Category: Real Estate

In a recent comment, on a very old post (“5 Ways to Make (or lose) Money With Investment Properties – Part 5 – Buying at a Discount”), Awesome asks “i live in Toronto, how and where do I find the deals”.  I found this a perplexing question, as the assumption seems to be that there’s a website, or a very simple technique, which leads to low priced real estate.  The obvious follow up to this is you buy from the cheap market, sell on the regular market, then start lighting your cigars with $100 bills.  I pointed him to my posts on inefficient markets and Mike’s post on valuing real estate but never heard from him again (I guess he’s off searching for the “simple”, “easy” way).  I also told him that if someone knew where a deal was, they’d just do it themselves (and make the money themselves).  If they knew a good approach for consistently finding deals, they’ll execute that strategy themselves (and not make it harder by advertising it and drawing competition).  Between these three posts I felt like there’s still some missing information, so this post is my attempt to fill in that gap.

In “How to Buy Real Estate For At Least 20% Below Market Value” John Reed talks in the beginning about how he never saw a bargain purchase in his years as a real estate agent (not even 5% below market value).  At the time he thought they didn’t exist (and thought people who claimed they did were selling snake oil).  Once he looked into it, he found they did exist, just that they never showed up in the “official” (MLS) channels.

He summarizes the two ways to buy at a discount (for goods which are USUALLY traded on an efficient market):

• properties which no one wants and
• properties which no one knows are for sale

The impact of these principles is that you can’t buy ANY property at a discount (there’s no way to get a 20% discount on that cute little bungalow you have your heart set on), but you can buy MANY properties at a discount.  It’s like dating: if you’ve got your heart set on dating Mary Jones or Johnny Smith you’re sunk.  HOWEVER, if you just want to date someone (who meets some reasonable minimum criteria) there are ways to make it VERY LIKELY that you’ll be able to get dates.  Sadly (or happily), romance can be a numbers game.

One way to find deals is to hunt for desperate sellers (they’d fit into the “no one knows are for sale” category).  One approach to this is to make low-ball offers on many items, and try to find the person who needs to sell quickly (and can’t take the time to advertise properly and let all interested buyer know it’s available).  I detail this process in my “Shotgun Investing” post (and is also how I bought my investment condo).  I still giggle when I read Mike’s description of a “for sale by owner” sign (that might have been a big tip off that they’re desperate sellers)

Another way to find deals is to hunt for what Reed calls “leper properties”.  These are properties that have something about them that causes most buyers and agents to immediately dismiss it as a potential purchase.  Properties with foundation problems are an example of this.  I was suspicious that there might be an opportunity for buying co-ops (as opposed to condominiums) in Toronto because of this.  My agent told me not to even bother looking at co-ops, which IMMEDIATELY got my interest.  This is the “no one wants” category.

Obviously for a leper property you must have some way to fix the problem (for less that the amount of the discount), otherwise you’re just buying someone else’s problem.

In my home town (around the corner from my parents) there’s a property that at one time was the nicest in the neighbourhood.  It was on a double lot, and was far bigger than the properties around it.  The owners let it get really run down and then were trying to sell it.  It sat on the market for a LONG time, and EVERYONE in town had heard how run-down it was.  Eventually someone bought it, and immediately started a massive renovation.  I don’t know what the purchase price was, but they’re fools if they paid anything close to market (it was a property no one wanted).

Not Easy

One other factor with discount purchases is they aren’t as easy as buying on the market.  If you buy the typical way, everything is set up to make it as straightforward as possible.  As soon as you start buying in an unusual way (such as either of these approaches), the risk is going to go up and the difficulty is going to go up.  You’ll put time into a deal, then have it fall through at the last minute (or you’ll try 10 deals and have them all fall through).  Part of a reasonable approach to discount purchases is to be as efficient as possible in evaluating when a deal may occur, and dumping prospects IMMEDIATELY when it looks unlikely (so you can put your time into pursing a deal that has a higher chance of going through).  Many people don’t have the stomach for this (and will get angry if a deal doesn’t work out) and they’ll abandon their strategy because of the emotional toll.

