My experience with for sale by owner listings is mixed.  On the positive, it was easy to get a hold of the owner and there was nothing lost in translation when communicating positions.

Here are the issues though. The price did not reflect market. Quite simply, the condo was listed way above market. How did we know? Firstly, my real estate agent ran an analysis which showed the unit was listed 6% too high (I’ll address how he did the analysis in my next blog about looking for a new condo). This was confirmed by the unit immediately below, represented by an agent, listing their unit for 2% below the unit upstairs (remember this is the listing price so the sale price would be lower than that).  Given this is a condo, the layout was exactly the same so there was no real reason to list so high. Also add in the fact the downstairs unit has to add in the agent’s commission in its pricing and you get a sense of how far off pricing was.

The fact the unit below listed for so much less confirmed our analysis. We suspect the owner got many comments about this.  A week after the listing first went up, the price dropped. I understand that over-pricing a unit is typical in  for sale by owner. The owner is too emotionally attached to price properly.

The second issue was the negotiating tactics of the owner.  He mentioned the price was negotiable several times without us asking. He emailed my agent several times asking about interest. He was basically negotiating against himself. For a wide variety of reasons, I did not put an offer on the unit and wished him the best of luck.

However, there are some interesting lessons to learn from this experience:

1. It looks so much easier than it is: In a really hot market, a self-represented seller may be a good way to save money. But in softer markets, such as the mid-tier Toronto condo market right now, expertise is needed to price and negotiate the sale of real estate. As much as I disparage undeserved real estate commissions, I also recognize that good real estate agents are needed for tougher sells.

2. You hire agents as much to act as a stupidity brake than for their services. Lowering the listing price after a week, commenting that price is negotiable and signaling the weakness of his position are typically not things good negotiators do. If one knows that their emotional control and discipline is not strong, one had best to think twice about being a self-represented seller.

3. Patience is key. My over-riding sense of the experience was that the seller was impatient and thought a few showings would do the trick. Selling real estate is like anything else- it is as much a process as a result. Selling real estate in real life is not like tv- there is no cut away which fast forwards you 3 weeks to an offer being submitted.

More adventures to follow.

My friend did made a few observations about my policy which seem outdated. I have had the same home insurance policy for 5 years and kept renewing it without thought. What has happened in the intervening period is that my circumstances have changed but my policy had not. Morale of the story #2: check to see whether your insurance actually reflects your current life periodically.

Given the broker is also my friend, he did take some time to explain to me how home insurance policies work and where I may have had adequate coverage and inadequate coverage. I wanted to share with you some of his observations (please note that I am not an insurance broker so any errors are mine). The same observations apply to a renter’s policy as well.

As I understand it, a home insurance policy is mainly broken into 2 major parts: property/contents insurance and liability insurance. The former deals with insuring risk of loss from damage or destruction of property. Think of things like flood damage or fire destroying your furniture. The latter deals with liability arising from injury or damage to a third party caused on your property. Think of slip and falls on your property, a tree branch falling on your neighbor etc. Liability coverage is more or less  self-explanatory so I will deal with property/contents insurance.

The property/contents insurance insures against different types of risk. One major heading is contents. In plain English, the maximum dollar figure the insurance company will pay the policy-holder to replace contents. If there is $100,000 worth of contents insurance, the insurance company will cover up to that amount. It is important for many households to check whether this coverage is adequate. As a household starts accumulating stuff (for lack of a better term), the contents coverage may no longer be sufficient.

“Additional living expenses” is coverage for the policy holder having to find other living accommodations in the event they have to move out.  This type of coverage is frequently triggered when there is a flood or fire damage to a home and the occupants have to move out during clean-up. I was woefully under-covered under additional living expenses. I suspect many other people are as well.

Simply put, rent has gone up since the time I first took out the policy and adequate additional living expenses 5 years ago no longer covers living expenses today. For many household, there may also be a deficiency in additional living expenses if there are additions to the family. More bodies equals more living expenses.

What is interesting to note is that my insurance company gives a discount for my building having a 24 hour security guard. If you live in a condo or gated community, make sure the insurance company and/or insurance broker knows about this. The discount is small but money is money.

