Friday, October 12, 2012
Real Estate as a wealth building strategy
Dan, I am writing out of the blue today, because I need a change. I took a glimpse at an investment book last night, and one thing that it said is to talk to those in the know about investments.
Could I pick your brain about real estate? Is there still a lot of potential in our market for house flipping? Is it worth getting involved in flipping or would it be better to find real estate (commercial) to invest in? What is your opinion on flipping? Where does one start, to minimize headaches/failures? My book suggests having good team players, and you have always been a strong player when it comes to real estate.
Interesting that you have dropped a note of this flavour as I have been dealing with quite a few clients that are curious on how to move forward as a real estate investor to assist them in wealth building, as a matter of fact, I think this note may very well turn into a Blog…
There are many "real estate investment groups" books and seminars that can give you a lot of insight and different takes as to their investment strategies in the market, both long and short term. I am not a member, nor do I support any of these groups, however, I would suggest exploring some of these may be a good start for your quest. I would also suggest there are literally thousands of "potential investors" that have been through seminars, read books and joined organizations giving direction on how to go about investing in real estate (especially with little or no money down.) There is rarely a corner I drive by that doesn't have a sign that says "we will buy your home"… I would also suggest you take whatever information you gather from these self-proclaimed "guru's" with a grain (or a pound) of salt!
Don't get me wrong, I am definitely a proponent of real estate as an excellent wealth building strategy, as a matter of fact I believe there are none better. What I am saying is that one needs to take a conservative stance on returns on your investment, especially in our current world economy. There will also be opportunities for short term gains, however, most of these will have a very high risk factor. Taking a gamble with your hard earned cash is something I would never adhere to and certainly an avenue I would not personally advise for anyone.
Flipping, renovating, developing, modernizing, updating and such for short term profit is an extremely volatile and risky position to be in today, I suppose without some risk there would be little potential for gain. I have a variety of developers that are constantly on the hunt for ideal purchases for redevelopment and/or quick renovations for profit. I often consider developing, especially in the city core, myself. True developers often have a variety of "holding" properties at any point in time in anticipation of the value in a certain area going up at a future point in time to meet their profitability criterion. Spending a lot of time and effort researching where a potential future development or rebuild would be most profitable should be a major component of a developers protocol. There are no guarantees as to where the next popular or trendy place will be, and I would suggest that if you were consistent in making those predictions you would do very well for yourself.
Let me give you an example… five or ten years ago it was fashionable for the "upper middle" and "higher" wage earners and wealth builders to move to the outskirts of the city to large acreages and huge homes. Great examples of this would be Elbow Valley, Springbank and Bearspaw. We still see a certain amount of activity in these areas, however, there has certainly been a shift in paradigm for the wealthier echelon of our society. If we could have seen this coming more clearly we could have profited from the current trend - and that trend is a movement to the city core. A few years back we saw smaller builders and developers buying properties with 50' frontages to tear down and rebuild high end attached homes and infill's. This was (and still is) quite popular, but here is where things have changed… where in past it was investors and developers buying to redevelop at a profit, a good portion of the purchases and redevelopment are now for personal use. Why is that important? Quite simply, profitability. Where an investor needs to analyze a profit margin, someone developing simply for the pleasure of living in a specific area, profitability takes on a more minor role. If you have deep pockets and do not anticipate selling anytime soon, analyzing the bottom line is less fundamental. So prices in these pockets (such as Altadore) rapidly increase, purchasing land for development and profitability becomes more of an issue, so spec home builders start to look for other areas that may be more profitable.
And this has certainly happened… many small builders have looked into other communities in anticipation of the "next thing". And here is where the issue lies… finding that next area to develop is quite complex, and often accurate predictability is difficult if not impossible. I have seen many start up builders move to areas such as Highland Park, as an example, in anticipation of seeing the same popularity blossom in that community as we have seen in others. Cost of land in an area such as this is considerably less than somewhere like Altadore, and they feel they can develop and sell for a larger profit. What we have seen in this situation is that potential buyers are not willing to pay the same premium as the builder anticipated. We have seen many, many small builders fall by the wayside as they have invested into areas that did not support their expectations. I would suggest that an area such as Highland Park may do well in future, however, that time is not necessarily now. Perhaps purchasing a holding property in a community such as this would be something to analyze and consider for a future development.
Another interesting example of an area that showed promise, but slowed considerably is Bowness. Early this year there were quite a few homes for sale in the mid to light $300k's. Many of the homes in the centre part of the community are quite similar in size and land (50 x 120 lots with similar sized bungalows). At the same time there were some "upgraded" homes that were selling in the mid $400k's in the exact same area. Investors looked at this and thought they could sink $40k - $60k into the building, then "flip" the home for a decent profit. Here is what happened… quite a few investors purchased the fixer uppers at the same time with the same end goal… fix up the run down and dated property, then bring them to market at the premium price point… however, many came back on the market at about the same time. What they did not consider was the sustainability of the volume of potential buyers for that higher listing price. A pure example of supply and demand, there were too many renovated homes in Bowness for the demand. Now many of the investors will need to make some important decisions. Will I sell for the current market value, and possibly lose money, or should I hold this property for a while in anticipation of an upward swing in values in future? If they decide to hold on for a short term, perhaps waiting until the spring rush, they may face further decline in market value over the next few months… Alternatively, they may decide to use the development as a rental property and look at it as a more long term holding property.
Holding the property for a longer term than anticipated now brings a new issue to the forefront. If this redevelopment was originally put together as a short term project, they will now have to lock up some of their operational budget and funding. That means less (or no) cash for a future project. I believe we have more and more of these scenarios happening and what that does is slow much of the potential future development we could have if the market continued to more upward, or even if it stayed the same. I wonder how many "I am holding but wish I didn't have to hold" properties there are today?
