Rental Market Declines and Landlords Struggle with Vacant Condos

It’s not often we witness a declining rental market, but here we are. And, despite popular belief, even the unstoppable Toronto real estate market is susceptible to downward pressure. COVID’s (indirectly) the Culprit of a Declining Rental Market How has COVID impacted the real estate market? As we predicted, COVID didn’t slow the market; in fact, in many cases, it was the root cause of a surge in buyers, multiple offers, and increased selling prices, but it left a negative impact in its wake.  The pandemic closed offices, forcing people to work from home and kids to learn virtually, it resulted in needs, wants, and priorities to shift. Small, conveniently located condos in Toronto were no longer convenient.  There were limits to how many people could occupy an elevator at once, masks became mandatory, and in some cases, guests were being turned away. This, combined with new condos closing, caused a surge of rental properties to become available. Many tenants no longer needed to stay in the City; they could move to the burbs or somewhere rural and work remotely.  This move often resulted in little to no significant change in monthly expenses and sometimes even savings. Now, landlords are confronted with tenants negotiating lower rates and vacant condos that they can’t afford to carry long without the rental income.  Here are some tips on how to compete in a market with so much competition and declining values: If a market is trending downward, you have to price a couple of weeks ahead –Adrian Trott DON’T BE NAÏVE ABOUT THE RENTAL MARKET You mustn’t value your property solely on a similar property that rented a few weeks prior.  Just because your neighbour got $2,000 per month three weeks ago doesn’t mean you can get the same.  You have to be aware of the changing dynamics of the market, your increased competition, and the rental market (this also applies when selling real estate). DO BE PROACTIVE AS THE MARKET CHANGES If a market is trending downward, you have to price a couple of weeks ahead. This means predicting where the market is going.  If a similar condo rented for $2,000 three weeks ago and competing condos are now lingering between $1,950 and $2,000, the first person to realize that the value in today’s rental market is $1,875 will win.  Even though this number seems low today, in six weeks, you’ll quite possibly be getting more than those who held out longer.  Not to mention, you’ll collect rental income quicker. DO MAKE YOUR RENTAL LISTING SHINE Most rentals look like crap.  They’re dirty, smelly, banged up, and it’s all highlighted through terrible ten-year-old smartphone photos. Invest a bit of time and/or money to clean the unit and, perhaps some paint is called for also.  CLEAN the condo, take proper photos, and consider virtual staging.  You now have these photos forever to repurpose down the road. When the pool of prospective tenants is dwindling, and the options for them to choose from is increasing, you need to give them a reason to consider your property.