Have you seen situations (real estate or other) where a good price has been had for one of these two reasons?

I’ve had a draft of this post sitting in the Four Pillars draft queue for over a month, and after a recent question by JN it seemed time to finish it and post it.  While I hope it gives a decent overview of finding, selecting and finalizing a tenancy for a rental property, please keep in mind that I’ve only actually gone through this process once.  The tenants have stayed for 3 years (but I can’t stand on my results), and I put quite a bit of effort into figuring out each stage in the process (reading, talking to other landlords, going through the proper procedures, etc).  A previous post on this topic was part of my “Getting Started With Investment Real Estate” series.

Philosophy on Renting

Before you even start trying to rent out your property you must know yourself and what you’re looking for.  Do you need to get a tenant (any tenant) in the property as soon as possible?  Do you want to focus on finding the best tenant possible, even if it takes longer to fill the unit or leads to a lower rent?  Do you want to maximize the income from the unit?  Do you want to minimize the bother your tenant causes?  Your answers to these questions will affect how you go about the process of finding a tenant.

For the record, my belief (which underlies my suggestions in this post) is that no tenant is better than a bad tenant (and I’d rather minimize bother than maximize income).

Advertising

The first step in getting tenants into an empty unit is to let people know that it’s available.  If you have the time and inclination, I would first try to advertise through every available free channel (e.g. Craigslist, Kijiji, posters in the neighbourhood).  If you aren’t getting a large number of responses (at least 10+) you need to crank up your advertising immediately and maybe consider paying to post in the local newspapers or paid internet postings (such as ViewIt in Toronto).

I provide as much information as possible in the advertisement to help people make their decisions.  I put together a website for the unit (which I referenced in each ad), which had pictures, maps of the area, and lists of local amenities.

Rent

Determining what is market rate for a unit is tough.  If more than half of the people showing up to view the apartment choose not to fill out your application then your rent is too high.  Lower it.  Keep lowering it until you get half the people to fill out your application.  If someone takes an application to fill out at home or says they’ll contact you later, they’re just being polite, they aren’t interested. If everyone is filling out an application than your rent is too low.  I’m not 100% sure the best course of action in that situation (I’d probably pick the best person, and be upfront with them that I know they’re getting a good deal and warn them that the rent will be increased at the end of the lease).

Showings

A large number of people won’t show up for appointments.  If they find another place or something comes up, for whatever reason they don’t bother to let a potential landlord know.  I suspect tenants view it as one situation they’re in control and can safely stick it to a landlord.  When I was renting my unit I’d rush over to show it whenever was convenient for the people who called.  Next time I’m doing it I’m going to plan all the showings at one time (maybe on a Saturday afternoon) and make them 20 minutes apart.  I’ll take the name of anyone who can’t make the showing and offer to contact them if it doesn’t rent.

I walk around and point out the nice features of the apartment and answer questions.  If there’s something that’s a negative about the unit I don’t point it out, but I certainly acknowledge it if the tenant inquires (such as no security guard, no air conditioner, or no dishwasher).

Application

If you do a Google search for rental application or ask any friends who invest in real estate for a copy of their rental application you should be fine.  First and foremost you don’t want any illegal questions on your form.  The purpose of the form isn’t really to get the answers (although they might rule out some applicants).

If someone has a convoluted explanation for why they can’t tell you their current landlord or why they don’t have a current employer I’d probably drop them as an applicant.  There may be good reasons why they are in the situation they’re in, but don’t spend your time trying to assess their unique challenges.

Check out anything they’ve listed and see if you can verify it (I was able to tie a woman’s “current landlord’s” phone number to her father’s consulting firm with Google).  If they’ve lied on the application, reject them.

Contact current and previous landlords.  If they’ve ever had problems collecting rent reject that applicant.

Keep the form.  Sometimes if you run into problems later their “personal references” will be a way to track down a tenant or may help you with other problems.

Credit Check

In Ontario you can do this with Rent Check Credit Bureau.  They’re expensive for only one unit though ($20 per check and a $100 annual membership fee or something like that). You can avoid the membership fee if you join the landlord self-help center for $25.

