experts: real estate column Monday, July 05, 2004

Questions, Questions

I receive hundreds of questions - here is a sample of, hopefully, general interest.

By Ozzie Jurock

This article appeared in The Vancouver Sun

I receive hundreds of questions. Thank you. Unfortunately I can't deal with them all. Here is a sample of - hopefully - general interest. I have abbreviated your questions and taken out all the "I like your story" stuff - I love it ... but as I said before - I am a legend in my own mind already.

Here are the most recurring:

QUESTION: I read that statistics show that mutual funds are outperforming real estate over time. Is this true?

ANSWER: 'Facts are stubborn things, but statistics are more pliable' said Lawrence Peter. I look at it from an average person's point of view. No great sophisticated statistics. You just buy a house. If you had bought one in Vancouver in 1960 for $13,105 and put $650 down, that is worth today $530,000 - your profit is $529,350 - Tax free. Now what did your Mutual Funds do?


QUESTION: I hear the market is turning down, should I wait before I buy now?

ANSWER: Well, forecasting is never easy, particularly, when it is about the future. In one form or another this is the most asked question. My answer is always the same: The peak of any real estate market is easily seen - 6 months after it peaked, but not before. Forecasters have been announcing the 'market turn down' in San Diego since 1999 and in May it clocked in 34% (Yep!) higher than last year. Buy the best you can for you and your family. Hire good professionals, do your own research, your own due diligence and buy a good purchase for you and do not buy 'the market.'


QUESTION: I hear that listings are rising and that this means the real estate market is about to turn down.

ANSWER: Similar question with a twist. All this talk about rising listings. Large headlines be-crying the changing market. What they mean to say is that NEW listings are rising (and imply that this is bad for the market). There is talk of: "Relief for buyers may be coming ... as listings continue to increase in most markets." Are listings rising? Yes, but so are sales. We have sales increases of 20% - 30% from Chilliwack to Lions Bay. If sales increase that much, it is LOGICAL that new listing inventories are rising to meet the demand. (Even if they rose by 30% they would just keep pace). The listing numbers YOU should watch are the ACTIVE listings (every property still for sale - regardless whether listed this month or 6 months ago). And that number at the end of May was only 2% above last year but a whopping 60% below the 20,572 Active Listings on May 31st, 1998.


QUESTIONS: Who offers 'unique' mortgages for the 'hard to finance' property?

ANSWER: Remember that Robert Frost said: "A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain." Today there are a hundred 'unique mortgages.' That's why you need to see a mortgage broker to explain it all. Here are some:

  1. The 'no proof of income' mortgage. For the self employed. GE Capital will insure a high ratio mortgage that accepts income as stated by you. No T-4's. It WILL accept it. However, make sure that your statements are consistent. If your application says: Income: $200,000. Profession: Janitor from 1990 to 2003, now self employed as professor at UBC ... They may not accept your application.
  2. The 'bankrupt mortgage': Xceed mortgage Co. offers a one year discharged bankrupt person with some re-established credit up to 95% financing. (Yep, at a higher rate)
  3. The '100% offset of rental income mortgage': Citizen's Bank will 'offset' the rental income of your investment property by up to 100%. In other words, if your mortgage, tax payments and condo fees are $1000/month and your rent is $800/month, then you will only have to debt service $200.
  4. The 'multiple choice' mortgage. Nova Scotia Bank's 'step program allows you to register an umbrella mortgage and underneath split it up into credit line/ 5 year term/ open term etc. pieces.
  5. The 'take one-add one mortgage'. First Line offers a product that increases your line of credit every time you make a mortgage payment in the same amount.

QUESTION: When buying an investment property, how much should I set aside for expenses?

ANSWER:

  1. Rule of thumb for condo fees - $2 per sq. foot.
  2. For maintenance, depending on the age and condition of the house - allocate about 1% of the purchase price annually.
  3. As an investor in a larger building it is also important to make an allowance for vacancies. Use the vacancy rate in your area (i.e. in Vancouver today - approx. 2.5%) and plan on getting - over time - that much less rental income.
  4. When you buy the property create a 'reserve pool' of at least 1% of the purchase price. If you dip into it, keep topping it up to 1%.That pool would start with the first month's rent and some of your cash (remember you pay the first mortgage payment at the end of the month).
  5. The deposit must be in an interest bearing account and should NOT be considered as part of your pool

QUESTION: What is usually included in the asking price?

ANSWER: Deciding what stays and what goes with the old owners is ALWAYS up for negotiation. A seller wanting to take fixed items out of a house should specify them in the sales agreement. Appliances that are not built in (washer, dryer, refrigerator, portable dishwasher, portable microwave, shed, table saw and freestanding stove) are all negotiable. Generally - in law - if you didn't specify it, it depends on whether an item is a chattel (an item not bolted in) or a fixture (an item that is). But there are many grey areas. Curtains, ok, he'll take, but what about curtain rods? What about mail boxes, etc.? Always write items into the contract, Oh, and remember almost always - what you do not ask for - you do not get. (I once bought a house where ALL the furniture and household goods (including the wine goblets) were thrown in.)


QUESTION: How do lease options work?

ANSWER: A lease with an option to purchase is a tool sellers can use to induce a sale, where the buyer lacks sufficient funds for down payment and closing costs. Option amounts vary from one deal to another. Lease options generally provide that a portion of the rent is applied toward the purchase if the option is exercised. Occasionally, a builder/ developer will offer nothing-down/lease to own loans to induce sales in an otherwise slow-moving project. Generally, you will ALWAYS pay more than the property is worth (after all, the seller takes the property off the market). As a seller, make sure you collect full rent PLUS an amount to be applied to the down payment. As a buyer make sure that YOUR lawyer has perused the document and that all is above board. You do not want to end up paying extra rent only to find out that the conditions under which the lease (or option to buy) kicks in are onerous.

For more real estate investment advice, visit Ozzie Jurock’s website at Jurock.com




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