Category: Real Estate

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Real Estate

Even More Reasons Not To Trust Your Real Estate Agent

That’s right – after completing two posts on why you should not trust your real estate agent when you are buying a house and when you are selling a house, several more reasons have surfaced from various sources and I felt it was worth another post on the topic.

Underestimate potential costs for renovations and repairs

This is pretty common – a buyer looks at a house but is concerned with the potential costs of renovations and maintenance items like a new furnace. Most real estate agents are only too happy to give the buyer an idea of what the items will cost. The problem is that it’s in the best interest of the agent to downplay the costs since that will encourage the buyer to make the purchase and the commission will be paid. This happened to both Mr. Cheap and myself on previous real estate deals so we’ve learned this lesson the hard way.

The fact is that estimating renovation costs (not an simple skill) doesn’t necessarily have anything to do with buying and selling real estate. Your real estate agent might be a former contractor or might have a lot of experience with renovations…or they might have absolutely zero experience with renovations and are just taking numbers from something they might have read in the past.

Push for maximum purchase

In the case where someone is looking to buy a house but isn’t using anywhere near their maximum available credit, it’s possible for the agent to push the buyer to raise their price level which will increase the potential commission for the agent. For a price difference of $10k or $20k it’s not going to make a big difference to the agent but if they can get the buyer to increase their limit by $100,000 or more then it will significantly increase their payday.

Pinyo from Moolanomy left a comment indicating how his agent told him that he could afford $4,000 per month in payments when in actual fact he finds that a $1400 mortgage payment is more than enough.

The lesson here if you are a buyer is to know your own budget and don’t let anyone else tell you what you can or can’t afford.

Agent is probably getting paid for referrals

Most agents make extra money by referring their clients to various people who will give them referral fees. Mortgage brokers, contractors, tradesmen, home stagers, lawyers – you name it and your agent can probably give you a name.

This isn’t to say that a person referred to you buy your real estate agent isn’t going to be competent – it’s just important to know that they might be getting a fee for doing the referral.

Round number – odd number trick

As mentioned in the comments of the previous post, agents will often try to get you to lower your selling price or raise your bid by telling you to “make it a round number” or “make it an odd” number depending on the situation. If your bid is an odd number ie $250,500 they might suggest that $251,000 is a better bid because it’s an even number. As the Financial Blogger suggested – in this case $250,000 is also a round number which might work better for the buyer.

Over estimating the value of your house

Typically if you are selling a house then an agent wants to you to list with them. They are often very tempted to exaggerate the value of your house so that you will hire them as your agent. Once you sign with them and the house doesn’t sell, then they will start working on you to lower the house.

The inflated value doesn’t always originate from the agent, most sellers have an inflated estimation of their house worth so an agent might ‘go along’ to get the listing.

“Free” real estate evaluation

Most home owners have received material in their mail box offering a “free” house evaluation by a real estate agent. These are just marketing, plain and simple. If the home owner has no idea what the house is worth then it might not hurt to find out what the rough estimated value is but keep in mind the previous point about agents giving exaggerated house estimations.

Take a look at another perspective on real estate agents that Mr. Cheap wrote.

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Real Estate

The Fallacy of Return on Investment

Return on investment (ROI) is a popular, useful way to evaluate an investment. Simply, it’s the return you get from an investment, divided by how much it cost you. E.g. you buy a GIC/CD for $1,000, a year later they return your $1,000 and give you $50 in interest, you’ve got a 5% (50/1000) return.

I’ve posted before on my ROI from my condo (calculated at the 6 month mark – once I’ve done my taxes I’ll post about what it looked like at the 1 year mark). Going into the future, some of my expenses will drop (my mortgage is continually decreasing, I got a break on my insurance when I renewed) and my income (rent) SHOULD go up.

Will this mean that I have a continually increasing ROI? Many people would say yes and that’s part of the reason its supposedly great to invest in real estate, but I think there’s a problem with this line of thinking. I’ve wrote about this fallacy as it relates to stocks, but I think it’s broader than that.

Say I bought a condo for $100k 10 years ago and you bought an identical condo for $150k yesterday (which is the fair market value for both of our properties). Say we both rent our condos out for $1300 / month. My ROI is 15.6% (1300*12/100000) while your’s is 10.4% (1300*12/150000). We’ll ignore all expenses just to convince everyone that real estate is a magical, perfect investment vehicle.