You want to look for delinquent payments (if they aren’t paying other people on time, why will they pay you in a timely manner?).

If there’s problems with the credit check, reject them and move on to the next applicant.  If you run out of applicants, advertise again and show it to some more people (perhaps lowering the rent if you’re having trouble getting enough applicants to find a good one).

Lease & Keys

At this point you have a tenant, fill out a lease (you can sometimes buy one at a bookstore, get one from a landlord’s association, or ask for one from a friend who rents properties), get first and last months rent (and damage deposit if local laws allow).

Let the other applicants know that you’ve rented to someone else.

I don’t claim this is gospel, and if anyone with more experience disagrees with anything I’ve written, please comment below.  Also comment on any alternative approaches you’ve had success or failure with.

In real estate there is a euphemism “this property would be ideal for a foreign buyer” which means that it’s overpriced and they need a buyer who is ignorant of local market value to pay that much for it. In smaller communities in Ontario a variant on this is “I’m going to try to find a Toronto buyer” which means the same thing.

A friend of one of my relatives played the part of the ignorant Toronto buyer. His father-in-law passed away and left his wife about $1 million. They started looking at property outside of the GTA (greater Toronto area), got excited about how cheap everything was, and started buying real estate like it was going out of style.  I’ve lost touch with them but the last I heard they had gotten themselves in over their head (they hadn’t been able to rent out or resell what they’d bought).

Apparently in the 80’s Japanese developers played the role of ignorant buyers in New York. After coming to town and finding everything cheap compared to Tokyo, they started overpaying for properties. They’ve since learned their lesson and are paying market rate.

Some times it isn’t just regional variations. A while back I saw a saw a 5 bedroom property being offered for $140k in my home town, which looked like a killer deal. I’ve been watching it for the last 6 months, and it’s still available. Finally I mentioned it to my brother and said it didn’t make sense that it was sitting on the market unsold for so long. My brother had heard through the grapevine that the condo complex it is in had gotten tired of all the rentals and had gotten new rental restrictions put in place. There was a good reason why it’s selling cheap:  it’s ideally suited to a student style of rental, which is no longer allowed.   Someone who didn’t do their due diligence and jumped on the deal might be sitting on a property that is difficult to rent out (and couldn’t be easily resold for the purchase price).

One of my brother’s friends was involved in the sale of a fly-in fish camp.  Apparently the lake that the lodge was on was dead (no fish), but the buyers didn’t know to check this.  They were babes-in-the-woods moving into a new industry they didn’t understand, thought they’d found a good deal and got taken.  I was surprised my brother’s friend talked about this, as I’d find it VERY questionable to be involved in such a transaction, and I find it shocking that he’d brag about being involved in taking advantage of people (it said a lot to me about what kind of guy he is).

Market rate is market rate. Very few people will foolishly give away a property for a fraction of its value, so if a property seems to have an abnormally low price, the first question we need to ask ourselves is why? Many “get rich quick” schemes sell the idea that you have to move fast and seize opportunities. If we don’t have a compelling reason *WHY* something is cheap (and a way to inexpensively remove this roadblock and make it worth far more), then chances are we don’t understand something about the property. It’s probably not a killer deal we need to jump on.

Nancy Zimmerman (check out her blog if you haven’t read it yet, it’s good stuff) was recently considering buying a place she found at a good price (especially compared to the Vancouver market she was used to).  Myself, and a number of other commenters were concerned about jumping on a “great deal that needs to be finalized quickly”.  I think she made the right decision not buying, and look forward to hearing if she gets any more information about if it was as good a deal as she thought (or if there was some problem lurking in the background).

Valuation of real estate properties is quite difficult – in fact it can really only be done within a fairly broad range since in my opinion it is just too hard to try to accurately predict the sale price of a house.  The title of this post should have been “How to guess at real estate prices”.  🙂

A few years ago I spent a lot of time looking at various houses, taking notes and finding out the eventual sale price.  The reason I did this exercise was partly because I enjoyed going to open houses but also because I knew I was going to be in the market for a new house and I wanted to learn the market better.  My theory regarding house valuation was that if I looked at enough houses and analyzed the different properties and the sale prices – I should be able to gain some sort of expertise and should be able to accurately predict the value of various houses.  My theory was a failure as I couldn’t seem to gain much accuracy for various houses that I tried to predict the sale price.

