The big news of the last week or so has to be the flood of… well mixed messages coming from different sources all tying back to the economy.
On the one hand we have reports that say Canadians have “over” leveraged themselves. The ratios “they” say are currently higher than at the worst point of the US collapse. Hm.

Let me get this straight, everyone and his dog went out and bought a house thanks to the affordability being lower thanks to the all time historic low rates. “Never a better time to buy.” was the slogan I kept hearing. Lots of people bought based on the new rates, but now we’re over leveraged.

Maybe it’s like the movie “Princess Bride” when Vizzini calls out “Inconceivable” and Fezik response “I’m beginning to think, you don’t know what that word means.”

New rules came out from CMHC to avoid this “over leveraging” by introducing a “new” Mortgage Qualifying Rate (MQR). In my mind many lenders were already doing this, it just wasn’t being enforced. I would get responses back from certain lenders saying “if the rates go up even by 1%, this client wont be able to afford their mortgage.” And this was back when Prime was 6.25% (no not a typo). It’s 2.75% today (although that may change next week, more uncertainty there as well). It’s been so low for so long (if you call 18 months long) now that people are thinking this is the new norm.

We’re over leveraged (inconceivable!), but not to worry CMHC has us covered by the new MQR requirement. Which just dropped recently to 5.69%. OK, wait. Does this make sense to anyone? Even the new qualifying rate is dropping? Doesn’t that kind of make things easier to qualify for and contribute to the over leveraging (inconceivable) once again? Or is it more that suddenly the banks were no longer lending as much as they could and their economists spoke with other economists and they all agreed that the future wasn’t as bleek as all that, so they loosened the choke hold on the industry.

Other news shows a rise in the major city centres of double digits across Canada, which naturally has everyone calling for a bubble. Once again, we have lower rates which makes things more affordable and more people buying. Increase in demand causes increase in price… but it’s a bubble.

I read an article somewhere that showed that there have only been two “bubbles” in Canada since they started tracking prices. Once in Vancouver (80′s when rates went to 22%) and once in Toronto (recession of the 90′s or we could blame Bob Rae and the NDP .

I’d say there’s been way more talk of bubbles than any that have really happened.

My question is, there was a massive run up in prices in Calgary and Edmonton that are showing the biggest increases this time around, have we reached the values pre-2009 melt-down or do we still have a way to go yet? I believe that these places had the biggest hit in 2009 and got caught in the media frenzy coming out of the US, such that deals abounded in late 2009 and early 2010.
I figure in these areas we will start to see more sustainable growth going forward. I’m not the only one, just ask Don Campbell, president of R.E.I.N. and his recently updated top 10 list of where to invest in Canada.

So somehow the real estate recovery from across Canada to pre-boom/bust levels is seen as a bubble by the media and they then tie this to us being over leveraged.

I think our economy and our housing markets are both very strong. The concern I see is the US economy… or the world economy for that matter. I think were looking at a very long and slow recovery. If it takes too long or is too slow, then we’re going to get dragged along with it. No double digit increases in housing, but no sudden jumps in rates either.

Then there is the doom and gloom predictors, Rober Kiyosaki being among them, that say this is only the beginning. We’re going to see another BIGGER run up in the markets by 2013 and then another BIGGER meltdown. Gold or Oil or something new will double in price causing a disruption in the markets which wont be sustainable. They called it “sub-prime” mortgages last time. It will be something else next time. The economic fundamentals haven’t changed and certainly greed still exists.

Well, lets hope we can avoid these “Cliffs of Insanity” and that Miracle Max will be able to perform a miracle and save the beleaguered US/World economy. It’s only “mostly dead”. We’ve seen much worse.

OK folks I have to tell you this has been one of those difficult weeks for deals.

As mentioned in previous posts, I like to call myself “self-unemployed”. Why? Because some days I just have to fire myself for, well I certainly can’t call it poor performance that’s for sure. How about failure to close? As the old saying goes, “Business is perfect until people get involved.”

I learned early on this game that it doesn’t matter what the clients have signed, until the transaction goes through with the lawyer and the financing is being sourced through you have arranged, ANYTHING… and given my experience over the last 4+ years, I do mean ANYTHING can happen between now and that magical closing date.

Fortunately the sun rises the next day and I hire myself back again. OK, that and the fact that I get an email from a client out of the blue telling me he’s buying a rental. Perks me right up. “How can I help?”

This week saw me chatting with a contact I have at the bank. They asked, “you did get them to sign something. You will get paid something for your time. Right?” Only if it closes and they haven’t gone elsewhere. To which they respond “how do you live like that?” One deal at a time. On to the next one.

There’s another saying I love. It’s not how far you fall, but how high you bounce that counts. Or that quote from Mark Victor Hansen, just remember every time you fall down, the next time you get up your 6 feet further ahead. Of course it helps if you are at least 6 feet tall for this to work.

