Shortfall: Know this Term if You're Buying A House This Spring

Planning on buying a house this Spring in Toronto? Then you have likely gone through your check list. Down payment?  Check! Pre-approval from the bank? Check! An estimate of what land transfer tax you will need to pay out?  Check!  Moving costs, insurance, bills?  Check, check, check!  It would appear that you have everything lined up and ready to go, but there is one more thing that you should add to your checklist.  And that's money for a shortfall.

"What is a shortfall?" you ask. Well, before I get into the nitty gritty of what it is, let me offer up a little backstory first.

As almost anyone who reads a newspaper or blog knows,  houses in Toronto are hot again this Spring. I know, not terribly surprising. There are many more buyers than there are houses to buy. How do I know this? Well, I have been in my share of bidding wars this past few months, and I have seen it first hand, though you don't need to be a real estate salesperson to clue into this.

It seems that at this particular moment in time, we are experiencing the quick ascension of two emerging neighbourhoods, namely the Danforth Village in the east and the Junction Triangle in the west.  Why? Well, they are the last two affordable places to buy a house that is close to a built subway line.

This low level of  inventory is not just in these parts of Toronto. It's happening in many areas of the city, but the Junction Triangle and the Danforth Village are two good examples of where some first time buyers or first time house buyers are heading to buy their home in Toronto. Quite frankly, I think these neighbourhoods have a lot going for them, and are transforming in really cool ways. I can see why there's some demand.

With that said, anyone who would like to buy a house in a hot Toronto neighbourhood right now will need to sport their war helmets and pull out their smiting sword, for battle.  Not for every property, but for many of them.

So, now that we have set the stage, let me explain a shortfall by way of example.

Let's say a couple has qualified for a mortgage that is $850,000 dollars. They have $160,000 to put down on the house after all their expenses. They find a nice big detached home for sale at $699,000. They know that houses have recently sold for a little more in the area, and in the past few months, they’ve been going for a lot more. On offer day, there are 15 offers. The buyers want the property badly enough and put in a bid of $950,000 to get the property. You may think that bidding $250,000 over the asking price is unheard of, but it's not. Though it was close, the buyers’ offer is accepted! Then the bank that is offering them the mortgage sends out an appraiser. The buyers’ financing depends on what this appraiser is going to say. The appraiser drives in from Mississauga, not really sure of the Toronto market, but with a lot of accreditations on how to do appraisals, and tells the bank that the property is only worth $750,000 according to their estimations. So, there is a SHORTFALL of $200,000 between what the buyers have paid and what the bank will cover in the mortgage.

What does that mean for the buyers? Well, it means that they have to fork over $200,000 of their own money to cover the difference between the purchase price and the appraised price PLUS they need a downpayment on the mortgage of $750,000. With $160,000, that is not enough.

I know, scary stuff. This is, however, a VERY extreme example of a shortfall. They are usually not so big, though it is always a good idea to anticipate that there could be a shortfall, even it if is as low as $10,000.

The trouble is, it is difficult to assess the shortfall because you do not know what the appraised value will be. Some appraisers come back higher than others. I have heard of appraisers appraising the same property with 20% spread in value.

There are some things you can do though to prepare for this:

1. Do the math. Know the comparable solds in the area so that you can have an idea if your offer is close to this value. If not, you need to factor a potential shortfall into your calculations. If you are tired of losing out in bidding wars, then you will know that a shortfall may be needed to win on some properties in in-demand neighbourhoods.

2. Work with an agent who knows the area where you are looking and knows what is required to win in theToronto neighbourhoods where epic battles of real estate take place.

3. If you find your appraisal to be lower, you can always try another mortgage at a different bank or you can appeal your appraisal. Remember, appraisers are not always going to come up with the same number.

Of course, if all of this is just too strange for you as a buyer, then you just need to pick another neighbourhood that has fewer bidding wars, what I call the NEXT emerging neighbourhood, or you may want to head to something less competitive, like a condo.

Is Your Real Estate Salesperson Looking Out For Your Best Interest?

