best time for either option.

Lucky the economy is starting to pick up steam again, especially here in Alberta. This will help a lot of those in arrears and hopefully they will not end up in foreclosure.

Ahh… the good old foreclosure process. It’s actually very time consuming and expensive to foreclose on someone. I know I just foreclosed on someone last year, not cheap and definitely not easy. Banks also know it cost a whole lot of time and money to foreclose on someone, even someone that is CMHC insured. If you didn’t know, CMHC does not cover foreclosure costs, only mortgage losses. Sara and Sheldon already did a few very informative post on the foreclosure process a year or so ago.

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As many expected, the Bank of Canada raised rates 0.25%, making the overnight rate 1%. Most banks followed suit, making the prime rate 3%.

Here’s the high points from the press release (via Canadian Mortgage Trends)

“…Consumption growth is expected to remain solid and business investment to rise strongly.”

“The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected…”

“…Financial conditions in Canada have tightened modestly but remain exceptionally stimulative.”

“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

I posted a quick survey the day before the announcement, and here’s what people thought would happen.

It’s a difference of $13 on every $100,000 of mortgage, which is chump change. These are some screaming low rates, and there’s been talk about how the global economy will be growing at a little bit slower pace moving forwards, which also means we’re not as likely to see double-digit interest rates in the near future.

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I know we’re cutting it a little close with this one, but when the Bank of Canada releases the new overnight rate tomorrow morning, do you think it’s going to go up or down? I’ll share the responses tomorrow after the announcement.

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Here’s some links to help your Friday (or Saturday) go a little faster. I’m going to try and post things like this a little more regular, so please leave a comment and let me know if there’s types of links, news, topics or questions you’d like to see more of!

• From Lovely Listing – NFSWednesday: taking racecar beds to a whole nother level
  The shock absorbers make it perfect for people living in earthquake-prone areas, and the ridiculousness makes certain you’ll never take yourself too seriously.
• Stephen Gordons’ Worthwhile Canadian Initiative – On Canada’s exit strategy
  Our exit strategy appears to be to let the fiscal stimulus package expire in 2011Q1 as planned, and to let monetary policy take up the responsibility of providing whatever remains in the way of counter-cyclical policy. From where I sit, that looks to be the sensible path.
• Mike’s Calgary Real Estate Review – New Zoning Restrictions On Secondary Suites
  Council has erased zoning restrictions on secondary suites for thousands of suburban Calgary houses, a unanimous decision at least one alderman acknowledges he made without understanding the changes he was approving.
• From Canadian Mortgage Trends – Variables Win Long Term But…
  Long story short, variables are still a great bet for many. But, if you:
  • Have a tight budget
  • Are nervous that prime rate could exceed analyst rate estimates in 18-24 months
  • Find an amazing deal on a 5-year fixed
• Mike Sachoff on WebProNews – ApartmentGuide Adds Search Tab To Its Facebook Page
  “A significant portion of ApartmentGuide.com users are between the ages of 18-35, aligning nicely with Facebook’s demographics,” said Arlene Mayfield, president, Apartment Guide. “Further, Facebook had over 150 million U.S. users in July 2010 with that number expected to grow considerably.”
  More sites need to do this. Facebook is huge in Canada.
• Ryan Moeller on Bigger Pockets – 10 Ways to Mitigate Risk and Control the Outcome in Real Estate Investing
  Savvy real estate investors research and use information to make good informed business decisions. By doing this, you can mitigate risk and control the outcome.
• Sara and Sheldon’s Edmonton Real Estate Blog – 1000 Things we Love About Edmonton
  I’m a sucker for lists and Edmonton related stuff, and I love the stuff they write. This one looks to be awesome!
• From Canadian Capitalist – This and That: Napkin drawings, Role of luck and more…
  Check out the first link he has, some great napkin drawings from the NYT.

Photo Credit

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