Now say we both come across another investment offering a ROI of 13%. Using just ROI, rationally someone might say you should sell and move your money into the new investment, while I should keep my condo. But our condos and rents are the same, so how could it make sense for one of us to pursue an alternative investment but not both of us?

The problem with this thinking is that it’s considering my condo to be worth $100,000 when its not. Its now worth $150,000. The only reasonable way to think about this is to consider the CURRENT value of the condo (look at the opportunity cost). The purchase price is totally irrelevant (except perhaps for tax calculations and whatnot).

I’ve done various calculations on my condo return. Its looks great (over 7%) when I consider the purchase price (around $130k depending on whether you factor in the cost of renos and transaction costs). It looks pretty meager (around 4%) when you look at the ROI based on the current value of the condo (similar units are selling for an ASKING price of more than $160k – I don’t know what they’re actually selling for).

I got a good price on my condo when I bought. That transaction is finished however. I can’t claim that I keep benefiting from a good purchase price into the future as long as I own it (or I can claim this, but I’m fooling myself). I could have bought it, fixed it up and sold it (flipped it) and captured this increase immediately. The decision whether to sell or rent should be based on the market value NOT on the purchase price.

I came across a mistake in the opposite direction in a real estate book I was flipping through recently. The author claimed that you should base you ROI on your equity (current value – current mortgage) which I agreed with (the current value part anyway). However, he also considered positive cash flow as the income and reached an unusual conclusion. Say you bought a $100k property for 5% down ($5k) with a $1000 / year positive cashflow. His claim was that you start with a ROI of 20% ($1000 income / $5000 equity). Fair enough. He then speculated that a year later the property value AND the income went up 10% ($110k property, $1100 / year positive cash flow). His claim was that your ROI was now 7.3% ($1100 income / $15000 equity) and you needed to sell. The problem with this is that your leverage is massively affecting your ROI in a way that certainly doesn’t smell right to me (if you could get a property for 0% down with positive cashflow his calculation would claim that’s an infinite ROI). To my mind the investment is almost exactly the same as the day you bought it: the income and the value have gone up an equivalent amount, so why sell?

Personal yield on stocks, as I wrote before, is exactly this fallacy (one of the commenters on my previous post claims this fallacy is called “mental accounting”). Your personal yield is meaningless (for anything other than making you feel good about the investment). The dividend yield, based on the current stock price, is what is meaningful if you want to evaluate the ROI of an investment going forward (again: this is ignoring the tax drag, which should be included if you’re actually thinking about selling).

Just to be clear, I don’t think ROI is a fallacy, I think it’s a very important concept. However, I often read statements that make me worry that people are misapplying it.

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Real Estate

Raising Rents

My tenants are coming off of the end of their first year’s lease, and happily they’re going to stay. Landlords always have strong opinions on the subject of rent increases (and rent decreases – most are dangerously, stupidly opposed to them).

One school of thought is that property is an investment, and in order to maximize the investment you need to always be charging the maximum rent. John T. Reed discusses this in “How to Manage Residential Property for Maximum Cash Flow and Resale Value” and makes a very good case that you should always be charging the maximum possible rent. For multi-unit properties, his view is that if you have less than a 5% vacancy rate you’re leaving money on the table. His points include the ideas that:

  • Current tenants can become problem tenants as easily as new tenants could
  • New tenants might be LESS troublesome then current tenants, there are a lot of good people out there in the world, there’s no reason why they’ll be worse then what you currently have
  • Getting top rental dollar is necessary for justifying a high property value
  • If you aren’t raising rents and moving in new tenants often you’ll have no idea what the market rate actual *IS*

The counter-argument is simply that good tenants are gold and you shouldn’t give them a reason to leave. One place I was living raised my rent from $650 to $700 and I promptly gave notice (there were a bunch of reasons I wanted to move, this was just “the straw that broke the camels back”). The place sat empty for 2 months until they could find another tenant (losing them $1300 – it’d take over two years at the increased rental price to make up for this loss). Once a landlord is covering his expenses, PITA factors (“pain in the ass”) become more annoying and it becomes easier to accept less money if people don’t bug you.