Real Estate salespersons have never been a beloved profession in on our culture like a doctor or an astronaut.  No, we are never mentioned with the actresses, presidents and even lawyers when a young kid is asked what they want to be when they grow up. Salespeople are often seen as tricky in the eye of the public. For a long time, and still today, the idea of a salesperson brings up images of the cigar-smoking used car salesman or the door-to-door vacuum salesman or even the Avon Lady. They are seen as people whose #1 interest is to make a sale,  even if the client doesn't need a used car, a vacuum or a year's supply of ruby lipstick.

Still, I think the idea of sales has changed since those days.  Personally speaking, selling real estate just isn't about making money for myself, but it's about making my clients happy with my services, and finding them the best deal.  Because on some level, I care about what people think of me. Even on a greedy level where I want to make money, I know that doing a good job with a client will lead to more referrals and more money for me. Yes, I'm a people pleaser at heart, but I'm not Saint David of Real Estate. I think it's just good business sense. 

For the most part, I find my fellow real estate agents, whom I work with on a regular basis, are looking out for their client's best interest, and are usually professional. I think that the Toronto Real Estate Board and the other provincial and national boards have done a pretty good job at creating an ethical guideline for how real estate salespersons should act, but still, every once in a while, I run into an agent who I believe is not looking out for the best interest of their clients, and drives me a little nuts in the process. 

Let me illustrate this with an example. I recently had some clients who were interested in a property. They went through to see the the property twice. That's usually a pretty good indicator that there's some interest there. Because of work and travelling arrangements, they had asked me to wait a few days until they were in town to fill out an offer. The property had been on the market for a long, long time. If interested, it is always best to put in an offer as soon as you can, but they felt there was no reason to rush. I contacted the listing agent and told him that if he receives any offers to let me know. Therefore, if an offer came through, I can arrange for my clients to bring in an offer earlier, and his seller would have two offers, instead of one offer, from which to choose. On the day I planned to meet with my clients to put together the offer and register it, I found out that the listing agent had sold the property already. Not only that, but he represented the buyer in the transaction as well as the seller. Therefore, he made more money from both the buying and selling ends of the transaction. 

Now, by the real estate rules that we go by, the listing agent can do this. I did not have an official offer that I could show him and his clients. So, technically he only had his one offer. 

For my clients and for me, this could be a lesson to move quicker. The longer you wait the more chance there is of a property slipping away from you, even if the property has been on the market for months at at time.

Still, if an ethical and professional process took place and the listing agent had told me that there was another offer on the table, I would have been able to rush my offer through and his sellers would have had the benefit of choosing the best offer. Instead, he only presented the one offer. So,  he is not exactly acting in the best interest of his sellers. In the end, he makes more money, but his clients don't necessarily get the best deal. It's the kind of thing that I think makes salespeople look bad. Their goal is their sale, not their client's best interest.

My goal here is not to show you how some real estate salespeople are not looking out for your best interest, but it should make you think how you pick your real estate agent. 

If you are looking for a salesperson to represent you, make sure you do your research. Speak to others who have worked with a particular agent with whom they've had a good experience. If you are working with someone you just met, interview them. Make sure your agent is as transparent and straight forward as possible. Ask him or her how they do their business and how they handle offers. Most importantly, if you are looking for a selling agent, ask: How are they going to market your home?  Some sellers are so focused on getting the commission rates down that they don't focus on any thing else. And when commission rates are cut low, I find, agents seem to do a lot less to market the property and take care of their client.  

All in all, most salespeople are good folks in the real estate industry. Just make sure you pick the one who will represent you wisely. 

Can the Toronto Land Transfer Tax Be Slain?

I'm usually not one to mix politics with real estate. I'm not here to endorse any kind of political bent on who is better beit from the left, right, or centre. This week, however, I have seen quite a few pieces on how some candidates running in the next civic election would deal with the Toronto Land Transfer Tax, and I hope that this land transfer tax is seriously revised.

