McLovin at vancouvercondo.info 3 Aug 2010 12:31 pm & 12:59 pm – “The story of a reluctant landlord: A friend of mine bought at the Waterscapes Skye development in 2008 (pre-construction) hoping to flip the property. He paid about $650K incl GST (25% downpayment) for a beautiful 2 bedroom that was completed in Jan 2010. He saw the writing on the wall and decided to get out but the most he was prepared to lose was $50K. So he listed it for $599K with no interest. At this point he made the decision to hold it for “10 yrs or more”. He was simply not prepared to sell it for less than $599K. He has a tenant in there and he bleeds about $700 per month (after mortgage, strata, taxes, insurance), but he pays down almost exactly $700 on principal each month currently, so he feels like he isn’t really bleeding but treading water. In his mind he is not actually losing anything each month, except the drop in value. He is committed to holding it for the long term and will not and does not have to sell.
I am telling this story because its important to note that many people don’t have to sell and won’t. He believes he will get his $100K back (which is what he believes he would have to eat if to sell it today) over a 10 yr period. He can afford the payments and it is not affecting his lifestyle he did consider that worst case senario when he bought which I am not sure all wanna be flippers have. Not everyone needs to sell and many are prepared to hold on.”
Commentary by vreaa, posted at vancouvercondo.info 4 Aug 2010 6:28 am -“The clue to how McLovin’s friend should have acted comes in the first line of the anecdote:
“A friend of mine bought at the Waterscapes Skye development in 2008 (pre-construction) hoping to flip the property.”
If the premise for an investment disappears, get out.
The premise here was a quick flip. That failed; Get out; Take the loss; Move on.
One of the very biggest mistakes in investing is to change the premise of the trade after the fact, when the trade goes bad.
What McLovin’s friend has done is tell himself that a day-trade is part of his long-term core portfolio.
That way madness lies.”
—
Related anecdote from E at vancouvercondo.info 3 Aug 2010 5:32 pm – “In 1993 I bought a condo in Coquitlam. By 1999 the value had plummeted by 35%. I finally sold it in 2004 for $5,000 more than I paid for it 11 years earlier. I cringe when I hear of homeowners taking their property off the market expecting prices to come back because sometimes that can take a very long time.”
UPDATE from McLovin 5 Aug 2010 9:57 am – “Follow up on my friend. He is a seasoned investor and does not have his head in the sand in any way. He acknowlged that he screwed up but was prepared for the “worst case” scenario which has come to fruition. This unit does represent a “chunk” of his investment capital but by no means prevents him from looking at other opportunities. He has an ample net worth so a job loss or sickness would not impact his ability to pay the mortgage. He did say something that is very important for all Bears to remember: No one knows for sure what the market will do in the next 1-10 years. We all feel that we know 100% that it is a bubble and will crash but many of us have been wrong for a long time. He acknowledges that if he know for sure it would not be worth what he paid in 10 years he would sell now and take the loss. Because he does not he would rather take his chances and hold, slowly paying down the principal.
He added the following:
He has an excellent long term tenant at slightly below market value so his is less likely to move and if he does because he is asking below market he will have an easier time renting it.
He has a 5 yr fixed at 3.85% so higher interest rates are not an issue for some time for him.
The building is brand new and has a 10 yr. warranty so special assessments are very unlikely.
This is an interesting case of someone who has looked at all the variables and in his best estimate made the decision to hold verus sell. You may not all agree with his decision but it shows that not everyone who bought in the last 3 years has their heads in the sand and further has to sell into a declining market.”
“Not everyone needs to sell and many are prepared to hold on.”
The question though is: Can they once they need to refinance a few years down the road when the value has dropped beyond the outstanding balance on the mortgage?
I am sure everybody who bought in the last two years wants to hold onto their property, but that doesn’t mean they will be able to.
I don’t get it. Seeing is how he is losing money just trying to cover the carrying costs (let alone mortgage interest) does he not need to see price appreciation of something like $150-$200k just to break even?