experts: real estate column Tuesday, October 14, 2008

Financing, Flipping and Renting

A reader writes: Is it a good idea to rent for a year or two then buy if we hit a valley? Or is this risky in a place like Vancouver?

By Ozzie Jurock

"To be, or not to be: that is the question: Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of troubles, and by opposing end them? -William Shakespeare

In the famous words of "The William" 'to vote or not to vote' on the $700 billion bailout package was the question on Monday. But opposing - alas - Americans, in perhaps rightful indignation, did not end the 'sea of troubles'. Many of the questions this week center around what the failed bailout package may mean to us. Well, I am not an economist, but the real problem remains confidence. People not trusting their banks and withdrawing deposits ($17 billion was withdrawn in three weeks from the largest US bank failure - Washington Mutual - last week ever, triggering the failure). Perhaps the FDIC should simply increase insurance on deposits (currently insured only to $100,000 - as in Canada! If worried and if you have more - spread it around the major banks) to five hundred thousand or a million and thereby stave off the run on all banks - now worldwide from England to Hong Kong, from Singapore to Germany. Confidence must be restored ... but it may take months. Central banks are 'liquefying the system' as never before, yet individual banks still remain leery of even each other. The credit crunch will spill over into the general economy. In this space I mused a few months ago that we all should get all financing in order, to get our credit lines fixed and unused credit - actually drawn down ahead of time. In the short term it may mean perhaps lower interest rates, or if not solved - much higher interest rates in a few months. In the meantime ... let's remember that while the TSX collapsed some seven per cent on Monday, it did collapse by 23 per cent on October 19, 1987 in one day. I was president of Royal Lepage (Res.) in Toronto at the time and the best advice money could buy (and we spent it) was, that we would head back to the thirties. In reality what happened was the opposite. In fact, every major collapse of the market was followed within three to five years at even greater highs. Let's hope for the same this time.

Let's start today with this oft asked question:

Q: I have a question that I'm sure you get all the time right now. We are looking at selling our house. Do you think it's a good idea to rent for a year or two then buy if we hit a valley? Or is this risky in a place like Vancouver?

A: Yes, indeed, that is the question. Personally I treat my real estate investments differently than my residence. My criteria for owning my home is: Right arm on the fireplace ... left arm, extended with a glass of Shiraz surveying MY space. If that makes me happy ... I don't care about the vagaries of the market. Imagine all the people that wrote to me in 2005 and 2006 with the same question and acted on a perceived collapse then? My investment real estate I divide into two: 1. The real estate that cash flows. This I will keep forever. Up or down who cares, tenant pays off the real estate. Passive income is where it is at. 2. Flipping. I would not be flipping at this time.

I feel and have said so many times here, that we are at the end of this cycle, but to exactly time when the market will bottom or turn up is only clear six months after it happens. The previous three downturns lasted an average of three years - prices dropped from top to bottom 15 per cent to 17 per cent. But that is on average, some areas did not drop at all, some product like some new condos dropped more in the last (1995 - 1998) downturn. Finally I have often regretted selling some real estate, I have never regretted to keep owning it.

Q: There was a house originally listed for $224,900, dropped in July to $209,900. I went and viewed the house with my chosen realtor. She is coworker of the person with the listing. Two hours later the phone rings and my realtor tells me there is another offer and if I am interested I will have to make an offer right away. I ask for a half hour and then made an offer of $191,000. The other offer is subject to sale. We have been pre-approved. I was told they wouldn't even write up my offer. What I would like to know is what percentage below the asking price should I start at?

A: I get that question quite often. You can make really any offer you want, but the vendor can accept or reject any offer you make. There is no given percentage. The property may have been listed too high in the first place and then a 20 per cent below asking price may be reasonable. On the other hand the property may be offered at market value and a 10 per cent below asking price offer would not be reasonable. Currently on the Westside there are more than 20 homes listed at up to $100,000 below assessed value. One in particular listed at $97,000 below assessed value sits right beside one listed at $45,000 over assessed value. Clearly, the offer you would make on one or the other would be markedly different. It comes back to this: How much research did you and your agent do in the marketplace of similar properties that recently sold (to establish value in comparison to the asking price of the one you wish to buy)? Then make your offer, if it is not accepted learn to say: "So what, next!" You are after all now in a buyer's market. Schussing out that great deal may take some work ... but it will be worth it.

---

There were still tons of questions on the US. Where to buy, what to buy, tax consequences etc. Please look at previous stories in the SUN on the subject (if you cannot find them there go to my website at Jurock.com and look up all the stories written in the SUN there). We also have an Outlook 2009 conference this Saturday October 4th, where there are displays from Hawaii, Maui, California and Arizona among the many 'mini convention' participants. Six speakers and already more than 500 attendees booked. Every burning question will be answered.

Published in the Vancouver Sun, October 2, 2008




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