I was able to learn the local housing market to some degree but if I could guess within 10% of the final price then that seemed to be as good as I could do.  A plus or minus 10% error on a $500k house is not all that useful although I was able to know when sellers set the price below market for a bidding war.  Of course I couldn’t tell what the final price would be.

Look at lots of houses

The best advice that I have for a house hunter is to look at as many houses as they can, take notes (or keep the mls listings) and find out and write down the final sale price.  The purpose of doing this is to learn the local housing market and get a feel for what kind of house will go for various prices.  You might be asking why this is necessary if you have an agent….well…..this post might give you a clue!  I think a good agent who knows the area could be a great resource as far as knowing house valuations but unfortunately not all of them will be forthcoming if they aren’t familiar with your area.  If you have the time, then the best strategy is to learn the local housing market yourself.

This also applies if you are selling your house.  In fact it’s easier to do if you are only looking at houses similar to your own since there probably won’t be that many of them.  This is useful to try to set an asking price and also to counter your agent who will generally have different ideas than you about selling prices.

Land can be a huge factor.

One of the “truisms” of real estate that everyone always says (to me at least) is that detached houses command a premium over semi-detached.  While I can certainly accept this as being true, I’ve always been skeptical that there is much of a premium involved.  After all, other than the fact that a wall is shared, the house can be very similar to a detached.

As a bit of background – in my area there are probably 65% semi-detached houses and 35% detached houses so unlike some areas, there is nothing “unusual” about a semi.   It’s also a very urban setting so land values are quite high.

More background – for any American readers –  what I call “detached” (standalone house having no contact with any other structure) you might call “a house”.   What I call “semi-detached” you probably call “duplex” or “semi-attached”.

Detached/semi-detached was one of the “factors” that I tried to analyze in my great house valuation project.   After looking at quite a few houses, I really couldn’t see any premium for detached.  Part of the problem of course was a difficulty in finding houses that were similar in many respects except for the detached component.  I concluded after a while that the detached premium was probably low enough (<5%) that I couldn’t measure it properly.

It wasn’t until much later that I realized how high the land value was in the areas I was looking at.  Since most of the houses were in reasonably good condition (for old houses) I had assumed that buyers were paying quite a bit for the house along with the land.  As it turns out the buyers were generally paying a huge percentage for the land and a surprisingly small amount for the house.  I figured this out by eventually looking at some houses that were teardowns or complete guts.  Since the house was worth very little in those cases, clearly the buyer was just paying for the land.  In one particular area I looked at – most houses were selling for around $450k.  Much to my surprise, there were a few houses purchased for around $350k, $360k that were torn down which leads me to believe that $450k houses were in fact only $100k houses sitting on $350k pieces of land.

What does this have to do with detached/semi-detached?  Well, given that the land value was such a dominant factor in my local house prices, that meant that any premiums/discounts on the houses themselves are minimized.  Ie if the detached premium is 20% but the house is only worth $100k and the land is worth $350k then a semi-detached equivalent would be worth only $20k less which I wouldn’t be able to measure.

Of course semis are different in that it’s a lot harder to tear down a semi unless you buy both halves so it’s not accurate to say that the land under a semi has the same worth as a similar sized plot under a detached house but I’m assuming it’s close enough.

I have some other main “factors” which I think contribute to house prices which I’ll hopefully share in a future post.

In real estate there are listing which can be called “pocket listings“, “in pocket listings”, or “exclusive listings”.  In each case the idea is the same, an agent *DOESN’T* advertise the property in order not to share the commission with another agent (by representing both the buyer and seller) or to only share the commission with agents they have a special relationship with.  The most significant feature of such listings is that they will be kept off of MLS.

Of course, this is helpful to the agent, but the benefit is at the seller’s expense.  By not having the maximum number of potential buyers be aware of the property they are lowering the sale price (supply and demand).  Why any rationale seller would agree to this is beyond me, and I can only assume the agents manage to trick them into believing it’s in the seller’s best interest.