Now, before we get into this, let's look at a brief history of land transfer tax in our city:

Originally, the Ontario Land Transfer Tax started in 1974. Like many taxes, the government was looking for ways to increase revenues, and in turn, the Ontario Land Transfer Tax was created. The provincial tax has been around for a long time, and it won't be going anywhere soon.

Then in 2008 David Miller brought in the Toronto Land Transfer Tax – a city version to add to the provincial land transfer tax. It is understandable why someone would need to bring in more money at that point, especially since the previous Mike Harris provincial government downloaded many of its costs on to Toronto. Because of this, Toronto needed to find a new revenue stream fast. Of course, I don't think the Toronto Land Transfer Tax was the way to go about it.

In addition to the Ontario Land Transfer Tax that people were paying for years, the Toronto Land Transfer tax practically doubled the amount of taxes paid out. And these are not small sums of money. For a $750,000 house purchase, you are paying $22,200 in both taxes. It 's easy to understand why people are not thrilled about it.

With that said, let's not make this about moaning over having to pay taxes. I understand taxes are necessary, but this one stinks. Higher property taxes for everyone across the board? Sure. Road tolls in one of the few majors cities in the world without any? Makes sense. Taxing people after they've spent almost all their money on a new home and will require more money to move, renovate, and update any deficiencies in the house? That's not exactly considered good timing.

The funny thing is, Rob Ford had made it part of his last campaign to remove the Toronto Land Transfer Tax. It was the one thing where we agreed, though certainly not enough to have me vote for him. And as it turns out, he did not even deliver on it. Why? No, it has nothing to do with crack, or drunken stupors, or being too busy with Jimmy Kimmel. He did not deliver because he had come to realize that the city needs the money the land transfer tax generates. It would be far too unpopular among his core supporters to suggest a different revenue stream like higher property taxes or road tolls. Ford was a cutter of spending, and he really didn't cut the land transfer tax as promised.

So, this next election he claims he would like to reduce the Toronto Land Transfer Tax by 5%. Not quite the same impact or scale of his last election promise.

Many candidates have not weighed in on this tax yet since the election will not take place until the Fall. Still, Karen Stintz says she wants to change how the land transfer tax works by having it apply at a higher amount to make the tax less of a burden.  David Socknacki would like to tie it to the rate of inflation.

There are lots of ways to go about it. Reduce it, get rid of it, have a higher qualifying amount for first time buyer or have no one pay tax on a given amount, like the first $400,000.

The fact that changing the Toronto Land Transfer Tax has already shown up on the campaigns of those running for mayor suggests this is going to be an important issue for many of us in Toronto.

Why Canada Can Benefit from An American Real Estate Recovery

Let's face it, as Canadians we like to think we are a kind and gentle folk, but most of us can't help but be competitive with our southern American neighbour every chance we have, whether it has to do with hockey, health care, hot dog eating, film festivals or who has the best cities.

Canadians can get a little smug when it comes to real estate and Americans. During the recession, we didn't have the colossal collapse in our real estate markets because of our cautious and careful banking and governing ways. Meanwhile, the Americans went to extreme heights only be knocked back down to earth with their careless and greedy banking practices.

But the time for Canadian superiority is about to close because American real estate is back, even in the hardest hit places like Nevada, southern California and Florida.  A large bungalow, for example, in a decent Miami neighbourhood fell as low as 250K three years ago (in American dollars) from a height of 700K to 800K at its peak. Already, this house is on the rebound and shows no signs of slowing down. This bunglaow would go for around 400K this year.

As a Canadian, or a Torontonian, you may think that the return of their real estate market has little bearing on ours, but the truth is, it does. There's no guarantee American real estate will not crash again at some point, particularly in the southern tourist destinations. Still, the markets return so far has been steady and strong; and Canadians should be happy about this, even though we secretly (or openly) want to be competitive with our American friends.