Like everything else in finance, the devil is in the details so check your policy regularly. Good luck.

My preliminary observation is that the condo market is softening in our city. There are a lot of new condos being built and, quite frankly, there have been some vendors with an inflated sense of worth. According to my real estate agent, there are decreasing numbers of bidding wars or purchases for above list.

In this market, I find there’s been some indifference or inattention to how units are being shown. Specifically:

Open house don’ts

1. Tenants. I saw one place that had a tenant. The tenant refused to leave and basically ended up showing the place to us while her spouse was watching television. This obviously became an odd and uncomfortable showing. Not to mention the fact the tenants were pack-rats; the stand up shower could not be used because of all the buckets and mops in it. Tenants are not your friends when you selling the place since there is nothing really in it for them. I am not sure how you can cajole a tenant to be co-operative but selling a tenanted unit may make the process more difficult.

2. Please leave. I attended another open house where the owner did not leave. To top it off, she was on her cell phone during the entire showing. An open house is a sale process- try to at least show you are interested in selling the place. If she wanted to stay, at least try to pay attention to us.

3. Air the place out. This one is from a family member who is also looking for a place to live. They attended an open house where the entire place smelt like wet dog. It was such a turn-off for them. My entire thought process in looking at an open house is whether I could see myself in the place. Try to make some effort to keep the place smelling nice and clean.

On the flip side, I saw some great examples of how to stage an open house. Specifically:

Open House do’s

1. Music. It sounds funny but I saw a few places where they deliberately played music on their sound system. What a great way to put a potential buyer in the right mood.

2. Make the place as bright as possible. Warm lighting and blinds/curtains left open are great for creating the right mood.

3. Keep the place clean. This sounds obvious but I saw a couple of places with less than clean places. I don’t need to see spotless places but not washing the floors, dusting the place or cleaning the windows just gives the potential seller another reason to say no.

I’ll try to keep a running journal of the process.

The issue with the report is that its sample size (in both geography and time-line) is quite small. The larger issue is that apartments as investments may not even be the best real estate investment.

To begin with, the almost universally recognized metric for return on real estate investing is the “cap rate” or the “market cap.” A cap rate is determined by: (annual net operating income)/cost of acquiring the property.Thus, a property owner with an annual net operating income of $80,000 on a million dollar acquisition has a cap rate of 8%.

As a side note, you will notice that cap rates do not factor in appreciation since, at least when it comes to rational real estate purchases, pricing is a function of cap rates at the time of sale.

When Altus Group, a real estate consultancy firm, looked at cap rates for the end of 2010 for Canada, it found the following cap rates for the following types of real estate:

Industrial: 7.0%
Retail-strip mall: 6.9%
Apartments: 6.1%
Offices (central business district): 6.1%
Retail- mall: 5.7%

Without sector specific analysis, cap rates in the U.S. was 7.22% in Q2 2010 although there is a general trend downwards as prices continue to increase for real estate (as a note, high cap rates are like high dividend yields- they show the underlying investment may be riskier since, in the real estate context, there may be reduced demand for the asset).

Using only 2010 data then, apartments appear, in the short-term at least, to be neither the best or worst type of real estate investment. The relatively high cap rate for industrial is most likely a function of the fact that operating costs are low and demand is relatively low whereas the inverse may be true for retail malls.

As a final note, as I have blogged about from time to time, real estate is fundamentally a good investment but as the cap rates shows, over time, return on real estate is solid and not spectacular since appreciation gains are paper gains until sale. Expectations for real estate investing returns should be tempered with these types of stats in mind.

Title fraud consists of: (i) impostor pretends to be a homeowner; (ii) transfer title to himself/herself; (iii) obtains a mortgage pretending to be the current owner (relying on the fact the financial institution does not conduct its due diligence to run a title search); and (iv) disappears with mortgage funds.

The obvious concern is that the true homeowner has lost title to the home but is now responsible for the mortgage obligation.

Without reciting the jurisprudence on this matter, and to simplify this as much as possible for informational purposes, the law in Ontario for all transfers made after October 19, 2006 works under a legal doctrine known as “deferred indefeasibility (the case law and laws outside Ontario take a similar approach but please refer to appropriate information and/or advice if you live elsewhere).