Some agents will try to hustle and take advantage of the period where a listing is forced to be a pocket listing, between when they sign with the seller and when it goes live on MLS.  There’s certainly nothing wrong with this, but it can draw them into ethical compromises if they’re sprinting after the double-commission.  In this situation they should DEFINITELY make it clear to the sellers that the property hasn’t had much exposure (and they don’t need to jump at any offers).  They also shouldn’t stretch out the period between when they get the listing and it’s up on MLS.

This happened to me, from the other side, recently.  I’d been talking to a number of agents (I told them all I was working with other agents and didn’t sign a buyer’s agreement with any of them), and one of them contacted me to show me a property that met my criteria.  I went to see it with her (she was seeing it for the first time to prepare the listing).  After the viewing, we were chatting in the parking lot, and she did her best to get me to put an offer in.  She even showed me e-mail correspondences between her and the seller to prove to me what his thinking about price was.  I would be amazed if this isn’t illegal (since she is betraying private communication with the seller, to whom she has a fiduciary duty).

I was prepared to make an offer, and later that night she left a message for me, in a pretend panic, claiming that she had SOMEHOW convinced her seller to accept my offer, but that ANOTHER buyer had appeared, with the exact same offer I was making (it hadn’t hit MLS at this point) and that I needed to rush over to her house to sign the paperwork ASAP.  I knew she was playing games with me, and told her I was prepared to move forward with an offer, but that I needed due diligence (for her to provide me with comps of the previous sales she told me about which I had used to set the value of the offer) and that I wouldn’t get into a bidding war with the other buyer.  At this point she said “maybe we should just forget about the offer then” and that was the last time I heard from her.

John Reed has written that the practice was illegal when he was an agent in New Jersey years ago.  In Canada I think it is legal (I assume it is, since a lawyer writes about doing it in Ontario), but even if it’s legal I find it terribly unethical.  Some agents discuss the practice here, and thankfully they almost all seem to weigh in against it.

This post was featured in the Consumer Focused Carnival of Real Estate.

It wasn’t long after I’d bought my investment condo that I was called a slumlord for the first time (jokingly by a friend’s father).  I think most people who rent out real estate get called this at one point or another, and it’s a popular view of people in the business of providing housing.

A slumlord is a property owner who rents the property “as is” to poor tenants, then provides minimal (or no) maintenance to the unit (while doing everything possible to collect rent).  In some ways I feel that my current landlord is a bit of a slum lord (it took her 2.5 months to replace a broken dryer, after MANY messages from myself and the other tenants, and she blew me off when I had a insect infestation shortly after I first moved in).

PERSONALLY, I wouldn’t be interested in offering this type of housing, but in many ways I don’t have a problem with those who do.  Anyone who can afford properly maintained housing will do so.  The slumlord offers low-cost housing to people with low-income or poor credit.  As a tenant, I could certainly pay more and get a nicer place, but I’d rather have lower rent (and am willing to accept a “less responsive” landlord).

Many governments in developed countries have made typical slumlord behaviours illegal, which led to landlords not offering housing to tenants who would typically be renting such accommodations.  The reaction to this was to then offer incentives to get landlords to provide such house (Section 8 in the US, or the Canada-Ontario Affordable Housing Program in my neck of the woods).

There is a desire that the poor be provided with middle-class style accommodations, which is fine as a desire, but for this to happen SOMEONE has to pay the difference in the rent rates.  Either it will be landlords (losing money on low income tenants), or the tax payers (in the case of Section 8 style programs or community housing).  Since it’s difficult to force people to become / remain landlords if they don’t want to (they’ll just move capital to more lucrative investments if housing becomes over-regulated) the tendency is for these things to become an entrenched part of the bureaucracy.

W5 (a Canadian investigative news program) did a show called “Canada’s worst landlord” (links to video from the actual program on the right hand side), which was about Toronto Community Housing (where a friend of a friend works).  They are able to provide disgusting conditions for their tenants which would never be tolerated if it was an individual or company providing them, but *is* tolerated because it’s government housing.  Unfortunately I think this is the inevitable direction community housing drifts in.

