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April 3, 2017 | Good Luck with That

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Janet and Alphonse own a crap semi located thirty minutes  by speeding Uber from the downtown core of the Big Smoke. “Yes,” he says, “it is crap. You can hear the dog next door snoring through the wall.” Purchased for $218,000 six years ago, it went on the market last Monday for an unrealistic, reach-for-the-moon $588,000. There were 104 viewings and 26 offers. It sold on offer night for $712,000.

Stories like this are everywhere. In one day this past weekend two clients dumped two houses, both for over $2.2 million in bidding wars without conditions of any kind, each more than 30% over asking. When the Toronto Real Estate Board stats come out later this week, they’ll be epic. And just in time for the coming Ontario budget in which the government has vowed to take a big whizz on a smouldering market.

What’s changed to ignite this fever in Toronto, Hamilton, Victoria, Niagara, Kelowna, Barrie and (even) Vancouver over the last ninety days?

Nothing. Mortgage rates did not fall. Incomes didn’t advance. Oil did not erupt. And meanwhile we got crazy Trump, ballistic missiles in Korea, terrorist attacks in London and Russia, Brexit part deux and the season finale of The Walking Dead. This is serious.

Of course, what we’re witnessing is one of those times where emotion, speculation, buying panic, greed and hormones move markets off their economic piers. Huge price moves, volatility and risk result. The smartest people around you in such times are always the sellers. Always. Always.

The frenzy is raising eyebrows everywhere. “Fierce Bidding Wars force Toronto Buyers to Skip Home Inspections,” Bloomberg told its global audience on Monday. Of course, doing a home inspection is so 2015. In hot markets any bidder hoping to snag a house would never ask for such a condition. The only exposure most prospective buyers get is at an open house stuffed with dozens of other people, where it’s virtually impossible to find the time or space to comprehend what you’re purchasing. This exposes them to an additional, and major, level of risk. Even bringing your home inspector to an open houses is impossible, since the realtor on duty will kick your asses out. This should tell you all you need to know about the market. Danger.

What to do if you’re reckless enough to be buying now?

Ask the seller if a home inspection report exists, since many smart vendors will have one done prior to listing. Stand there at the open house are read it. All of it. Ask to have a copy emailed to you (although that probably won’t happen). Then grill the agent or the owner about any and all issues raised in the report.

If no document exists, scope out the place as best you can, then query the agent on duty about noticed imperfections or deficiencies. Hold your phone in front of you and push ‘record.’ If you end up buying, and bugs start coming out of the kitchen sink, the basement walls bleed or the garage falls over after the termites finish with it, you may have some legal recourse. It’s against the law for a realtor to lie to you, provide inaccurate information or fail to disclose any material fact that he/she is aware of.

As Bloomberg points out, home inspectors are starving. Business is down by a third in the GTA, and almost half in the sizzling hinterland. It means buyers are offering more money than ever before in history, in a more competitive environment, in a more compressed time, without a scintilla of protection. Often this is based on just 15 or twenty minutes of exposure to a property and its systems. Truly amazing.

Also gone is the once-ubiquitous financing condition. Most buyers are now pre-approved for a certain amount (often bearing no relation to actual income) – which is okay – but the bidding wars change everything. Prices escalate within minutes. There can be an ugly surprise days or weeks later when the ‘winning’ competitor finds out his bank’s appraisal is considerably lower than what he agreed to spend. This is when good people are driven into the arms of bad subprime lenders.

Well, Canadians are not unique in swallowing massive risk during an asset bubble. People stopped doing home inspections in major US cities, too, shortly before the market imploded. The rationale was simple: when properties bloat in value every month, all you need do is borrow some of the gain to fix the problems – adding even more to the real estate’s value. Whazza problem?

We know how that turned out. But, as you know, it’s different here.

Did I ever mention you should sell?

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April 3rd, 2017

Posted In: The Greater Fool

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