So I guess that brings me to your next observation, would it be better to find commercial properties to invest in? I absolutely am a proponent of long-term holding properties whether it is commercial holding, or residential rental properties. There are many opportunities that present themselves in any market as far as a long-term holding and also in terms of profitability. Perhaps one of the hottest holding properties would be a self storage facility, I would also suspect there are a great many investors looking for such an animal. Warehousing, apartment buildings, office space, strip malls, the list goes on and on. A major component of a holding portfolio is the money necessary to put financing in place. Regardless of which financial institution you work with, they will expect you to invest a portion of your own assets into the project. Many of the organizations, seminars, books and speakers that preach long term holding or short term flipping talk about using "other people's money" (OPM) for securing the property. Financing, and especially "creative" financing, is way beyond my area of expertise, however, I do adhere to the old saying, "if it sounds too good to be true…" I have been to seminars that encourage you to utilize the equity in your home or other investments to secure a new real estate direction. Regardless of how you leverage or liquidate your current wealth and assets, let me remind you that money is not free and there will be a premium on what you borrow, and that needs to be addressed when deciding to move forward with your business plan and wealth building strategies.
The unique and beautiful aspect of a real estate investment is that there is the opportunity to have someone else pay your mortgage, or at least a good portion of your mortgage. I think you will have difficulty finding another investment that gives you that opportunity. And as you slowly build your portfolio and pay down the mortgage, you can then access that new equity to borrow against for new investment properties. Keep in mind it takes time to pay down your loan, patience - in this case - is very important. Time will also start to increase the value of your investment, accelerating your equity. We are currently in a very volatile market, and we will most likely see some short-term downward movement in real estate values (see my last Blog, Downsizing and Building.) However, you need to keep an eye on your long-term goals to help weather the storm. We cannot predict exactly what will happen in future, and if we keep waiting for the "perfect" time, "perfect" plan or "perfect" opportunity, we may never make the commitment that is needed to move forward in building our wealth.
What one needs to do is plot out your long term goals and forecast, and that is where aligning yourself with an experienced and diverse circle of influence will assist you in making informed and educated decisions and choices that will assist you in moving forward. I would, of course, be happy to assist you any way I can. Do not hesitate to ask if you have questions or concerns you feel I can help you with.
Good luck with this new life direction!
Wednesday, October 3, 2012
Downsizing and Building
I was recently contacted by clients that are considering downsizing their home to take advantage of a lower mortgage debt load. After spending a great deal of time putting together information to assist them in making a decision on how to move forward, I felt this information would be useful and is pertinent to anyone considering a similar scenario or considering building a new home. Enjoy!
Their current home is a beautiful, modernized two storey in a lake community that was developed in the early 1970's. It was originally listed in August 2007 after the extensive renovations were completed for $819,900. I assisted them in purchasing this lovely home for $645k in September of the following year. That huge drop of 21% in anticipated value must have been a tough pill to swallow for the previous owners. I suppose that would be an interesting lesson in timing and perhaps a topic for a future Blog…
This family is looking at reducing their mortgage by about $200k and staying within the same community. With that large debt reduction, they will also be looking at downsizing their home, both literally and figuratively speaking. With this significant value change, some of their choices for a new home will certainly be fixer-uppers or "dated" homes that will need some significant renovations to bring the property to today's standards. There will also be some recently upgraded homes, they will just be of a different style, size and perhaps in a less desirable location within the community when compared to their current home. What they really need to decide is whether they are interested in purchasing a home that may need an extensive makeover, or whether they would be happy in a much smaller home than they are currently accustomed to.
In the case they decide to renovate an older home, another major decision is whether they are willing to live in the house while the work is being done, or will the renovations be completed prior to moving in. I would suggest that living in a home that is getting major renovations is certainly a challenge, especially if you have children. If you are deciding to take on a similar project, I would encourage you to consider renting a property to live in for the interim, or finding someone that will take you in (such as a relative) while the work is being done. Another option that many consider is to stay in their existing home while the work is being done, then to sell the first home once the work is completed. The big issue here is predicting what will happen to the market value while this process is taking place, and this is a similar process as to when building a new home.
To move to the next stage in making this change, we need to be sure to have a good plan in place, especially if considering holding two properties for a time as you renovate or build your new home. We are certainly in a volatile market, and have been for a long time (since 2005?)… Imagine being in the same position as the previous owner above in August 2008 and considering a similar scenario - purchasing a fixer upper in anticipation of renovating and enjoying the lower mortgage and new development in a few months. If they made this decision with the preconceived notion that they were expecting close to $800k for their home, you can see the dilemma… that value certainly slipped away from them in a big hurry. I am in no way saying that the same thing will happen over the next while, as a matter of fact, the complete opposite could also happen as did happen to anyone that would have considered this scenario in late 2005, prices literally doubled in many areas of the city in a matter of a few months. If you are buying and selling at the same time, whether the market is high or low is relative as you are buying and selling in the same market. However, when you are buying and selling at different times, anticipating the gap between the two values becomes a bit of a gamble. The same can be said for building a new home. You buy a "new build" at today's price, however, you take possession of that home at a future date (perhaps six to nine months or more) where the value can possibly change dramatically depending on what has happened in the market. What I would like to do now is give you my take on the current market and the probability of where it could possibly go - to assist you with the decision on moving forward with this new direction and how to approach the change.
I am taking the position of optimistic caution for where the market is heading over the next few weeks, months and years. There was an interesting article in the Herald yesterday with the headline "MLS sales and prices both ascend in September" (Calgary Herald, Business Section, Page C3, October 2nd, 2012). Upon initial review, it certainly seems to paint a rosy picture of our current state of affairs in the local real estate market. Let me delve a bit deeper into what I personally see going on to get a better gage of how things are looking, and where they could be heading.
The first point to ponder is that all of the "growth" increases and leaps in value and movement that we are seeing in the media are in comparison to last year at the same time. In a city of our size, we should see sales figures of somewhere between 1,000 and 1,400 single family homes sold per month. Our peak season (March to June) should be at the higher end of that number, and perhaps even peak over that amount. Alternatively, our low season (October to January) will typically dip below this range, especially December and January which historically see very slow sales. I would caution you that we are heading into our slowest period of the year. That fact is always a big question mark for values of homes and certainly for the time on the market it requires to find the right buyer for a home. Our average monthly sales figure from 2008-2011 has been just over 1,100 sales per month. Last year saw moderate growth at best as our general sales figures were flat. Our peak month in 2011 was in June when we reached 1,385 sales. That is within the range I mentioned above, however, a very mediocre "peak" number. We then saw a steady month-by-month decline in sales from July 2011 until January of this year. Without a doubt, much of the growth we saw at the beginning of this year can be contributed to that lackluster seven month period.