Because there’s such a dim view of slumlords (and the term is applied so broadly) and regulations, I can’t understand why ANYONE investing in real estate offers low-income housing.  The tenants will often have time and resources (free legal aid and whatnot) to enter into disputes with you, the law often provides them with a great deal of protection (which is often one-sided), and society won’t even appreciate the service you are providing (I’ve never heard of anyone being lauded for providing low-income housing, the view is usually that they’re exploiting the poor).  By targetting middle / upper class tenants you avoid these issues entirely.

The counter-argument would be that since it is a pain-in-the-butt, fewer investors will be trying to purchase such properties (or offer them for rent) and it will be a more lucrative investment.  I have my doubts overall, but even if that was the case, it wouldn’t be a worthwhile trade-off for me.

Do you have any slumlord experiences?  If you were investing in real estate, would you consider offering low-income housing?  Do you have any personal experiences (good or bad) doing so?

I was in Tim Horton’s recently, and overheard two men talking.  One of them was saying “I got cash from him in the first month, but I haven’t gotten anything since then.”  Perking up at a real estate discussion, I casually eavesdropped.  They were on their way out, but I heard him continue saying “I don’t even know if the name he gave me is a real name.  I’ve never seen any I.D. or his student records or anything…”

Sadly this is quite common: someone decides to get into land lording, perhaps renting out a room in their house, or converting their basement into a small apartment.  Figuring that they’re operating on such a small scale, they throw caution to the wind and rent based on their gut feeling.  People follow a similar approach with subletting, reasoning “I’m not a landlord, I’m just subletting my apartment.”

Although there are *SOME* *SMALL* legal difference based on the number of units in a building, for the most part when you start selling housing to someone you’re a landlord. All the standard legal protections for tenants apply.  If you’re subletting your apartment and something happens, you will be in the middle of the situation. If you’re renting out part of your house and they turn into a bad tenant, it’s just as bad as a tenant in a typical apartment, except they’re LIVING WITH YOU! Whatever the situation is for the Tim Horton’s guy, I find it SHOCKING that he would rent to someone without even verifying their identity.

Since most of The Residential Tenancies Act applies to them, it is well worth landlords (and soon-to-be-landlords) to review it.  Many of the expectations some people have (such as “it’s my house, I can make whatever rules I want!”) are explicitly rejected.  I’m positive it’s a joke, but Krystal at Give Me Back My Five Dollars posted an amusing example of this sort of thing.

Two married friends of mine bought a house a year ago, and have been renovating the basement to rent out as a student apartment.  The wife has been asking me for advice, and is trying her best to make the best possible decisions.  The husband has been acting from a place of anxiety, and just wants to get someone in and paying rent as soon as possible.  I’ve warned him that a bad tenant is worse than no tenant, but he feels pressured to get rent checks coming in soon.

I think often people who end up renting out part of their houses want the rent, but they don’t want the tenant.  They figure there’s some way they can make enough rules that the tenant will be so inconspicuous (until rent is due) that it’ll almost be like they’re living without a tenant. When I was first looking for a place to rent at the start of my Masters, I looked at homes where people were renting out rooms. Without fail, I found that each one had the attitude “I want your rent, but I don’t really want you living here”. One landlord complained about the current tenant having a boyfriend spend the night without asking his permission, and another told me the place was air conditioned, but HE would decide when the AC was on or off.

It doesn’t work this way. If someone is paying money to rent a place, they rightfully expect to be able to live there (ideally without a tyrant telling them 500 things they can and can’t do). It’s not a universally agreed upon perspective, but I view my tenants as customers. I won’t be able to say yes to EVERY request they make, but I certainly want them to be happy in their tenancy (and hopefully remain for as long as possible).

I’m not sure that Ontario has the right balance, but a tenancy agreement *IS* a legal contract, and the rights of both parties need to be protected.  In Ontario, and in most other places, legal protections ARE automatically put in place (even if there isn’t a written contract.  These need to be understood, even when property owner doesn’t view the rental situation they’re offering as “that serious”.