So what did Mr. Cheap do? I left my tenants’ rent as it was. I promised them when they moved in that if they didn’t call me for minor issues (such as changing light-bulbs), I wouldn’t raise their rent. I’ve been delighted with them as tenants (no bounced checks, no problems). I like to joke with my father that the hardest part of renting out my condo is walking to the bank to cash the check each month. So even though my condo fees have gone up, and inflation means I’m earning less each month from their rent, I don’t need potential aggravation from new tenants while I’m applying for my PhD (if I raised my rent and the current tenants moved out).

Hey, what can I say? I’m Mr. Cheap, not Mr. Greedy!

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Real Estate

Why You Can’t Trust Real Estate Agents When Selling A House

Check out the first part of this series “Why You Can’t Trust Real Estate Agents When Buying A House“.

Yesterday, we discussed how your agent and you will have similar goals when starting a house search but your interests will diverge the closer you get to a deal. When selling a house, the same phenomenon happens but usually a lot quicker.

In the beginning: buddies

Usually when you agree to list your house with an agent they will make you sign a contract with them which ensures that you don’t turn around and sell the house with another agent after they have done some work. In my experience, the agent will pull various comparable houses in the area and together you will figure out an asking price. Another step that normally takes place is for the agent to do a walk through and advise the client of possible improvements they can do to the house to make it sell easier.

The asking price is usually the first potential source of conflict – the seller wants a high price and is often unrealistic about what their house is worth. The agent knows that if the house is listed too high that it will sit for a while and any effort the agent makes to sell the house will be a waste of time. Agents make more money by selling more houses rather than getting a high price for each house so they want to make sure that the house is listed at a reasonable market value or lower. This is why pricing a house low for auction is so popular because it’s the best situation for the agent. Another situation is if a client wants to price the house high – then the agent has to bide their time and work on the client to lower their price so it will move.

Thinking about accepting an offer – Trust no one!

Things that your agent might say (and you should ignore) when you are selling a house:

  • “Since I get paid on commission – the more you get for your house, the more I get paid so we both want the same thing”. This is one of the biggest lies in real estate. Yes, mathematically an agent will get more commission if your house is sold for a higher price but the problem is the amount of time it might take to get that higher price is not worth the extra commission. For example if your house has a market value of $400,000 then your agent’s cut might be 2.5% or $10,000. If you are patient and wait for someone to come along who will pay $410,000 then the agent will make $10,250 for an extra $250. To get this $250 they might have to do several open houses and wait quite a while. Clearly they are better off just selling the house for $400k (or even less) and taking their $10,000. The problem is that the difference in selling price to the agent is pocket change but the difference to the homeowner is huge since we are talking about a $10k difference.

Negotiation – don’t listen to a word your agent has to say.

At this point you are potentially pretty close to selling your house. You want to sell the house at the highest price, the buyer wants to buy the house at the lowest price and your agent just wants you to sell the house and doesn’t care at all what price you sell it for because they just want the deal done right now. Since selling at a lower price will get the deal done quicker a lot of agents will encourage you to counter lower which basically means that you are negotiating against them as well as the seller.

Things that your agent might say (and you should ignore) when you are negotiating are:

  • “Don’t counter offer too high or the buyer might walk”. If the buyer has put in an offer then it’s up to the seller to accept the offer or reject it with a counter offer. It’s true that a high counter offer might scare off the buyer but isn’t that part of the negotiation?
  • “Your first offer is often the best offer”. Another way an agent might phrase this one is “We have an offer which means if I can get you to accept it by any means possible then I get paid very soon”.
  • “Dual-agency means there is no conflict of interest even though I represent both parties”. The “dual-agency” scam is where a selling party has a real estate agent and a buyer comes along who doesn’t have their own agent. The selling agent will offer to “act” as both the selling agent and buying agent and of course collect double the commission. Even though this is such an obvious scam, I actually don’t think this one is a big deal since real estate agents are basically working against you anyways at negotiation time so adding more conflicts probably doesn’t really matter.
  • “Are you willing to lose this deal for $2,000?” (or $5k, $8k) This is a tough one – on the one hand it seems silly to not close the deal and be only a half of a percent away from a deal but on the other hand shouldn’t your agent be asking this question to the buyer? Ie – “we are going to walk, do you really want to lose this deal for $2k?”
  • “Are you willing to lose this deal for $12 a month?” This is part two of the previous point which is applied if you don’t bite on the first attempt. It’s also a more useful gambit if the “separation” is a bit greater. If you and the buyer are $12,000 apart then that sounds pretty significant but what if you are only $75 a month apart (for 25 years) or even better what if you are only $63/month apart (over 40 years).