What this doctrine means in plain English is that the true owner continues to hold title in the property if the fraud is discovered. Thus, section 78(4.1) of the Land Title Act of Ontario states:

Subsection (4) [which refers registration of instruments including transfers] does not apply to a fraudulent instrument that is registered on or after October 19, 2006.

The bank who was duped can seek compensation from the Land Titles Assurance Fund which is set up to compensate losses suffered as a result of real estate fraud (the same is true for the home-owner if they did not catch the fraud).

HOWEVER, the doctrine of deferred indefeasibility further states that if the impostor transfer title to a subsequent party or the property is subject to a power of sale/foreclosure by the bank, the subsequent purchaser acquire an interest in the property which is good against the world (hence, the meaning of the term deferred indefeasibility). Given the subsequent purchaser had no opportunity to avoid the fraud, they, too, are innocent parties in the fraud and should not be punished for their lack of knowledge.

Thus, the Land Titles Act further states:

Nothing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument.

The practical implication of the doctrine of deferred indefeasibility is: (a) any homeowner who discovers the fraud early will fall within the “right” side of the doctrine since any transaction will be undone; and (b) the burden of the fraud is de facto on the bank as mortgagee since they had the best opportunity to stop the fraud at the initial transfer title and/or mortgage transaction.

Thus, to get back to Gail’s original comment, the bank’s resort to not falling on the wrong side of the doctrine of deferred indefeasibility is either: (a) requiring lawyers to undertake a large amount of due diligence for every home transfer and/or mortgage registration; or (b) trying to encumber the title by registering security in the form of a mortgage.

The practicality of option (a) is that real estate lawyers are engaged in a race to the bottom in fees due to client price sensitivity and this measure only works for new home purchases. Option (b) is limited to the extent that a fraudster can obtain a HELOC by identity theft in much the same way as it obtains title and a mortgage fraudulently.

A prudent approach may be to obtain title insurance with riders which specifically address real estate fraud in addition to encumbering title (yes, title insurance is not insurance you necessarily have to obtain when you purchase a home; it can be obtained at any time). Registering a mortgage against title helps but, as Gail points out, creates another issue if the mortgage gives you access to funds and you cannot control your spending.

If you are concerned you may be subject to real estate fraud, please do seek professional legal advice. If you are interested in title insurance, please speak to a lawyer or call the title insurance companies themselves for information and quote.

The time is not a coincidence.  Preferred (or preference) shares tend to fall out of favor during good times since preferred shares have priority to common shares to dividends/distributions but do not share in the upside of that the common shares do. But, unlike fixed income, a retail investor can initiate relatively small positions in REIT preferred shares and sell the REIT preferred shares back on an exchange. For this reason, they are often described as hybrid debt-equity instruments.

Do REIT preferred shares they have a place in your portfolio?

Theoretically, REIT preferred shares have higher yields than their common share/unit counterparts (currently not the case in RioCan but shown in American issued REITs) and government issued bonds. Since the cash flow is derived from a hard asset and leverage in well-run REITs tends to be low, the dividend is relatively secure (loan to value ratios tends to hover in the 40%-60% range in large REITs which means liquidating assets in a worst case scenario should stave off insolvency short of a fire sale happening).

Like most preferred shares, pricing volatility also tends to be quite low since many preferred shares can be called at a set price meaning the trading price tends not to swing wildly from its issuance price. Finally, the price of REIT preferred shares tend to move in opposite direction from large cap stocks (observers of REITs will know the price of  large cap stocks and REITs generally move in opposite directions historically. The effect is more pronounced in the case of REIT preferred shares as compared to large cap stocks).

As such, REIT preferred shares behave more like debt instruments with higher yield than equity and, in the abstract, most suitable for investors with a low threshold of volatility risk seeking steady returns on a hard asset. Having said that, one should avoid engaging in a “should I sell my REIT common shares/units for REIT preferred shares” debate since it is an apples and oranges comparison.

REIT common shares/unit are purchased as much as an income source as an appreciation source and inflation hedge. A REIT preferred share does not necessarily share that purpose. The downside, as noted, is, again, the classic risk to reward trade-off. REIT preferred shares are safer instruments but with the loss of upside. They should not form a large percentage of holdings for someone with a long investing horizon.