When we look at a shorter term we can see that we have actually seen a decrease in sales and the average price of a home in metro Calgary in recent months… as a matter of fact, prices have declined month by month since our year peak in May to the tune of -7%! (Average price in May was $502,065 and average price in September was $468,360 for a single family home in Metro Calgary - CREB Monthly Housing Statistics, September 2012).
There are certainly areas within the city that do better than others and there does seem to be a lack of inventory of certain types of homes in specific areas, especially those closer to the city core. So when we look at the city as a whole, we do see that our inventory is down as well as our new listings. However, when we look specifically at many of our suburbs, we see a different story. In the subject property's community of Lake Bonavista, there are currently 15 active listings and last month there were only four sales. Other areas in Calgary are seeing a major slowing in activity. For example, there are 32 homes for sale in Kincora, last month there were only two sales. Sherwood had one sale last month (16 active listings) and Hanson Ranch had one sale (8 active listings). Evanston fared a bit better with 13 sales, however, there are 64 active listings over there. We can go throughout the city to see similar trends in the suburban areas in the outskirts of the city limits. (Active listings taken from MLS on October 1st, 2012)
There are also many external contributing factors to real estate sales, and I am sure there are few areas that are more affected by extraneous factors than we see in Calgary… where are oil and gas prices? Do we have a net "in" migration to the city? And what about global factors such as the economic conditions in the rest of the world? What is going on with the European union? What is happening politically in other oil producing nations, especially those in the middle east? We often maintain optimism in Alberta that contributes to our micro economic conditions… however, it is very difficult to maintain steady growth that trends against what is happening in the rest of the world, especially for prolonged periods of time.
Also consider the fact that in Canada we are seeing a slowing national real estate market outside of our province, and in a world of uncertainly in the global economy, consumer confidence in Alberta and the prairie provinces has certainly improved this year… my question is how long can we maintain our optimism? We seem to always do better than most other areas in economic crunches, however, we ARE eventually affected.
To summarize, I do believe that what is happening in the global economy will affect us over the next few months. I would suggest we will see a bit of a cooling period and the chances of the same dramatic jump in the market we saw early this year happening again next year are slim. I would hope we see a bit of growth in values, however, if we stay steady over the next year I think we will be doing well.
In making the decision to purchase or build a new home today, whether downsizing or upsizing, I would suggest that the gamble in anticipating the value of your current home in a few months may be a dangerous venture. As in the real case scenario of the home above, if your budget depends on a certain sales price of your existing home, perhaps it would be prudent to sell the home in the current market (whenever that is) as the current price you can sell your home for is the only guaranteed price you can "bank on" and will eliminate the stress of an unknown profit margin in the process of building or redeveloping your new home.
Well, stress-free for what you know you have for a budget for the financial aspect of your new project. Dealing with building and renovations and that stress is a topic for another day…
Their current home is a beautiful, modernized two storey in a lake community that was developed in the early 1970's. It was originally listed in August 2007 after the extensive renovations were completed for $819,900. I assisted them in purchasing this lovely home for $645k in September of the following year. That huge drop of 21% in anticipated value must have been a tough pill to swallow for the previous owners. I suppose that would be an interesting lesson in timing and perhaps a topic for a future Blog…
This family is looking at reducing their mortgage by about $200k and staying within the same community. With that large debt reduction, they will also be looking at downsizing their home, both literally and figuratively speaking. With this significant value change, some of their choices for a new home will certainly be fixer-uppers or "dated" homes that will need some significant renovations to bring the property to today's standards. There will also be some recently upgraded homes, they will just be of a different style, size and perhaps in a less desirable location within the community when compared to their current home. What they really need to decide is whether they are interested in purchasing a home that may need an extensive makeover, or whether they would be happy in a much smaller home than they are currently accustomed to.
In the case they decide to renovate an older home, another major decision is whether they are willing to live in the house while the work is being done, or will the renovations be completed prior to moving in. I would suggest that living in a home that is getting major renovations is certainly a challenge, especially if you have children. If you are deciding to take on a similar project, I would encourage you to consider renting a property to live in for the interim, or finding someone that will take you in (such as a relative) while the work is being done. Another option that many consider is to stay in their existing home while the work is being done, then to sell the first home once the work is completed. The big issue here is predicting what will happen to the market value while this process is taking place, and this is a similar process as to when building a new home.
To move to the next stage in making this change, we need to be sure to have a good plan in place, especially if considering holding two properties for a time as you renovate or build your new home. We are certainly in a volatile market, and have been for a long time (since 2005?)… Imagine being in the same position as the previous owner above in August 2008 and considering a similar scenario - purchasing a fixer upper in anticipation of renovating and enjoying the lower mortgage and new development in a few months. If they made this decision with the preconceived notion that they were expecting close to $800k for their home, you can see the dilemma… that value certainly slipped away from them in a big hurry. I am in no way saying that the same thing will happen over the next while, as a matter of fact, the complete opposite could also happen as did happen to anyone that would have considered this scenario in late 2005, prices literally doubled in many areas of the city in a matter of a few months. If you are buying and selling at the same time, whether the market is high or low is relative as you are buying and selling in the same market. However, when you are buying and selling at different times, anticipating the gap between the two values becomes a bit of a gamble. The same can be said for building a new home. You buy a "new build" at today's price, however, you take possession of that home at a future date (perhaps six to nine months or more) where the value can possibly change dramatically depending on what has happened in the market. What I would like to do now is give you my take on the current market and the probability of where it could possibly go - to assist you with the decision on moving forward with this new direction and how to approach the change.
I am taking the position of optimistic caution for where the market is heading over the next few weeks, months and years. There was an interesting article in the Herald yesterday with the headline "MLS sales and prices both ascend in September" (Calgary Herald, Business Section, Page C3, October 2nd, 2012). Upon initial review, it certainly seems to paint a rosy picture of our current state of affairs in the local real estate market. Let me delve a bit deeper into what I personally see going on to get a better gage of how things are looking, and where they could be heading.