Conclusion (pretty much the same as yesterday)

The more you educate yourself about the real estate market you are looking in and how real estate agents operate then the better off you will be when selling a house. Real estate agents are quite useful when selling a house because most people won’t buy from a private seller and because they have access to MLS.

Whatever you do, never forget that they get paid when the deal gets done and only then. They don’t get paid for having extra open houses or walking away from close deals.

Do you have any good “lines” that you were told when selling a house?

Check out another perspective on real estate agents.

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Real Estate

Why You Can’t Trust Real Estate Agents When Buying A House

Most prospective house hunters or sellers think they have a “good” agent. Either it’s someone who they previously worked with or perhaps a referral from a friend or a co-worker. One of the big reasons for having confidence in their agent is a belief that the agent is “on their side” and “honest” etc etc. I would suggest however that by a certain point in the process, your agent is your enemy and you are negotiating against them more than the other party. This post deals with the buy side of the house buying game. The next post will deal with the sell side.

In the beginning: happy friends

When a house buyer first signs up with an agent, things are usually pretty rosy, the agent assures the person that they can find an appropriate house for a price you can afford and everything will be great. The agent has “lots” of experience and knows the area inside out. At this stage of the game, you and your agent are mostly on the same page. You want to buy a house and they want you to buy a house. Your agent will most certainly want to get the process over with sooner rather than later, but that’s usually the case with the buyer as well.

During the search: uneasy allies

Agents know that they need to spend a fair bit of time with a buyer, especially ones who want to look at a lot of houses. After a while however it’s not worth it for an agent to continue a long search especially if their contract is running out. This is the time when the agent will start trying to convince the buyer to lower their standards and raise their prices. Sometimes this is educational if the buyer has unrealistic expectation, but mainly this is to speed up the process so the agent can get paid. I should point out however that real agents are normally quite useful during the search since they often know more than you do about the general real estate and can get you access to private showings. The other big benefit is their access to sale price information for similar houses.

Related – How to win a house bidding war

Thinking about putting in an offer?  Trust no one!

The point when the buyer submits a offer on a house is a time when a lot of house buyers, particularly first timers feel out of their element and defer to their agent for advice. This is the worst thing you can do. Your agent gets paid when the deal gets done and only when it gets done.

This is a time when knowledge of the real estate market should be a big help in determining how much negotiation should be done. As well, if the buyer is not in a hurry to buy then that sets up a great negotiation opportunity. However if there is one thing that real estate agents don’t like it’s clients who negotiate hard – why? Because the only way to negotiate properly in a deal is to be able to walk away if the price you want isn’t met. The way an agent sees this type of situation is that if a deal falls through, they have to spend a lot more time looking at houses with you before they get paid.

Things that your agent might say (and you should ignore) when you are about to put in a bid are:

  • “Don’t bid too low or you will offend the sellers”. This is garbage – if the sellers can’t handle a low ball bid then they are unrealistic. And what exactly is a bid that is “too low”? I’m not saying put in an unrealistic bid, but don’t be afraid to start low and work your way up.  It’s important to know the market so that you don’t have to rely on the asking price or your agent to tell you the proper market value of the house.
  • “Don’t bid too low or you might offend the selling agent and might I have to work with them in the future”. This stunning example of gall and self-interest was actually told to Mr. Cheap. I don’t think this one needs any further comments. 🙂
  • “You should get a bid in quickly before someone else puts a bid in”. This is a favourite of my agent – create a sense of false urgency, get the deal in motion and get it done ASAP. Sometimes this is good advice, but other times – such as when the house has been sitting on the market for a month or longer then it’s just not appropriate.
  • “Someone else is looking at the house later today and they are really interested”. This lie usually originates with the selling agent, but smart buying agents are usually more than willing to play along because it will increase the chances of their buyer putting in an offer in that day.

Negotiation – don’t listen to a word your agent has to say.

At this point you are potentially pretty close to buying a house. You want to buy the house at the lowest price, the seller wants to sell the house to you at the highest price and your agent wants you to buy the house and doesn’t care at all what price you pay because they just want the deal done right now. Since paying a higher price will get the deal done quicker, a lot of agents will encourage you to bid higher which basically means that you are negotiating against them as well as the seller.