Buyer Loses $620,000 Over Cancelled Real Estate Deal

As with all investments, purchasing real estate comes with risk. It’s important to prepare and understand the risk.  Here’s an example of an extreme case that costs a buyer hundreds of thousands of dollars, along with my suggestions on minimizing the chance of falling into the same predicament. To paint a picture of this situation, let’s quickly summarize the key components of the article I’m referring to. The Story In the 2017 real estate market’s heat, a buyer won the ‘bid’ to purchase a property in Toronto for $1.9M.  Their offer was not the highest, but it was an unconditional offer.  This means that once the seller accepted it, it was legally binding.  There was no conditional period during which the buyer had time to get approved for a mortgage or complete a home inspection; they were legally bound the moment it was signed.   At some point after the purchase, but before closing, the buyer put their home on the market.  After a period of time, they were not successful in selling their home (or perhaps unable to sell for an amount they were comfortable with.) As a result, on the new home’s scheduled closing day, they informed the seller that they would not be able to close because they hadn’t sold their home and therefore were unable to secure financing for the new one. The Seller had to re-list their home for sale and subsequently re-sold it for approximately $620,000 less than what the first buyer agreed to.  Fast forward through, what I assume to have been, a series of heart-pounding, financially crippling, stress-inducing legal battles, and the courts sided with the Seller.  The result was that the buyer was responsible for compensating the seller for the approximately $620,000 loss in reduced selling price plus their appeal costs. Can you imagine having to remortgage your home for more than half-a-million dollars and have nothing to show for it? It’s not like you got to do a glamourous renovation or send the kids to university.  You literally accomplish nothing and have an increased monthly carrying cost of approximately $2,000 for another twenty-five years.  It’s unfortunate, but there are things you can do to minimize your risk of this happening: Sell Your Home First We often hear, “do we sell first or buy first.” The latter being the most common.  Let’s assume you must sell to secure financing for the new house.  In this case, the risks are that you don’t sell for what you expected or get a later closing. The latter requires bridge financing, which is common and rarely detrimental to the sale or a person’s finances. There should be no case where a house literally won’t sell. There’s ALWAYS a willing buyer; the question is, how much will they pay?  In this example, the buyers likely weren’t willing to pay enough for the seller to afford the new house. Perhaps it was just that the seller was stubborn or uninformed and didn’t realize the repercussions of backing out of their purchase.  Perhaps selling for less would have ultimately cost less in the long run. The risk of selling first is quite simply that you don’t find a house to buy in time. This could mean buying something that’s not to your liking, moving in with family, or finding other short-term lodgings.  To minimize the risk of this happening, try to sell with a long closing date to provide more time and review interim lodging options in advance. Have Your Home Ready to List for Sale We’ve seen everything, including smelly, dirty, cat-pee-saturated hoarder houses.  Trust me, your house is perfectly fine for us to visit. I cannot stress the importance of this enough.  When somebody contacts us, we instantly get the wheels in motion to prepare their home for sale.  Your home must be ready to list the MOMENT you buy.  The market can change on a dime.  Preparing your home to sell last minute could result in selling in a different market.  It can easily take a couple of weeks to paint, remove furniture, and complete minor repairs.  Don’t delay in allowing your Real Estate Agent into your house because it’s “…not clean enough for a visit.”  We’ve seen everything, including smelly, dirty, cat-pee-saturated hoarder houses.  Trust me; your house is perfectly fine for us to visit. Let’s get the process started! Negotiate a Long Closing The Seller of the house you’re buying may prefer a short closing, but it serves neither you nor them any good if it’s so short that you haven’t reasonable time to sell your property.  At the end of the day, it usually comes down to money.  If the seller wants a quick closing, a good Realtor can often sell the idea of a longer closing by building value in protecting the seller’s best interests and determining a reasonable cost to pay for their accommodation. This is a great strategy to minimize your risk and level of stress as you sell your home. Prepare for The Worst – Can you afford to carry both properties? Can you rent out your current property to tenants and afford to close on the new property? Are there alternative lenders that offer not-so-ideal terms and rates but more flexible loan options?  A professional mortgage broker can come in handy with something like this. Moving is an exciting time, but it can an emotional roller coaster.  Consider all outcomes and options, and hire professional representation for all facets of the process.  

Cottage or Dream Home

A common topic of conversation this year has been whether to invest in a cottage or upgrade to your dream home.  Because of the COVID pandemic, the frequency of this conversation increased ten-fold. Appropriately, I’m writing from the comfort of the deck at my family-cottage in Kearney, Ontario.  This cottage has been in my wife’s family for over 50 years; hand-built by her Great Grandfather. The land was purchased for $8,000 over a drink, a spit, and a handshake –a far cry from the cost of one today, but the return and enjoyment is the same. It truly is one of our favourite getaways and we try to get up here two times a year. We unwind quickly, settle in, enjoy our time, and make memories. I feel like this is an appropriate time to reflect on this conversation to help you decide which direction to go. THE EFFECT OF COVID ON HOMEOWNERS AND REAL ESTATE The real estate market has become hot, multiple offers and bidding wars are once again the norm. With everyone confined to their house and working from home, people are finding their current home doesn’t fit their needs.  The solution often comes down to upsizing their current home or getting a vacation property; but, which one? There’s no question that upgrading to your dream home is probably more cost-effective.  A second property comes with a second mortgage, property tax, utilities, insurance, and maintenance. You’re more likely to consider renovating, buying a boat, toys, renovations and landscaping.  Alternatively, upsizing can sometimes be done for a more reasonable increase in cost. Cottage vs Dream Home Pros and Cons DISTANCE TO TRANQUILITY: Kick your shoes off and step into your backyard oasis in minutes, or spend five hours packing and traveling to the cottage.  For some, the drive is part of the fun, for others, a tedious, stress-inducing commute.  If the latter, avoid traffic by looking at less-popular areas and time your trips during off-peak travel times. FREQUENCY OF USE: Will the cottage get a lot of use? Do you see yourself up there every weekend or is this an occasional destination? Compare that to how frequently you’ll be able to benefit from the upgraded home. UNDENIABLE DIFFERENCES: One thing a cottage accomplishes, that a primary residence seldom does, is creating a sense of solitude and escape.  It’s a place you’ll truly disconnect and get away from the daily grind.  For the same reason you may not want a cottage ($$$), you’ll love boating, fishing, and making memories. In conclusion … Both options are worthy of consideration. However, if the all-mighty dollar weighs the scale most heavily, upgrading may be best. Alternatively, consider becoming a Landlord. Find a home that can be partially rented or a cottage to rent out on a short-term basis. The additional income will subsidize your costs, making both options more feasible. I hope this has helped provide some direction in your decision of what to do.  It’s not an easy decision but both options are exciting to consider nevertheless.