The first point to ponder is that all of the "growth" increases and leaps in value and movement that we are seeing in the media are in comparison to last year at the same time. In a city of our size, we should see sales figures of somewhere between 1,000 and 1,400 single family homes sold per month. Our peak season (March to June) should be at the higher end of that number, and perhaps even peak over that amount. Alternatively, our low season (October to January) will typically dip below this range, especially December and January which historically see very slow sales. I would caution you that we are heading into our slowest period of the year. That fact is always a big question mark for values of homes and certainly for the time on the market it requires to find the right buyer for a home. Our average monthly sales figure from 2008-2011 has been just over 1,100 sales per month. Last year saw moderate growth at best as our general sales figures were flat. Our peak month in 2011 was in June when we reached 1,385 sales. That is within the range I mentioned above, however, a very mediocre "peak" number. We then saw a steady month-by-month decline in sales from July 2011 until January of this year. Without a doubt, much of the growth we saw at the beginning of this year can be contributed to that lackluster seven month period.
When we look at a shorter term we can see that we have actually seen a decrease in sales and the average price of a home in metro Calgary in recent months… as a matter of fact, prices have declined month by month since our year peak in May to the tune of -7%! (Average price in May was $502,065 and average price in September was $468,360 for a single family home in Metro Calgary - CREB Monthly Housing Statistics, September 2012).
There are certainly areas within the city that do better than others and there does seem to be a lack of inventory of certain types of homes in specific areas, especially those closer to the city core. So when we look at the city as a whole, we do see that our inventory is down as well as our new listings. However, when we look specifically at many of our suburbs, we see a different story. In the subject property's community of Lake Bonavista, there are currently 15 active listings and last month there were only four sales. Other areas in Calgary are seeing a major slowing in activity. For example, there are 32 homes for sale in Kincora, last month there were only two sales. Sherwood had one sale last month (16 active listings) and Hanson Ranch had one sale (8 active listings). Evanston fared a bit better with 13 sales, however, there are 64 active listings over there. We can go throughout the city to see similar trends in the suburban areas in the outskirts of the city limits. (Active listings taken from MLS on October 1st, 2012)
There are also many external contributing factors to real estate sales, and I am sure there are few areas that are more affected by extraneous factors than we see in Calgary… where are oil and gas prices? Do we have a net "in" migration to the city? And what about global factors such as the economic conditions in the rest of the world? What is going on with the European union? What is happening politically in other oil producing nations, especially those in the middle east? We often maintain optimism in Alberta that contributes to our micro economic conditions… however, it is very difficult to maintain steady growth that trends against what is happening in the rest of the world, especially for prolonged periods of time.
Also consider the fact that in Canada we are seeing a slowing national real estate market outside of our province, and in a world of uncertainly in the global economy, consumer confidence in Alberta and the prairie provinces has certainly improved this year… my question is how long can we maintain our optimism? We seem to always do better than most other areas in economic crunches, however, we ARE eventually affected.
To summarize, I do believe that what is happening in the global economy will affect us over the next few months. I would suggest we will see a bit of a cooling period and the chances of the same dramatic jump in the market we saw early this year happening again next year are slim. I would hope we see a bit of growth in values, however, if we stay steady over the next year I think we will be doing well.
In making the decision to purchase or build a new home today, whether downsizing or upsizing, I would suggest that the gamble in anticipating the value of your current home in a few months may be a dangerous venture. As in the real case scenario of the home above, if your budget depends on a certain sales price of your existing home, perhaps it would be prudent to sell the home in the current market (whenever that is) as the current price you can sell your home for is the only guaranteed price you can "bank on" and will eliminate the stress of an unknown profit margin in the process of building or redeveloping your new home.
Well, stress-free for what you know you have for a budget for the financial aspect of your new project. Dealing with building and renovations and that stress is a topic for another day…
Wednesday, March 14, 2012
Where is the Calgary Market going in 2012?
The good news is we are off to a good start this year!
It does look like we are in for an interesting year in Calgary this coming year. In the first quarter of 2012 we are seeing decent sales, and our inventory is growing slowly. We do need to keep an eye on the inventory levels as we may very well see a dramatic increase in the next few weeks. Last year many homes that were listed did not sell - many of those listings have been terminated or have expired. As a matter of fact, in analyzing communities across the city I have seen that rate as high as 50% - that means HALF of the homes that were listed last year DID NOT SELL! I suspect a good portion of those expired listings will be coming back on the market for the spring rush. I would also suggest that many of these Sellers are going to be more aggressive in their pricing, how they approach marketing their homes and how they deal with offers. This could set the pace for values right across the board.
There is also a huge inventory of properties that has been on the market for many months and many listings have been on for YEARS! I found one listing recently in Mount Pleasant that has been on for 1,170 consecutive days! How long can a Seller hold onto a property without sustaining considerable losses, both financially and otherwise? One of the best examples of this is a beautiful property out in Bearspaw that was purchased back in 2007 for $6.35 million, a real gem! Two and a half years later it came back on the market, listed for $5.35 million. It has been on the market ever since (849 days) and the listing price has been in steady decline. You can pick up this home today for $3.85 million!
Have prices dropped 40% since our peak in 2007? Absolutely not, this is an extreme case of a declining value and there are a select few buyers with a budget over $2 million... however, this is a reality jolt, and a true fact. It does go to show that we do need to be very cognizant of the current market... and where it is headed!
I would be cautious of how sustainable this new activity these first few weeks into 2012 is on a long term basis. In Calgary and the surrounding area we should be selling around 2,000 properties per month, a little higher late spring, and a bit less in the cold months. We have been below this plateau since August of last year. Perhaps that pent up demand will carry us through a couple of months in the spring, again we need to be very aware of why we see the higher sales, and how long we can sustain those numbers. The next three months will be paramount in seeing any kind of gain in values in the area. Typically we look at the official opening of the Stampede as the "hump" in the market… school is out, the summer is officially here and many Calgarians head to cottage country and to summer vacations.
Having said that, I would suggest that if you are considering selling this year, there is a narrow window of opportunity in the next couple of months to ride the wave of the buyers who have been sitting on the fence for the past six months or so. Once that pool of buyers dries up, we will probably see much of what we experienced through the past year, a lethargic pace at best.