As a share with limited liquidity, exit strategies also tend to be problematic which is not so much a concern if a REIT preferred shares is seen as a buy and hold until I die fixed income instrument. Finally, there is the typical interest rate risk associated with any fixed income paying instrument.

(as an interesting side note, the fact that a REIT is issuing a preferred share is a sign that the blistering returns of 2009 and 2010- the S & P/TSX Capped REIT index returned 55.3% and 15.1% in those years respectively- may be coming to an end and we may see the return of more “normal” single digit returns per annum which is not necessarily a bad thing what is suppose to be a stable asset class)

Can a REIT preferred share form a part of a fixed income portfolio? It can provided the investor understands the risks and the portfolio is not already overweight in real estate. As usual, do your own due diligence, analyze your life and portfolio and proceed accordingly.

One of the after-effects of the credit crisis has been to spark conversations such as my colleagues whereas 4-5 years ago most middle class families were conditioned to believe  to buy a home or go bust. With the real estate market correcting itself to historical norms, it may be time to revisit what the appropriate tipping point is between buying a home or renting a home.

The conventional analysis on buying a home or renting a home begins with the price-rent ratio. The price-rent ratio is determined by finding the median listing price for a home in a particular area and divide by 12 times the median monthly rental price for a home in the same area.  For example, a 3 bedroom home in a particular community sells, on average,  for $300,000 and rents for $2,000 month or $24,000 per year. The price-rent ratio is $300,000/$24,000 = 12.5.

What is an acceptable price-rent ratio? Price-rent ratios are often called the price-earnings ratio (p/e ratio) of real estate for a reason. Most experts believe that a price-rent ratio of 15 is acceptable which is also approximately the same p/e ratio most experts recommend is a reasonable valuation for a non-start-up/small cap stock.

Or, to look at it another way, take the average rent of the type of real estate you are looking at and multiple that figure by 180 (the number of months in 15 years- although William Bernstein likes 150 months better). If the selling price is way over this figure, it may be over-priced.

Price-rent ratio has several limitation though. As rightfully pointed out in Zillow’s real estate blog, the methodology assumes that the underlying value of a home to purchase is approximately the same as a home to rent. As most sophisticated real estate investors know, the analysis for purchasing rental property is not the same as purchasing a principal residence. For example, when was the last time you saw a rental home with a pool in the backyard? Thus, it is not a pure apples to apples analysis in calculating price-rent ratio.

This would suggest then that a price-rent ratio works best in real estate classes that interchangeably bought by owners or landlords. For example, condos are purchased both as primary residences and rental units. For this real estate class, a price-rent ratio analysis would seem to be the most effective since the data is easily comparable. Where the property is quite up-scale and not typically used by renters, the price-rent ratio tends to spring some methodological leaks although it is still an useful analytical tool.

The second limitation for price-rent ratio is it relies upon a readily available and recent pool of data to come up with a figure. If a location experiences some structural change in its local economy, using data before such change may give the wrong result. Think of Fort McMurray, Alberta circa 2005; oil sands extraction has fundamentally changed how to value real estate in that part of the world. Conversely, think of a mid-western city closing a car plant, steel mill or lumber yard.

In both situations, the context is moving so fast that the pool of available information is quite shallow or changing too rapidly to predict trending. Price-rent ratios work best in larger regions where there is a lot of pricing information available which is relatively recent (I would argue anything over 180 days in large metropolis is no longer recent).

Nevertheless, it is a useful ratio to keep in your back pocket if you are deciding between renting or buying and are worried you may come out of the wrong side of real estate trends.

No other financial topic tends to evoke a purely emotional response as real estate.  It has become, over the last 10 years, the financial topic du jour in the backyards and dinner tables of the middle class. With real estate appreciation either slowing or continuing to decline, many continue to ask whether real estate is a good investment.

The problem with this question is two-fold (at the very least). Real estate, as the adage goes, is all about location. To read a headline in a national publication about the real estate market tends to obscure local effects and it becomes folly to use national data to make decisions which are local in nature. For example, the existence of a local school or employer can, and often does, insulate that immediate community from some of the negative effects of a national economic slowdown. Similarly, locations which structurally have high tenant-to-owner ratios (such as New York City or neighborhoods close to large educational institutions) tend to maintain their relative value.

