Money Smarts Blog

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally. See Part 5 – The Search.

Of four houses that we were to view, two were unexpectedly taken off the market that day. In one case, a home owner’s spouse had died and she no longer wished to sell. The other house was inexplicably closed to further showings. I found out later that a buyer had offered to pay $80,000 over the asking price. Days on the market: four. The prospective buyer had submitted a “bully offer”, an offer which is submitted before the official offer day. Under this scenario, the seller had a very short time frame, perhaps only 24 hours to consider the offer. The listing agent usually informs the agents of clients who already seen the house, of their need to submit their bids immediately if they wish their offers to be considered against that of the “bully”. Because bully offers are often generous, with few if any conditions, they are often accepted by the homeowner who is happy to accept as much as s/he can for the house.

The first house that my husband and I were able to see with our agent was a three-bedroom semi. For $499,900, it was definitely a fixer-upper with dark rooms and a pervasive damp odour throughout the house. Although the wiring and roof had been recently updated, the house most certainly required an overhaul to be habitable.

House number two was one with which my husband and I fell in love. Ideally located for us location-wise, the house was immaculately renovated and even furnished in our style. Despite our attempts to overlook the current homeowners’ decorating style, we couldn’t help being influenced by the aesthetics. While it was well above our budget, the house was very reasonably priced for the neighbourhood and therein lay our dilemma. After an angst-filled day of crunching the numbers, we had to pass on the house. Our realtor had also been able to ascertain that two home inspections had already been booked, and thus there would be multiple offers on the offer date. As the house was already above our means, we would have been unable to compete. In the end, the gem of a property sold for $100,000 above the asking price and after only a week on the market.

The lesson we took from this exercise was to try to avoid emotional attachments and to judge a house more dispassionately. In the weeks ahead, hopefully something will turn up.

Read the next post in this series “A Close Call“.

I’ve often thought that an interesting game would be a simulation that takes you through a few decades of a real estate investor’s career. Yes, yes I’ve heard of monopoly, you’re very funny!

What I envision would involve analyzing properties, determining the cash flow, and dealing with unexpected changes in market conditions and interest rates and whatnot. Probably it’d work better as a single player game, or if it was a multi-player game it would be fairly non-competitive.

Robert T Kiyosaki has a game, “Cash Flow” which is a step towards this idea (and he even made it with the idea of using it to help teach people about money), however its pretty lame (and I’d find it frightening if anyone actually felt better prepared to manage their finances after playing it).

Probably the game I’d imagine would in some way involve people balancing their time and money. They’d find and manage properties (with more potential problems as they got more properties), decide when to keep properties or when to sell them. Potentially it could work off of the computer as a game with cards or something (but there’d be a lot of book keeping tracking mortgages and whatnot). If it was on a computer, I’d make it as much of a simulation (instead of a game) as possible, and hopefully get it to mimic the real world as much as possible.

I’d ideally love it if it illustrated the idea of exponential gains, that things start of slow, and really pick up speed once compounding kicks in (which I don’t think is a very intuitive concept for many of us, we usually have a very linear perspective on life).

Nothing at all like what I’m describing, but I came across a silly, fun real estate game: Mansion Impossible. You should be able to figure out within 20 or 30 seconds what the strategy is then follow it until you win.

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
See Part 4 – What to Buy

Friends who have recently survived the house hunting experience have faced and lost bidding wars and have even come across “bully bids”. Bully bids are offers submitted early (instead of on the pre-arranged date) and way above the asking price. Thus, the search may not be an easy one and may take a while.

Part of our house search strategy involves educating ourselves about the factors which determine a house’s value. For that reason, we are also looking at properties outside our budget to look at how much more $50,000 or $100,000 buys. This exercise is also useful in considering our willingness to take on a fixer upper in a hot area. We are also considering taking on a tenant to be able to increase our budget.

So what does roughly half a million dollars buy you in Toronto? The answer is not much from what we have seen.

Open houses provide a fantastic opportunity to compare different neighbourhoods or to just scope out renovation ideas. With this in mind, we made open houses a regular part of our routine for a while. What was disconcerting is that open houses in the more popular areas tend to be very busy and attended by couples fitting our demographic. We are essentially competing with others just like us in terms of age and income – not a surprise perhaps, but a sobering realization of how many people we are up against.