If you are not considering selling your house in the next year or so, I would suggest we will do well in the next three to five years. Once things start to work themselves out with the global economy... our superior economic and political position and the location of Calgary will certainly make itself more and more apparent, and we should see a steady pace of future growth.
If you are considering buying in this market I would suggest this may very well be the best time in many years for a purchase. With interest rates at historical lows - and the opportunity to lock into these rates for long-term periods - there may not be a better time to move into a new home. The inventory of available homes typically is at its maximum in the next two or three months giving you LOTS of choice. That in combination with the softening attitudes of sellers in general will lead to a competitive and healthy marketplace.
I would be happy to discuss your posibilities with you, and to put together a strategy with you to help you achieve your goals. Please do visit my web pages to find out more about the market, and what we can do for you.
Wednesday, August 10, 2011
Economic Uncertainty
My concern at this particular point in time is the economic uncertainty that has been created by the recent crisis in the USA, and prior to that in Europe. Back in the later part of 2007 and through 2008 we were just starting to move into a brutal global economic downturn. It would seem the outlook at the time was that the crisis was a short term issue and we would get over it in short order. The reality of it was that we were heading into a global recession. In October of 2008, the "sub-prime" issue was brought to a head south of the border and that really affected what was going on in our market until mid-2009. With that happening only three years ago, I believe we are all a bit jumpy with all that is going on around us and that is one of the reasons we have been seeing such low sales numbers for the past year.
Many are - once again - in a "wait and see" headspace. Whether that is warranted or not is up for debate, however, it may essentially lead to a self propelling prophecy.
Having said all of that, I do believe real estate needs to be listed to sell, there is little room to "feel out" the market. A current analysis of a specific property will recommend a certain price range (for example, a range between $448k and $465k would be an appropriate value) With the current uncertainty in the market and our economic outlook, I believe the best line of offence is to be placed as close to the proposed "end result" as possible. If we feel the home in the example above will most probably sell for $456,500, placing the listing price as close to that final sales figure would be appropriate.
I do believe we are going to see a trend to lower prices, meaning many that are overpriced when they first list will be playing "catch up" in trying to find that magic number that will sell their home. Essentially, when we are trying to catch up in a downward market, there is a great possibility that one will lose potential equity gains the longer they take to react to the market. The best strategy is to be proactive, and not reactive.
The current economic crisis may pass quickly, but I certainly would not put all my chips on that scenario. If you truly want to move forward and sell your home this year, being aggressive now would be your best strategy. I would be extremely surprised if we do not see fall out for the rest of the year in the real estate market - as well as most other markets - with the economic mess we are in the midst of. We will eventually get through all of this and our market will correct, the question is… when? I think many will have to bunker down for a few years…
If you would like to discuss your own real estate goals and needs, I would be happy to address any of your specific questions or concerns and assist you in putting together your own real estate strategies.
Many are - once again - in a "wait and see" headspace. Whether that is warranted or not is up for debate, however, it may essentially lead to a self propelling prophecy.
Having said all of that, I do believe real estate needs to be listed to sell, there is little room to "feel out" the market. A current analysis of a specific property will recommend a certain price range (for example, a range between $448k and $465k would be an appropriate value) With the current uncertainty in the market and our economic outlook, I believe the best line of offence is to be placed as close to the proposed "end result" as possible. If we feel the home in the example above will most probably sell for $456,500, placing the listing price as close to that final sales figure would be appropriate.
I do believe we are going to see a trend to lower prices, meaning many that are overpriced when they first list will be playing "catch up" in trying to find that magic number that will sell their home. Essentially, when we are trying to catch up in a downward market, there is a great possibility that one will lose potential equity gains the longer they take to react to the market. The best strategy is to be proactive, and not reactive.
The current economic crisis may pass quickly, but I certainly would not put all my chips on that scenario. If you truly want to move forward and sell your home this year, being aggressive now would be your best strategy. I would be extremely surprised if we do not see fall out for the rest of the year in the real estate market - as well as most other markets - with the economic mess we are in the midst of. We will eventually get through all of this and our market will correct, the question is… when? I think many will have to bunker down for a few years…
If you would like to discuss your own real estate goals and needs, I would be happy to address any of your specific questions or concerns and assist you in putting together your own real estate strategies.
Friday, May 27, 2011
Future values in Calgary
I know you are contemplating whether to sell your home today, or rent it for a year in anticipation of values increasing. I just wanted to make a few comments to you so that you are aware of my thoughts on the market over the next few weeks, months and years. I want to point out a couple of my legal fiduciary duties to you which we discussed when I sat down with you. The first is "Undivided Loyalty" - "The Agent must act solely in YOUR best interests, always putting YOUR interests above their own interests and above the interests of other parties." And also "Reasonable Care and Skill", "the Agent MUST exercise reasonable care and skill in performing all assigned duties." In my own interpretation of these two aspects of my duties to you, I feel obligated to be sure you have all the information you need to move forward with your real estate holding, whether you want to sell your home or rent it out. I only have your best interests in mind when putting this note together for you.
First off let me be perfectly clear in my belief that holding a real estate property over a long period of time is absolutely one of the best long-term investments for anyone, and I truly believe that everyone should have some type of real estate holding in their investment portfolio. From the simple idea of owning your own home, to owning a rental property.
The advantage of owning real estate as a long-term investment is that not only are you gaining valuable equity as the value of your property increases, but you also have a renter assisting you with the payments of the mortgage on that investment. What I am hoping to do here is analyze what we think the market is going to do over the next little while, and address some of the issues you will need to deal with during, and after your rental experience with this home. I know you have rented properties in past, so I am not going to go over the process of collecting rent and addressing any issues that may transpire over the rental term that you will need to address and, of course, dealing with the accelerated "wear and tear" usually associated with renting out any property. I am hoping that you will look into using a professional property management company to keep an eye on things as you will be away from Calgary. Many owner/landlords look after their own properties, however, I would suggest this is an easier prospect when you are close in proximity to the property.