Things that your agent might say (and you should ignore) when you are negotiating are:

  • “Meet them halfway or in the middle”. This sounds quite reasonable at first- if the asking price of a house is $500,000 and you bid $460,000 and they come back with $490,000 then isn’t splitting the difference at $475,000 quite reasonable? Not if you can get the house for $470,000 or $465k,000 The fact is that the asking price of the house and your first bid are very arbitrary numbers and splitting the difference between the two might end up in a price that is not market value.
  • “Are you willing to lose this house for $2,000?” (or $5,000, $8,000) This is a tough one – on the one hand it seems silly to not buy a house and be only a half of a percent away from a deal, but on the other hand shouldn’t your agent be asking this question to the seller? Ie – “We are going to walk, do you really want to lose this deal for $2,000?”
  • “Are you willing to lose this house for $12 a month?”  This is part two of the previous point which is applied if you don’t bite on the first attempt. It’s also a more useful gambit if the “separation” is a bit greater. If you and the seller are $12,000 apart, that sounds pretty significant, but what if you are only $75 a month apart (for 25 years) or even better what if you are only $63/month apart (over 40 years). That doesn’t sound like much (even if it is).

Conclusion

The more you educate yourself about the real estate market you are looking in and how real estate agents operate, the better off you will be when buying a house. Real estate agents are quite useful because they can get you access to houses for sale and will often drive you around to look at them plus they have access to the sale price of other houses. Whatever you do, never forget that they get paid when the deal gets done and only then. They don’t get paid for showing you more houses or walking away from close deals.

Tune in tomorrow when we take a look at the trustworthiness of real estate agents when selling a house.

Take a look at another perspective on real estate agents that Mr. Cheap wrote.

Do you have any good “lines” that you were told when buying a house?

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Real Estate

Why The Subprime Crisis Has Not Affected Canada (Yet)

This post is part of a group writing project with the M-Network bloggers and friends. See the list of other posts in this project at the bottom of the post.

There has been a lot publicity around the subprime mortgage situation in the US. There are quite a few homeowners who have been or are about to be evicted from their houses because of a number of different factors. ARMs, NINJA loan, liar loans, fraudulent lending practices and worst of all…easy credit and low interest rates led to a situation where real estate prices went up and up. People who took the plunge five years ago with flipping houses made so much money that everyone wanted to get in on it. Now that the real estate prices are not going up anymore, the gravy train has stopped cold.

In Canada, we haven’t seen this situation (yet) and I think there are several reasons for this:

  1. Real estate prices haven’t gone up as much as in the US.
  2. Lending practices in Canada were stricter than in the US.
  3. Interest rates are stable.
  4. The economy is still going strong.

Real estate prices

Real estate prices did not rise as much in Canada as they have in the US over the last several years which might have helped prevent mass speculation. It’s easier to get excited about property investing/flipping when you see 30% annual returns compared to 10% returns which is roughly what we saw here in Toronto. I believe that people who are flipping properties are more likely to use excessive leverage in order to make more money. This works really well as long as the house goes up in value but if the house goes down (which is happening in the US) then the flipper might be in big trouble.

Stricter Lending Practices

The use of the word “stricter” is this case is a relative one. The last few years have seen changes in the mortgage market in Canada where you can buy a house with zero down, get a no interest mortgage and for those who are inclined to pay a smattering of interest there are 40 year amortization terms available. All of these features allow the Canadian home owner to increase the amount they borrow which will increase the odds of problems if any of the above factors come into play.

In the US it appears that anyone with a pulse and no paperwork or job or money could get a mortgage which obviously increases the odds that some of those borrowers won’t be able to make their payments. The availability of ARMs (Adjustable Rate Mortgages) is another product which can be very useful for some home owners but for some borrowers they were a way to get a house (for a few years at least) that they couldn’t afford. It was just recently that the US government passed legislation that makes lenders consider the payment after the mortgage reset (and not during the teaser rate period) when they look at the repayment ability of the borrower. Hard to believe that sort of common sense rule has to be legislated.