Just how will Canadians benefit from an American real estate recovery? Here's how:

1. FOREIGN INVESTMENT SHIFT

There's been a lot of concern that there has been too much foreign investment in Canadian cities. Too much foreign investment can destabilize a city's real estate foundations. If something bad happens to the economy like a recession or a turnaround in the real estate market, it's easy for owners from abroad to sell their real estate assets in Canada. It's not their primary home, so they have no skin in the game. It's merely an investment. If several of these real estate investments are sold at once, this could create a very destabilized economy. A lot of homes for sale could flood the market and cause prices to fall fast.  During, and for many years following the recession, many foreign investors were afraid of investing in the real estate markets in the United States. So, they began to buy up properties in stable Canada. Now that the States are showing an increase in their real estate prices, the investors have moved on to their cities. This, in turn, allows for more owner-occupied purchases and an more stable housing market in our country. The foreign investment becomes more evenly distributed.

2.  CANADIANS GET RICHER.

Canadians have been buying up a lot of the American vacation properties. In Florida, most of the incoming investors are paying all cash for their homes so they have no mortgage. As these properties increase quickly in value, they will help build the equity of many Canadians. Richer Canadians with great assets makes for a healthier financial status and a better net worth.

3. AMERICANS GET RICHER

A happier real estate market in the U.S. means richer Americans will spend more money in Canada whether it's tourism or through investment in real estate or other Canadian industries. We’re right there above them, sharing a giant border. They will come over.

Even though the United States and Canada can effect one another so much, we do have real estate markets that function quite differently. For the last few years, some Canadian cities have been climbing the international charts for expensive cities. Though they are relatively inexpensive compared to Europe and parts of Asia, Vancouver and Toronto are more expensive in the real estate department than they have been in a few years. I don’t think our cities will fall in value. In fact, I think real estate in these cities will continue to climb; but the return of real estate in the United State will make many American cities increase in the price far more than we will see in Toronto or Vancouver or Montreal or Calgary. San Francisco, Chicago, New York and even Dallas will have bigger returns.

What Neighbourhoods Have the Best Price Appreciation?

In the spirits of the Olympics, I thought I would discuss something of a competitive nature. That is, I thought I would explore some recently compiled stats on homes in Toronto neighbourhoods and how they stack up against one another. These statistics were based on the sales from the Toronto Real Estate Board from January 2012 to January 2014 for detached homes. Out of the 36 Toronto districts, the top 5 districts were as follows:

1. C9: The Richie Rich (Rosedale and Moore Park)
2.  C2: The Centre of the Universe (including Annex, Wychwood, Yonge-St.Clair)
3. C1: Also the Centre of the Universe (including Niagara, Trinity-Bellwood, Dufferin Grove, Palmerston-Little Italy)
4. W02: Emerging Neighbourhood Emerging Fast (including the Junction Area, High Park North  Wallace-Emerson, and the Junction Triangle)
5. W03: Early Emerging Hoods Rising From Their Inexpensive Past (Rockliffe-Smythe, Keelesdale-Eglinton West, Westom-Pellam Park)

For a complete list of detached home sales in Toronto please click here for complete results.

Now lets look at the winners. Clearly the top spot speaks to the amount of money that is entering the high end market in the past two years. C09 had an increase of 115.63% in just two years.  I do find these stats to be a little questionable. I will discuss this below, but it does indicate that high end is back in Toronto. The centre of Toronto is still very strong showing us how much demand there is for detached houses in these neighbourhoods. C02 has a increase of 71.25% and C1 had an increase of 54.02%.

I think some emerging neighbourhoods really showed their growing value in past two years. A more advanced emerging neighbourhoods can be found in W02, that has increased by 51.69%. And for a place where houses have been remarkably inexpensive by Toronto standards, the early emerging neighbourhoods of W03 have increased by 40.61%.

Now all, this info may be a little overwhelming.These are remarkable increases. If you have bought in the top neighbourhoods, especially if it is a detached house, you will be thrilled. You may be crying over your keyboard if you wanted to buy in these areas but decided to wait a few years.

But before you get too smug in your foresight or crushed by your buyer position, let's look at these stats with a critical eye.