I have dealt with a number of clients in past that have been in a similar position to yourself. They were unable to get the sale price they needed in order to deal with their financial obligations or their perceived value of the property at the time they had it on the market. The original cost of a home, the cost to build the home and the amount owed on a mortgage to a home have little influence on the market value of a property. Even a bank appraisal and the City of Calgary Property Assessment do not necessarily reflect the true sales value of a home. What determines the value of a home is what a potential buyer is willing to pay for a home, period. If potential buyers are not willing to pay a certain price for a home and the potential seller is not willing to adjust their expectations accordingly, the home will not sell. In a "balanced market" where there is a limited amount of homes available for a buyer to purchase, they are willing to perhaps pay a bit more than they originally intended to, keeping the market "in balance" and the values stable.
If there are not a lot of homes on the market, buyers feel the pressure to negotiate for a home that they want as they feel a certain risk of losing the home to another buyer. They feel a need to get the purchase done before they lose the property to someone else. In a market where there are more buyers than sellers, the values of homes go up. If there are too many properties on the market in relation to the amount of buyers looking for a home, that pressure is eliminated. The more and more inventory there is on the market, the less motivation a buyer has to make a purchase in a specific time frame. They will often wait to "see what happens" with the market, which essentially means they expect prices to go down in the short term so they are looking for "bargains" or homes of exceptional value. That is why we need to keep an eye on the market to see what the trend is, and try and predict where the market is going. In the long term, prices tend to move upward, however, short term prices can fluctuate dramatically depending on whether there is "buying" or "selling" pressure.
The bottom line really is that real estate is a true "supply and demand" market. If fewer and fewer people are purchasing homes, builders start to decline building new homes as the profit margins also drop. In longer periods of a buyer dominated market, we see more and more builders go out of business as they are unable to make a profit on their homes. As more buyers come on the market and we see less homes available to purchase we see the opposite happen where builders come out of the woodwork and existing builders put pressure on to build even more homes. The problem with this model is that new builds are slow to react to what the market is doing. If we see a steep incline in demand as we did in 2006, it takes months for new home builds to be completed, often over eight months. By the time the new building matches the original demand we often see an inventory that we cannot move quickly enough forcing the pricing trend down, as we saw in 2008 and are still dealing with today.
Further complicating the matter is the fact that a "buyers market", or an over abundance of inventory, tends to last a lot longer that a "sellers market" which tends to happen very quickly and last a short burst of time. Interestingly enough, the buyer frenzy that we experienced in 2006 was a direct result of the population in Calgary increasing at an amazing rate, increasing around 25%. That huge immigration to the city directly fueled the huge demand for housing in a very short period of time. At that time Calgary was a very affordable city to live in with a good demand in the job market. What happened though, is that this increased demand for housing also pushed the market to almost double its value in a short period of time actually making the city much less affordable to live in. That, in combination with a waning global economy, has slowed down our growth to a halt. As a matter of fact, last year was the first time we literally saw zero population growth since 1984!
What is also disturbing is the fact we are seeing massive new development in all sectors of our city. Drive to the outskirts of Calgary in any direction and you can see new neighbourhoods sprouting up at an astonishing rate. It is beyond my scope to address our future economy, however, I certainly wonder how we can sustain all of this development with little growth in our population. What we have been seeing over the past year or so is essentially "lateral" movement. People within the city "upsizing", "downsizing" or "rightsizing", we are moving from one home to another and selling our homes to someone else doing something similar. What is confusing then is how we going to fill up all of these new homes that are being built if we have fewer and fewer "new" citizens to our fine city?
Having said all of that I would suggest that we are in for some interesting times in the real estate market over the next few years. I would suggest we will see further decreases in value for the rest of this year. Historically the first half of the year sees the most activity in sales figures. As Canadians and Calgarians we wake from our winter blues invigorated and many look at purchasing a new home as the weather gets better. As summer approaches that excitement declines as we look forward to enjoying our short summer. As summer comes to a close we then get caught up in the new school year and getting back to work. As soon as our weather turns inclement again, we tend to cocoon back indoors avoiding the cold and snow.
With our busy time behind us and an increasing inventory, the next few months certainly points toward flat or decreasing values. At this time next year I would expect average and median values in Calgary to be lower than they are today. If you decide to hold your property in anticipation of selling your home at a higher price than you can get today, I would encourage you to look at a longer term plan than renting for a year then seeing what happens. If you are looking for increased value I would suggest you put together at least a three to five year plan to weather the coming storm.
Whether you would like to hold your beautiful home as a rental property, or sell it shortly is not what is important to me. What IS important to me is that you have all the information you need to make the decision on how to proceed with your real estate investment. If you have any questions or concerns regarding any of this information, or would like further clarification regarding any of these comments, please do not hesitate to call or drop me a line.
First off let me be perfectly clear in my belief that holding a real estate property over a long period of time is absolutely one of the best long-term investments for anyone, and I truly believe that everyone should have some type of real estate holding in their investment portfolio. From the simple idea of owning your own home, to owning a rental property.
The advantage of owning real estate as a long-term investment is that not only are you gaining valuable equity as the value of your property increases, but you also have a renter assisting you with the payments of the mortgage on that investment. What I am hoping to do here is analyze what we think the market is going to do over the next little while, and address some of the issues you will need to deal with during, and after your rental experience with this home. I know you have rented properties in past, so I am not going to go over the process of collecting rent and addressing any issues that may transpire over the rental term that you will need to address and, of course, dealing with the accelerated "wear and tear" usually associated with renting out any property. I am hoping that you will look into using a professional property management company to keep an eye on things as you will be away from Calgary. Many owner/landlords look after their own properties, however, I would suggest this is an easier prospect when you are close in proximity to the property.
I have dealt with a number of clients in past that have been in a similar position to yourself. They were unable to get the sale price they needed in order to deal with their financial obligations or their perceived value of the property at the time they had it on the market. The original cost of a home, the cost to build the home and the amount owed on a mortgage to a home have little influence on the market value of a property. Even a bank appraisal and the City of Calgary Property Assessment do not necessarily reflect the true sales value of a home. What determines the value of a home is what a potential buyer is willing to pay for a home, period. If potential buyers are not willing to pay a certain price for a home and the potential seller is not willing to adjust their expectations accordingly, the home will not sell. In a "balanced market" where there is a limited amount of homes available for a buyer to purchase, they are willing to perhaps pay a bit more than they originally intended to, keeping the market "in balance" and the values stable.