Thus, the answer to whether real estate is a good investment is not found in the front pages of your paper but by simply looking around you. Is your local school ranked highly, are “average” homes in your community being sold quickly, is the government investing in your community (where the stimulus money is going, other than the absolutely necessary repairs,  is a good barometer of whether the bureaucrats think your community is expanding and where the politicians need to build or maintain political capital)?

The second issue is how do you define a “good investment”? One of the subtexts of my posts lately is that 1991-2007 was a historically anomalous time.  A 17 year period with a minor rescission is not normal. Correspondingly, our notion of good investment returns went askew as well.

Most prudent investors believe that a 5-8% nominal return per annum (return before inflation) is considered a healthy return for equities. This rate of return balances risk and reward of a retail investor. Yet, to repeat a story I once wrote pre-credit crisis, I met a real estate investor who once said that nothing less than a double-digit return in an 18 month period was acceptable for his real estate investments. I do not believe that he was alone in his thinking.

However, economic data seems to indicate that real estate investing, as undertaken by institutional investors, has approximately the same range of returns per annum as equity. In other words, the debate about stock investing vs. real estate investing may not be a debate about rates of return but different methods of achieving the same range of return (file this under “Different doesn’t mean better or worse. It just means different.”). But the key, like stock investing, is that time is often a large factor in driving returns; the longer you hold onto an asset, the more likely you will make a reasonable return.

It would be foolhardy to throw an entire asset class overboard due to recent history. However, like everything else in life, patience and reasonable expectations would do us all well.

Having said that, there is now an open pro-renter policy lobby.  Specifically, Richard Florida, while not the first to suggest it but certainly the most famous given he is the “it” boy of economics, argues that a distorted home ownership rate slows an economy’s ability to recover from downturns given many people are rooted to location rather than being able to pick up and pursue opportunity. The more practical consideration is whether debt-strapped governments can continue to allocate resources to support home ownership.

What seems to be happening is the recognition that certain people do not have to economic means to own a home and the market should be allowed to correct itself.

If you are an average employed Canadian, the most likely reasons to see a lawyer are: (i) draft a will; and (ii) sell or purchase a home; and (iii) documenting a divorce. For the middle transaction, a simple sale of a house costs on average $827  (the $827 average does not include the cost of title insurance, taxes and disbursements). A purchase and sale will, on average, run a typical Canadian almost $1,300 based on the survey results.

Lawyers charge on average $344 for a “simple” will (one presumes a simple will is all to spouse and then all to kids in the event spouse pre-deceases the testator) and $156 for a power of attorney. It is not clear whether this is for one power of attorney or $156 for each of power of attorney for personal care and power of attorney for property. Assuming it is $156 for each power of attorney, estate planning would cost approximately $650.00 before taxes.

However, in the age of multiple marriages, kids from different relationships, deceased with assets in other jurisdictions, testators which are deeply in debt, support obligations to elderly parents or grown children is there such a thing as a simple will anymore? I will post on this in a future post but wills and estate planning are become less than simple as the family unit evolves.

Under the heading of “only the lawyers get rich”, lawyers charge on average $1,200 for  an uncontested divorce and over $12,000 for a contested divorce including a high of over $50,000; the high fees for a contested divorce probably arises from child custody disputes/arrangements.  It is for this reason that the family bar has begun to move towards collaborative family law. It is definitely an option worth exploring if you are contemplating or are in the middle of a separation.

Obviously, you get what you pay for in life so use the survey results only as a broad guide. On a more practical level, do try to actually engage in a conversation with a lawyer rather than starting out with “how much does it cost?”

All law is contextual so even if you do not like the price quote, a conversation or consultation will at least flesh out some issues you may not have been aware of. A good analogy would be you would not hire a contractor to renovate the kitchen without having them actually look at it first.

If you do not know how to find a lawyer, call your local law society. Most have referral services. The Law Society of Upper Canada, which regulates lawyers in Ontario, has finally made their lawyer referral service free after charging a modest fee for years.