First of all, let's be clear that these are detached homes only.  Detached homes are king. Even if you want to live in a dense city like Toronto surrounded by people, Torontonians still covet the detached home. And these stats prove it. More than any other housing type, detached homes in this city have surged ahead in value. Detached homes across Toronto sell for a much higher average than other housing types, though semis, row houses and many low rises have also done well in the past few years. So, if you cannot afford detached, the other property types are still great investments that are appreciating in value as well.

Another pattern you can see from these stats: Emerging neighbourhoods, whether they are newly emerging or later in the cycle are good investments. Neighbourhood is still key to the success of a purchase whether it is a condo, a detached house or a town home. Pick wisely.

Despite what these stats may hint to us, I do tend to be fairly critical of them too, and for good reason. One of the fundamentals of gathering statistics is to have a large enough sample. If you don't have a large sample, your stats can show some pretty wild variation that may lead to a misrepresentation of a given neighbourhood. So, take Rosedale and Moore Park, for example. In the last year, there were less than 100 detached houses that sold in Rosedale and Moore Park. That is not a large enough sample to give meaningful results, making it much more prone to wilder fluctuations. It could simply mean that bigger and fancier homes have sold more in the last year than two years ago. So, in a nutshell, its #1 position may just be a lucky fluke.

Other neighbourhoods have some unlucky results based on these statistics. This past year I have experienced detached homes in bidding wars in the Oakwood-Vaughan area, and yet the statistics position this neighbourhood, along with Forest Hill, in dead last. The results just don't add up for me when I see demand in Oakwood increasingly outpacing other areas of Toronto. Again, I believe the small sample of homes reflects the wild fluctuations in the detached homes that have sold.  If you look at the sales statistics for each year in the district of C03,  you'll find that in January 2012 detached homes sold for $1,355,000 then plumetted to $635,000 a year later,  then shot back up to $1,210,000 by January 2014. There was really no reason why home prices would have been cut in half between January 2012 and January 2013 only to shoot back up again between January 2013 and January 2014. If we just regarded the statistics from the last year, Oakwood-Vaughan would have been one of the best performing neighbourhoods in the bunch. Clearly, there was just not a big enough sample of sold homes to give us clear results.

Another reason these statistics may be a little off has to do with how the neighbourhoods are grouped together. Take again the Oakwood-Vaughan area. Homes south of Rogers usually sell for much more than homes north of Rogers. Then we have the wealthier neighbourhood of Forest Hill mixed in C03 district to make three very different neighbourhoods slotted into the same sample with very different communities and styles of homes for sale.  Detached homes in C03 range from sprawling city estates to very neglected homes in need of some serious love.

Regardless if you live in the overwhelming lucky Rosedale-Moore Park or the neighbourhood unfairly disadvantaged in these statistics like Oakwood-Vaughan, it still does show us how home sales can be like the Olympics. Some athletes, like some neighbourhoods have shown us a remarkable improvement on their performance. Other athletes, and some neighbourhoods, often perform well, but were a little unluckily or treated unfairly by the judges. So,  have fun with the stats, but don't take them too seriously.

Buying or Selling a Condo? Make Timing Work For You

Timing the real estate market. So many believe you could make buckets of money if you could master it. To be honest, I think this is a tough thing to rely upon to make your fortune in real estate. I see buyers standing on the sidelines for years as Toronto prices continue to go up, and they miss out on buying a house for half the price it was 10 years ago. I'm not talking about that kind of timing. This kind of timing can be unpredictable. Should you buy in 2018? Will the market crash? This is not the kind of timing on my mind.

In this blog, I'm talking about something more specific, particularly when it comes to condos. It is something that could be applied in any market to improve your chances of getting a better deal. No guarantees, but better chances. Some condos will sell well at any time because they are in great location and have grown a waiting list of people who are trying to get in. Then there are those condos that have a certain amount of stigma, rumours (or truths) of bad construction, poor quality, or poor management. Let's assume, we are dealing with condos that are well run and well located.