If there are not a lot of homes on the market, buyers feel the pressure to negotiate for a home that they want as they feel a certain risk of losing the home to another buyer. They feel a need to get the purchase done before they lose the property to someone else. In a market where there are more buyers than sellers, the values of homes go up. If there are too many properties on the market in relation to the amount of buyers looking for a home, that pressure is eliminated. The more and more inventory there is on the market, the less motivation a buyer has to make a purchase in a specific time frame. They will often wait to "see what happens" with the market, which essentially means they expect prices to go down in the short term so they are looking for "bargains" or homes of exceptional value. That is why we need to keep an eye on the market to see what the trend is, and try and predict where the market is going. In the long term, prices tend to move upward, however, short term prices can fluctuate dramatically depending on whether there is "buying" or "selling" pressure.
The bottom line really is that real estate is a true "supply and demand" market. If fewer and fewer people are purchasing homes, builders start to decline building new homes as the profit margins also drop. In longer periods of a buyer dominated market, we see more and more builders go out of business as they are unable to make a profit on their homes. As more buyers come on the market and we see less homes available to purchase we see the opposite happen where builders come out of the woodwork and existing builders put pressure on to build even more homes. The problem with this model is that new builds are slow to react to what the market is doing. If we see a steep incline in demand as we did in 2006, it takes months for new home builds to be completed, often over eight months. By the time the new building matches the original demand we often see an inventory that we cannot move quickly enough forcing the pricing trend down, as we saw in 2008 and are still dealing with today.
Further complicating the matter is the fact that a "buyers market", or an over abundance of inventory, tends to last a lot longer that a "sellers market" which tends to happen very quickly and last a short burst of time. Interestingly enough, the buyer frenzy that we experienced in 2006 was a direct result of the population in Calgary increasing at an amazing rate, increasing around 25%. That huge immigration to the city directly fueled the huge demand for housing in a very short period of time. At that time Calgary was a very affordable city to live in with a good demand in the job market. What happened though, is that this increased demand for housing also pushed the market to almost double its value in a short period of time actually making the city much less affordable to live in. That, in combination with a waning global economy, has slowed down our growth to a halt. As a matter of fact, last year was the first time we literally saw zero population growth since 1984!
What is also disturbing is the fact we are seeing massive new development in all sectors of our city. Drive to the outskirts of Calgary in any direction and you can see new neighbourhoods sprouting up at an astonishing rate. It is beyond my scope to address our future economy, however, I certainly wonder how we can sustain all of this development with little growth in our population. What we have been seeing over the past year or so is essentially "lateral" movement. People within the city "upsizing", "downsizing" or "rightsizing", we are moving from one home to another and selling our homes to someone else doing something similar. What is confusing then is how we going to fill up all of these new homes that are being built if we have fewer and fewer "new" citizens to our fine city?
Having said all of that I would suggest that we are in for some interesting times in the real estate market over the next few years. I would suggest we will see further decreases in value for the rest of this year. Historically the first half of the year sees the most activity in sales figures. As Canadians and Calgarians we wake from our winter blues invigorated and many look at purchasing a new home as the weather gets better. As summer approaches that excitement declines as we look forward to enjoying our short summer. As summer comes to a close we then get caught up in the new school year and getting back to work. As soon as our weather turns inclement again, we tend to cocoon back indoors avoiding the cold and snow.
With our busy time behind us and an increasing inventory, the next few months certainly points toward flat or decreasing values. At this time next year I would expect average and median values in Calgary to be lower than they are today. If you decide to hold your property in anticipation of selling your home at a higher price than you can get today, I would encourage you to look at a longer term plan than renting for a year then seeing what happens. If you are looking for increased value I would suggest you put together at least a three to five year plan to weather the coming storm.
Whether you would like to hold your beautiful home as a rental property, or sell it shortly is not what is important to me. What IS important to me is that you have all the information you need to make the decision on how to proceed with your real estate investment. If you have any questions or concerns regarding any of this information, or would like further clarification regarding any of these comments, please do not hesitate to call or drop me a line.
Friday, January 28, 2011
Investing in Real Estate in the Current Market
I recently looked through the "BMO Bad List", the list of over 200 defendants to the bank's accusation of mortgage fraud. It will be interesting to see how this all irons out. Rest assured if they see any amount of success, we will see many other financial institutions following suit. Over the past few years there was a ton of money lost and gained in the industry… when it is the "Big Banks" that are in the losing position, you can bet their pockets are deep to remediate their position!
With the real estate market in such a volatile position today, it would seem that many potential sellers will be trying a variety of things to entice a buyer. Rent to own, seller financing, "guaranteed" pricing and such. The bottom line is that we will have to be very careful as many of these schemes rare their heads. I'm not saying they will all be shady - some may be clever and well thought out - but we will certainly need to do our homework… and utilize a knowledgeable real estate lawyer in putting together any type of new or strange situation.
I believe three things are of prime importance in selling a home. The first is the property itself - how is it presented? There are many homes that are online that certainly are not at their finest. Many are full of clutter, messy, dirty and certainly not staged in the best light. A home really should look its finest when presented to a potential buyer, which leads me to the second criteria, marketing. The first line of offense is, of course, the MLS. Are you utilizing all of the tools available to you? Are all 20 photos looking their finest? Other support marketing should also pique a potential buyers curiosity, making them ask questions, and leading to a viewing of the home.
Taking these two important aspects of the listing into account, the third - and most important - aspect of the listing is the price. If the property is at its finest, and the marketing shows off the property in a fine light, one can ask a premium price for the property. Coming to this "premium" price takes into account recent sales, where the market is heading, property assessments and such. Pricing is a very pragmatic process, there is no magic involved. If the property requires updating, if it does not show well, if it is located on a busy street, if it is messy, needs paint etc etc the pricing needs to be adjusted to reflect these insufficiencies. And if the home looks bad online, or the marketing is inefficient, again, the price has to be adjusted to reflect these deficiencies.
If you are interested in a bargain in purchasing a home, they will certainly present themselves over the next few weeks and months. I would suggest we will see a variety of "handyman" specials, foreclosures, and desperate sellers that may list their homes for below the current market value. I can also ensure you that if homes come up that are truly below current market value, there will be a great many bargain hunters, investors and such also looking at those homes. Homes that are of exceptional value will sell quickly.