Recognizing that our money would stretch farther if we left the downtown core a bit, my husband and I considered houses along Yonge Street between Eglinton and Lawrence, areas outside our dream locations but still along the subway line. In these “cheaper” areas relative to the Annex, our budget still only allows us to afford a semi-detached.

A semi at Yonge and Eglinton was well-priced at $549K, however proved tiny in its overall size and room proportions. Despite its uninteresting curb appeal, a semi at Eglinton and Mt. Pleasant listed at $619K was very intriguing with beautifully spacious rooms, 4 bathrooms and even a sauna. Its flat roof (potentially expensive and a worry with our winters) and steep staircases (rebuilding a staircase could involve costly structural alterations in the tens of thousands) ruled it out.

An elegant detached century home at Yonge and Eglinton seemed to offer good value with 3,000 square feet of living space and an asking price of $899,900. With well maintained original floors and stately wood detailing, it was still a fixer-upper with outdated kitchens and bathrooms, oil tank heating and some knob and tube wiring. It remained on the MLS for only a couple of weeks.

Some of the other listings that our agent sent were close to Avenue Road and the 401, a beautiful area, but too much of a hike from transit for non-drivers like us.

Downtown, at first glance, a detached house with its dramatically renovated interior looked promising at $649K. However, the lot size and rooms seemed small. Also, its location close to Alexandra Park, a tough public housing area was not ideal. I also couldn’t help thinking that it might be considered a better house in a less desirable area and was worried about its resale appreciation potential. Nonetheless, the house sold for $60,000 over asking after only 12 days.

An updated Annex townhouse had spacious rooms, but had only two bedrooms for a $749,000 asking price. Inexpensive tiles and finishes too traditional for our taste were also off-putting.

Thus far, I am still optimistic, but recognize that either our neighbourhoods or budget may have to change. I have been diligently checking the MLS each day, and am hoping to look at houses each weekend and during the week as they become available.

The search continues…

Read the next post in this series “Week One With an Agent” .

Millionaire Mommy Next Door recently posted a series on renting vs buying which was quite interesting. She takes the view that renting can be much more financially rewarding than home ownership and gives her own situation as the example. While I don’t disagree that she has improved her lifestyle by renting, she makes it sound like home owners can’t participate in equity markets which is a bit ridiculous. On the other hand some of the commenters take the opposite tack and say that the only way to win at real estate (or to save) is to own a house.

There is no difference between renting and buying

I would argue that theoretically there doesn’t have to be any economic difference between renting and buying. Ideally both renters and home owners should be invested in equities and real estate and will benefit if either investment class does well.

Renters could include more REITs (such as VNQ) or investment properties in their asset allocation so they have some real estate exposure to make up for the fact that they don’t own a house. Another strategy that a renter can follow if they want to keep up with their house-owning friends is to use leverage to buy equities so that they can have a large monthly payment as well. If your best friend buys a house and has a $250k mortgage then you (a renter) can go out and borrow $150k and buy equities. The renter can expect a higher rate of return from equities and therefore doesn’t need to borrow as much as the home owner. This way you can still remain best friends and commiserate together about not having enough money.

Don’t overspend on the house

The reality is that when we rent, we tend be fairly moderate in our demands since we know that all of the rent payment is a cost and nothing is going towards our equity. When buying a house, a lot of us buy as big as possible and ignore the huge interest costs, focusing instead on the small (in the beginning at least) amount of equity we are building. A comment such as “At least I’m building equity instead of throwing my money away on rent” would only be true if the amount of interest on the mortgage plus maintenance and property tax was equal to the amount of rent being paid which it usually isn’t.

What to do if you are a homeowner?

• Only buy as much house as you can afford and still be able to save money so you can invest in equity markets.
• Pay down your mortgage at a reasonable rate – 20 years maximum. In case your house value goes down the more equity you have (had) the better off you will be. If your house value goes up then you are still better off with less mortgage.

What to do if you are a renter?

• Save as much as you can (more than the home owner) and increase your asset allocation in real estate investments such as REITs. You could also buy rental properties although that’s another ball game altogether.
• If you really want to emulate the home owner experience without actually buying a home then consider using leverage to buy equities since that’s the reason home owners have done so well in the rising real estate market. Extreme caution should be used with leverage.
• Don’t feel like you are being left behind. I honestly believe that a renter has more financial options than a home owner. The trick is to make sure you take advantage of those opportunities.