For buyers, when it comes to timing, you may want to consider the following:

1. WHEN BUYING NEW

When developers first go on sale with a new condo, they offer their standard prices. If they do a good job advertising, everyone will run out and buy a condo unit until there are none left. This doesn't happen quite so often nowadays. Since there are more new condos for sale at the moment, not all developers are hitting their 70% sold units they require before they start construction. Without that 70%, they cannot build their condo in Toronto. For example, if units that have sold are stuck at 60%, developers will be willing to bargain since they want to go that extra 10% to get their project off the ground. Rarely do they lower the price. Instead, they start offering incentives to push themselves over than 70% hump. They'll offer things like: a free parking spot, a free locker, upgrades to the kitchen or free maintenance for a year. So, as far as timing goes, this would be a good time to make your move to buy new.

2.RIGHT AFTER A NEW CONDO IS REGISTERED

Once a condo is registered, buyers start paying a mortgage to live in their units, and a condo board is formed. Construction is done. It is the birth of a condo. At this point, buyers can become sellers. That is, they are free to sell their properties for the first time. More often than not, a bottleneck of sellers forms. Since the two or three or five years that those original buyers bought a preconstruction condo off of the floor plans, many of their lives have changed. They fell in love, had a baby, had a divorce, or found a job far away. In turn, their lives are no longer harmonious with the condo they bought many years ago. So, they try to sell them. In addition, there are the condo investors. These folks bought a unit in a condo building with the purpose of renting it or selling it once it was completed. Most will hold on to the unit and rent, but some will try to sell. With those two groups combined, there are often many sellers ready to sell all at once when a condo registers. This, in turn, may lead to a temporary lull in prices since new buyers have so many units to pick from. They can negotiate a lower price. Again, no guarantee this will happen with all condos, but it happens.

3. OLDER CONDOS

This timing method is not for everyone, but if you like space, you may want to purchase a condo that has been around a long time. Not just any old condo. Make sure it has a healthy reserve fund and is not falling apart. If you are open to an old one, chances are your maintenance fees are a little higher, but back in the 80s, wow, they knew how to make condos big! Many other buyers will poo poo an old condo since they look dated and don't show well. So your competition will be minimal. If you're up for a little renovation, you can probably get a larger condo for less.

For Sellers, you need to look at things a little differently. This is how I think sellers can benefit from timing:

1. THE FIVE YEAR MARK

If you have lived in condo that is roughly five years old, you are at peak selling potential. Why? Well, your condo is old enough to have built up a strong reserve fund for future repairs and updates to the condo. Also, after five years, the common elements are usually still in pretty good shape. The fixtures on the lights are still modern. The machines at the gym are all operational. Plus, the design and the style of your unit does not look old fashioned. Essentially your condo will not be upstaged by newer more modern condos. Finally, nothing has broken down yet. No big costs to fix the roof, the elevator, the windows. All these things put a buyer's anxieties at ease and provide the visuals that appeals to many buyers. It's a good time to sell.

2. NOW

This winter has provided a very low supply of houses and condos. Though houses are in higher demand, condos are much more available. Still, there are less condos for sale now than this time last year, and they are selling faster and at slightly better prices than the Fall. I'm not sure this will last until the Spring, but if you can pull it off, get out there now if you want to sell a condo this year.

3. AFTER A CONDO RENO

So maybe your condo is older, and maybe less desirable in the eyes of some buyers, but if your condo building has recently done a renovation of the common elements - a new carpet in the hall, a more modern lobby, and a fresh paint job, your chances of having more success with a sale will improve. Even if the condo is about to have a renovation, then that can be an incentive for buyers to get in there. Hopefully this renovation has been done after those running the condo have saved the money to update the amenities as opposed to depleting the reserve fund.

Now, I'd like to say it again: Timing isn't everything. This is true especially for sellers where having a great marketing plan is key. You need to know how you and your salesperson are going to advertise your property beyond a posting on MLS, how you will stage it, how you will stand out from other units in your building, and how you will negotiate your sales price. You need a strong marketing plan to attract those buyers.