Having said all of that, to be sure you are in a position to pull the trigger when a home comes up that appeals to you, we should have all of our ducks in a row, starting with the financing. Chatting with a Mortgage Broker can present you with a variety of purchase and financing options.
I am certainly a huge believer in real estate as a viable investment and wealth building tool. Real Estate, however, is a long term investment. Many have been extremely fortunate in "flipping" homes over the past few years. Making a lot of money in an inclining market, or buying "fixer uppers" and renovating for profit. In the current market, however, there seems to be very little profit margin for the handyman. As a matter of fact, if we lose value in general over the time one buys, fixes up and then relists, one may actually lose money. Even worse, many have tried to invest short term and have lost their shirts. I suggest we will not see any significant equity gains over the next year, maybe two or three. That does not mean that real estate is not a good investment, one still can make a profit in the rental market. And if you are anticipating moving into a specific property in a decade and buying a "holding property", chances are pretty good that the values will be significantly higher in the long run.
With the real estate market in such a volatile position today, it would seem that many potential sellers will be trying a variety of things to entice a buyer. Rent to own, seller financing, "guaranteed" pricing and such. The bottom line is that we will have to be very careful as many of these schemes rare their heads. I'm not saying they will all be shady - some may be clever and well thought out - but we will certainly need to do our homework… and utilize a knowledgeable real estate lawyer in putting together any type of new or strange situation.
I believe three things are of prime importance in selling a home. The first is the property itself - how is it presented? There are many homes that are online that certainly are not at their finest. Many are full of clutter, messy, dirty and certainly not staged in the best light. A home really should look its finest when presented to a potential buyer, which leads me to the second criteria, marketing. The first line of offense is, of course, the MLS. Are you utilizing all of the tools available to you? Are all 20 photos looking their finest? Other support marketing should also pique a potential buyers curiosity, making them ask questions, and leading to a viewing of the home.
Taking these two important aspects of the listing into account, the third - and most important - aspect of the listing is the price. If the property is at its finest, and the marketing shows off the property in a fine light, one can ask a premium price for the property. Coming to this "premium" price takes into account recent sales, where the market is heading, property assessments and such. Pricing is a very pragmatic process, there is no magic involved. If the property requires updating, if it does not show well, if it is located on a busy street, if it is messy, needs paint etc etc the pricing needs to be adjusted to reflect these insufficiencies. And if the home looks bad online, or the marketing is inefficient, again, the price has to be adjusted to reflect these deficiencies.
If you are interested in a bargain in purchasing a home, they will certainly present themselves over the next few weeks and months. I would suggest we will see a variety of "handyman" specials, foreclosures, and desperate sellers that may list their homes for below the current market value. I can also ensure you that if homes come up that are truly below current market value, there will be a great many bargain hunters, investors and such also looking at those homes. Homes that are of exceptional value will sell quickly.
Having said all of that, to be sure you are in a position to pull the trigger when a home comes up that appeals to you, we should have all of our ducks in a row, starting with the financing. Chatting with a Mortgage Broker can present you with a variety of purchase and financing options.
I am certainly a huge believer in real estate as a viable investment and wealth building tool. Real Estate, however, is a long term investment. Many have been extremely fortunate in "flipping" homes over the past few years. Making a lot of money in an inclining market, or buying "fixer uppers" and renovating for profit. In the current market, however, there seems to be very little profit margin for the handyman. As a matter of fact, if we lose value in general over the time one buys, fixes up and then relists, one may actually lose money. Even worse, many have tried to invest short term and have lost their shirts. I suggest we will not see any significant equity gains over the next year, maybe two or three. That does not mean that real estate is not a good investment, one still can make a profit in the rental market. And if you are anticipating moving into a specific property in a decade and buying a "holding property", chances are pretty good that the values will be significantly higher in the long run.
Wednesday, January 26, 2011
Bungalows
Bungalows may very well become the preferred house style of the future as the population grows older. Even more interesting are the "villa" either attached or detached style homes, often condo ownership or having a Home Owner Association. The owners want to be able to lock and go. Read that - not having to deal with snow removal or yard maintenance such as cutting the grass!
Bungalows with more than one bedroom upstairs are at a premium, but not necessarily the most popular of this style. They do mostly appeal to "empty nesters" (I will be one before you know it.) Typically retirees or close to retirement type folks would have - in past - moved away from the hustle and bustle of the big city (maybe to the Okanagan or Shuswap.) The trend I am seeing more and more is these folks want to stay in the city for a variety of reasons. The first is what the city has to offer such as culture, proximity to an international airport, and even sports entertainment.
The second, and most important, is that they want to be close to their offspring… and even MORE importantly, to their grandchildren. I would suggest that over time, value of this type of ownership could potentially surpass the rates of other styles of homes such as the two storey house.
As the aging population become more financially independent we also see Canadians purchasing winter homes abroad in such places as Arizona, Florida, Mexico and Costa Rica just to name a few, and the fact you can pick up properties in these areas for a mere percentage of the values in areas like Calgary make two homes more viable for more and more people. I can tell you the thought has crossed my mind this winter, especially with the brutal cold temperatures we have seen this year.
Food for thought!
Bungalows with more than one bedroom upstairs are at a premium, but not necessarily the most popular of this style. They do mostly appeal to "empty nesters" (I will be one before you know it.) Typically retirees or close to retirement type folks would have - in past - moved away from the hustle and bustle of the big city (maybe to the Okanagan or Shuswap.) The trend I am seeing more and more is these folks want to stay in the city for a variety of reasons. The first is what the city has to offer such as culture, proximity to an international airport, and even sports entertainment.
The second, and most important, is that they want to be close to their offspring… and even MORE importantly, to their grandchildren. I would suggest that over time, value of this type of ownership could potentially surpass the rates of other styles of homes such as the two storey house.
As the aging population become more financially independent we also see Canadians purchasing winter homes abroad in such places as Arizona, Florida, Mexico and Costa Rica just to name a few, and the fact you can pick up properties in these areas for a mere percentage of the values in areas like Calgary make two homes more viable for more and more people. I can tell you the thought has crossed my mind this winter, especially with the brutal cold temperatures we have seen this year.
Food for thought!
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