Interest Rates

This is another factor that applies to both Canada and the United States. While interest rates are higher than a couple of years ago, they are still fairly reasonable. If rates were to go up say 2% then I think that this will expose some sub-prime borrowers because they might not have any room to cut back in their budget to pay for a few more hundred dollars of interest each month. A borrower with a better credit rating would also feel the pinch with higher interest rates but they would likely have more flexibility in their budget.

Economy

The economy and job situation is still quite good in Canada which is not really different than the US but if we see a recession in either country and unemployment goes up, then that will certainly put more pressure on highly-leveraged home owners and foreclosure rates will go up.

Summary

Loose lending standards and rapidly increasing real estate values were the main reasons that led to some American borrowers taking out speculative mortgages that they couldn’t afford. Because these factors were not as prevalent in Canada I think that there are a lot less borrowers in Canada who are on the edge as far as being able to afford their mortgages. That said, lenders in Canada will still give borrowers a lot of mortgage which some people have taken advantage of, so if unemployment goes up and/or interest rates go up, we could still see a smaller version of the sub-prime mortgage crisis here in Canada.

The Globe and Mail recently had an excellent article ( free login required ) on subprime lending and some of the fraudulent sales methods used.

Finally I will leave you with link to a sub-prime mortgage discussion written by a senior employee at Pimco – it’s very informative and the format (the economist is talking with his pet rabbit) is very entertaining while at the same time, somewhat disturbing. 🙂

Other posts in this series

My Two Dollars posted My Thoughts On This Whole Mortgage Crisis And Why I Don’t Feel That Bad. This excellent post explains why David is a bit annoyed that people who overbought are getting helped by the government while fiscally responsible people (like him) don’t get anything.

Finance Freelance Life explains how renting a home and buying a home are not as different as they seem in Why renting is right for us right now.

Rocket Finance has a great post about his own real estate mistakes.

My Dollar Plan (yes, the one with 181 financial accounts) tells us a very unusual story of how she has an adjustable rate mortgage (ARM) and not only is she happy with it – she doesn’t blame her mortgage broker, the government or space aliens for the fact that she has one.

Moolanomy explains Debt-To-Income Ratio and Why It Matters. This post covers why you shouldn’t spend too much of your net income on your house.

Millionaire Money Habits tries to decide between investing in stocks or real estate in Catch a Falling Knife – Buying the Housing Slump.

PaidTwice wrote an interesting post on the “Can we afford it” mentality which gets into the problem of people deciding if they can afford something (such as a house) based entirely on the monthly payments.

Debt Free Revolution talks about how maybe it’s not such a good idea to take advantage of increased equity in your house by paying off credits cards with a HELOC. (Home equity line of credit).

Remodeling This Life wrote a post about how she and her husband bought a house and totally gutted it. This post brought bad some unpleasant memories for me because of our own fixer-upper experience. She has a fair bit of advice and warnings for anyone who wants to buy a fixer upper.

Being Frugal wrote Frugal Hacks For Your Home. Still not sure exactly what a “hack” is but maybe this post will tell me….

Plonkee Money asks why anyone outside the US should care about the subprime mortgage crisis.

Cash Money Life explains how mortgage escrow accounts work. These are more common in the US although I have heard of house insurance payments being combined with mortgage payments. In a related article he discusses how his mortgage payment dropped recently because of changes in the escrow liability amounts.

Single Guy Money talks about the real cost of home ownership.

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Real Estate

For Sale By Owner – The Wrong Way

sign.jpgAs everyone who has sold a house knows, real estate commissions are a rip-off. Real estate agents charge a commission for their services so it doesn’t matter what value the house is or how easy it is to sell, they get their 5% (approximately).

To counter this fee, the for-sale-by-owner movement has been gathering momentum. Larry MacDonald wrote some interesting posts on his successful efforts to sell his house and CNN had a post about an innovative strategy to not only sell your house without an agent, but sell it in five days.

If you are going to sell your house on your own to save money, don’t expect to save the entire amount that would have gone to an agent. You still have to spend money on marketing and that marketing budget should include some professional signs. I don’t know how many times I’ve seen FSBO signs that looked like they were made by three year olds. I was in fact inspired to write this post by a FSBO house on a nearby street which had quite possibly the worst signs I’ve ever seen. Your typical kid’s “Lemonade 5 cents” sign would put these FSBO signs to shame.