And finally the classic story of the fight between Mohammed Ali and George Foreman. Ali is taking an absolute pounding from Foreman. All Ali keeps saying to George is “Is that all you’ve got Gorge? Is that all you’ve got?” Well, George gave him everything he had and lost. Ali waited (if you can call being a punching bag for 11 rounds waiting) until he knew George could give no more.

Is that all you’ve got George? I’ve still got a few rounds left.

Let’s see if we can close a couple deals next week, or I might have to fire myself again.

Enjoy your week folks.
JRW

Hope everyone has enjoyed their holidays this summer.

I know summer is almost at an end when I hear announcements for “Super-Ex” on the radio. Traditionally in this corner of the world the last big even before school starts. Or as we like to sing in our household, “It’s the most wonderful time of the year.” Really we do love our kids. Certainly it was a lazy summer for them. Video games, movies, TV on demand, internet (mostly Reddit it seems) and the odd book (how past millenium)… ah the life of Riley.

I had predicted a lull in the real estate market in July given that HST was about to hit. Thus I planned my vacation for the first week in August. I figured everyone would be busy with summer and not be focused on real estate. I was close. June was dead (for me at least) and July was as crazy as ever. HST has arrived and the world didn’t implode despite media efforts to predict otherwise. I think the Eco-tax (yes, call it what you want it’s still a tax, move on) was more of a concern than HST was. Provincial government announces changes to placate everyone, but you may notice it’s not gone just better hidden from public view.

I digress.
OK, so when I said that things picked up in July unexpectedly, the deals coming in were mostly commercial. This after having a lull in my view for at least 6 months while everyone appeared to try and get one last rental in before the CMHC changes in April. Deals still closed in May either under the old rules or simply with more downpayment (20% for those keeping score). I discovered a couple lenders who still calculate the rental offset the “old” way (i.e. 80% of rental income reducing expenses vs 50% added to gross income) and they also allowed private second mortgages to 90%. Effectively the cost of borrowing on the last 10% increased, but overall deals were happening.

Also during this timeframe, I saw what I will have to call a spike in investors who “claimed” to be rent-to-own specialist. I’ll contrast/compare this with people/companies today who call themselves SEO experts who will optimize your site for what I call “google juice”. Suddenly on my real estate investors group (www.oreio.org) we start seeing post after post of rent to own deals. You make this much profit in 3 years and then the tenant buys the property from you.

What is it with all the real estate seminars that are out there? I know they are all “selling” a product and focus on the positive, but surely someone has to ask what the downside is or what potentially might go wrong. The stat that always gets me is that 70% of rent to owns don’t purchase the house at the end of the contract. The seminar people say “great”, put someone else in the house and try the same thing with a new tenant. Yeah, except that this was once someone else’s dream home and the likelihood of it matching someone else’s dream is fairly slim. “Sell it for a profit, you’ve owned it for 3 years there will be appreciation.” Unless of course you hit a down market in 3 years. If there is a sudden uptake in RTO, what’s to say there wont be a glut of houses in 3 years (given the 70% failure rate). Yes, you can rent it out again, but not at the same RTO level where you were collecting the downpayment.

Just a point of pause for those thinking of starting their own RTO business as from any of the seminars they seem to imply there is no way it can fail. Don’t get me wrong, I do believe this is a solid a strategy as any to make money at real estate, but make sure you have the downside covered in any situation or an exit strategy as many like to call it.

Back to commercial. For some reason in July everyone starts calling me about commercial deals, some on the “small” side, $300K and one massive one that came in out of the blue. Anyone want to refinance a hotel? I’m stunned at how quickly the numbers add up. Someone once said, it’s the same as buying a house only add a couple zeros on the end.

Why commercial deals all of a sudden? I have no clue, but if they all closed or even half of them close… I’m sitting pretty for the year… or two. I might even buy some advertising for my business… Nah. Why start now? My blog readership of 8 will carry me. Wont they? (I should really check the stats on readership someday, must be at least 10 by now)

In the past month, I’ve looked at the full gamut. 6 unit residential, to commercial mixed, to hotel. I think I’ve called every commercial lender I know, a few I don’t and even one out of the US (who doesn’t seem to have an issue lending in Canada or internationally).

I guess my previous posts have filtered out through the ether and for those that subscribe to the theory “attracted” these commercial deals. I just see it as I’m insane enough to even consider these deals and work through them (some simply in order to learn and expand my contact base). I know several brokers who don’t even bother. “It’s too complicated.” “They take so long.” Funny, don’t the greatest achievements in life take at least a little effort? Aren’t those overnight successes really a story of many years of preparation? Or the old adage of Luck is what you get when preparedness meets opportunity.

I’ll choose to “lean not onto my own understanding.”

Have a great week everyone.
I’ve recovered from my roller coaster week away in Ohio, so I should be back to weekly posts. Must call my Chiropractor.