Unfortunately by the time I went to take a photo they had taken their open house sign off the porch and I couldn’t get a good picture of the sign in the window. But to describe – in the window they had a piece of cardboard (normal box colour) with ripped edges – that’s right – no time to cut properly, gotta sell that house! Written with black marker in letters too small to see from the street, was presumably the details of the house sale – I could only read the “For Sale” portion of the sign. Attached to their front porch was an “Open House” sign – this was made out of very unevenly ripped cardboard (they must have been quite angry at this point), written in marker, possibly with the hand of a seven year old and had the news that they were having an open house on Sunday, 2-5 pm.

The thing that amazes me the most is that this house is probably selling for around $400,000, so we’re not talking about an abandoned grow house. How on earth could that homeowner possibly expect that a reasonable buyer is going to enter into a legal transaction worth $400k with a owner that looks like they went out of their way to have the most unprofessional signs possible?

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Real Estate

Higher Than Normal Rent Scam

With scams the best defense is often to discuss them and let people who haven’t run into them know how they work. Unfortunately, talking about scams can seem like a “how to” for scam artists, which IS NOT my intention here. I always love reading about scams and cons, in part to protect myself, and in part out of amazement at how devious people can be when they’re trying to part us from our cash. Depending on the level of interest, I may occasionally post more scams I’ve encountered, what the person was trying to pull and what might have happened if someone fell for it.

Some people starting with real estate investing, buy into the guru hype and will run around trying to buy stuff as quickly as possible. One scam that preys on this group is what I call the “Higher Than Normal Rent Scam”.

How it works is you find a piece of property that’s already tenanted, and it seems to be a great price for the rent it commands (say it costs $200K and is earning a rent of $2500 / month). You plug the numbers into your “get-rich-quick fast-calculations (patent pending) calculator” and decide this is exactly what the guru ordered. Talking to the seller, he encourages you, saying he’s selling to buy bigger investments himself and that this one will make you tons of cash. There’s only 1 month left on the tenant’s lease, but “he’s going to stay forever” you’re assured.

Soon after closing, the tenant contacts you and reluctantly informs you that he’s been moved elsewhere and won’t be renewing his lease. You wish him the best of luck (plotting not to return his security deposit depending on which guru low life you’ve been listening to) and decide to raise the rent and make it even more cash-flow positive (“this is how the rich think” you say to yourself, patting your own back).

The next month no one is interested in renting your place for $2700 / month (even though it would help you be cash flow positive, the nerve of these tenants!). You reluctantly drop it down to $2500. Still no takers. Time goes on, and finally you manage to rent it out to a shifty looking guy who has “lost his ID” and promises to get you a first-and-last month deposit “real soon” if you let him move in now.

Depending on who you are you may be thinking:

1) Can’t wait until the new tenant pays me! I’m on the fast track!!! Someone who says this doesn’t know it yet, but they’ve got a long, hard life ahead of them.

2) I guess I’m not a entrepreneur yet, I better hire a mentor for $200 / hour. Maybe I can hire that nice man who sold me the place to show me how he was able to get so much rent!

3) I guess the market has changed, I’m so unlucky. I’d best tell everyone how the world is against me and nothing is my fault.

4) Real estate is for suckers, I’ll never rent a property again and will sell this one as cheap as possible as soon as possible.

5) I’ll look into what comparable units are renting for. Then when I’ve found out they’re renting for $1200 / month, I’ll set my rent according to the market rate and screen tenants carefully. Looking into comparable properties, it seems like I paid 50% more for the property than I should have. Since it seems very suspicious that someone would have happily been paying more than double the going rate (sadly there aren’t a whole lot of dumb, rich people running around), I may begin to wonder if the lease was set up to justify an expensive property value and sucker me into over paying. Perhaps the seller and the former tenants weren’t the perfect strangers they pretended to be.

It’s easy to read a scam over and say “how could anyone be so dumb as to fall for that”. Clearly scams exists because people DO fall for them. I came across this one here in lovely Toronto. New real estate buyers may skip the step of determining FOR THEMSELVES what market rates are for a property they’re considering buying, and trust that nice seller who was so friendly and split a beer with them.

If you’re reading this thinking “good idea, I should try that next time I’m selling!” you’re scum. Sadly, there are bad people in this world and you’re one of them.

What scams have you encountered or, if it’s not too painful to discuss, fallen for?