Spot The Speculators #47 - $1.6M Tax-Free Profit In 36 Months - "The mere act of overpaying for a house three years ago might have been the smartest financial decision we had ever made."

Frank O’Hara’s ‘China’s Real Estate Spree in Vancouver’ [1 Jul 2011 edition of BC Business] is a ‘must-read’. This personal anecdote excerpted -

“The note, one of those yellow stickies from 3M, was stuck on the door of our west side Vancouver home late one Tuesday night in March. My wife, Cynthia, found it early Wednesday morning while letting our dog out and called to me upstairs: “Baby, you’ve got to come down here.”
In clear, studied script it read, “I would like to buy your house. I am not a realtor. Please call me.” It listed a local phone number and was signed “David” in block lettering. We looked at each other, both resisting the urge to cackle with glee and dance around the room with our winning lottery ticket. Barely resisting.
Like just about every other homeowner, non-homeowner or potential homeowner in the Lower Mainland, I was aware that property values had soared in recent years. I also knew that this was largely due to overseas buyers – and that “overseas buyers” was a euphemism for several strata of mainland Chinese buyers, some of whom are visiting the region on property-buying trips, some of whom live here already (or have family who do) and some who, so sure are they of the wisdom of investing in Vancouver, buy sight unseen from China. …

Until David’s Post-it note showed up, the figures and stories were just … cocktail-party fare that seemed largely divorced from our day-to-day lives. In theory, people who had purchased their homes long ago were now presented with the opportunity to make exponential gains over their initial purchase price. We were in a less rarefied group since we had bought our house only three years ago: a large lot in what we euphemistically called South Kerrisdale, an area realtors call South West Marine that’s frequently called Marpole by our friends. We had paid what had seemed an ungodly sum: $1,875,000, which was, everybody told us, “definitely” the peak of the market. But now, three years later, the stories circulating around town telling of impossible windfalls made our “peak of the market” purchase look as if we’d merely hit the base camp of Mount Everest. And the sudden presence of a suitor opened our eyes to the reality that the mere act of overpaying for a house three years ago might have been the smartest financial decision we had ever made.
 …

It took almost a day for Cynthia to call David back, a period in which we simultaneously imagined spending our impossible gains and then chastised ourselves for such greedy thoughts. One terrible idea then came into our minds: “David doesn’t actually sound like a Chinese name,” Cynthia mused. The implications of such a thought were dire, especially given that, due to his neat handwriting, he clearly wasn’t a doctor either. Even the most reckless North American buyer would be loath to pony up the sort of money we were angling for. We needed someone with a briefcase full of cash if we were to become the next Greek Church House.
But as soon as David picked up the phone, such concerns were assuaged. He spoke in competent but halting English and explained that he was looking for a house for his parents. While driving around town, he discovered our block and thought he’d skip the realtor fees by coming to us directly. He asked if he could return sometime over the next week to see the house, with parents in tow. We cleared our calendar. …

Cynthia mentioned our idea of selling to Mabel, our tough-as-nails next-door neighbour, who was part of the mid-’90s Hong Kong exodus (she has the peach-coloured box to prove it). Mabel often brings potato salad to our house as a gift and once a year at Christmas takes my wife and daughters out for an extravagant Chinese lunch and tells us the state of things, such as, “The former owner of your house was stupid to plant bamboo in your backyard. I told him so. If it disrupts my pipes, I’ll have to sue you.”
Mabel’s response to our thought of selling was equally measured: “You’re crazy.” In 15 years she had yet to develop a touch for the Canadian art of diplomacy. “The Chinese who are coming now are paying with cash – no mortgages. There will never be a downturn because they will never sell at a loss because they don’t have to. They’d rather just give their house to their kids than sell for a loss.” Her message was clear: anyone expecting a major market correction didn’t understand the psychology of the average Chinese purchaser, for whom concepts such as a change in interest rates were of no concern.
Mabel had us second-guessing ourselves. Were we like a mid-’80s Seattle couple selling our Microsoft shares because they had made such nice gains already? …

David and his parents arrived separately, a week after the note had appeared, to tour the house. His parents showed up first in a black Mercedes S600, a $190,000 bank vault on wheels that throughout the world announces, “I’m rich and powerful, and now that that’s out of the way, let’s get down to business.” The father had dark glasses and a stripe of distinguished grey at the temples, and didn’t give his name upon shaking hands; the mother, Maggie, was more gregarious and, as she was taking English lessons, anxious to practice speaking like a local. David, who turned out to be all of 18, arrived a few minutes later in an electric orange $355,000 Lamborghini Murcielago.
The cars alone were a good sign. They marked David and his parents as belonging to the truly wealthy class of Chinese buyers. …

Cynthia led David and his family on the tour as I tagged along. The parents spoke little or no English, so David helped translate such phrases as “steam room with rain-shower fixture” and “programmable Nuheat floor.” (We decided we didn’t want to tax him too much, so we avoided making him translate knob-and-tube wiring.) The parents politely nodded at Cynthia’s detailed chronicling of every upgrade, no matter how small. Halfway through the tour of our cavernous basement, the father muttered something. “My father is very afraid of this space,” deadpanned David. “He would very much like to return upstairs.” In truth, I think we knew that the house tour was a flight of fancy. All the things we had spent $1.85 million on would soon be rubble, replaced most likely by a nondescript house of no discernible era or architectural style.
We moved upstairs to our living room to discuss business. Contrary to the stereotype of tough, straightforward Chinese negotiators, we actually ambled around the question of the house and a selling price for a good half-hour, a long time with most strangers and an eternity when major language barriers exist. Even a month later, I’m at a loss to recall what we talked about. I do recall the line that broke the ice: “The house down the street sells for $1.8 million,” the father instructed David to tell us. It had been an opening salvo but one I was unprepared for.
He was presumably referring to a house a few blocks away in deplorable condition on a small lot. Worse, that price was not only less than we paid but $750,000 below our woefully out-of-date assessed value from the city. The discrepancies were so great that had I been sitting with anyone else my stock response would have been, “What does that have to do with the price of tea in China?” It quickly became apparent we were at cross purposes, but I couldn’t muster any animus. We were the ones who had equated Chinese with irrational spending. They continued to express serious interest in the property, but although we continued to chat for a few minutes I knew our untethered dreams would not be granted by these particular visitors.
 …

Ideally, this would have been a self-contained parable, a caution to greed, prejudgment and a score of other vices. A three-by-three-inch sticky note had turned us into speculators – and now a four-by-four-foot sign rises out of our newly reseeded lawn. The asking price? $3.5 million – twice what we paid just 36 months prior.
The open house is next Saturday.”

Very smart to be selling.
We’d ourselves, however, attribute the resultant $1.6M windfall to exceptional good fortune rather than ‘the smartest financial decision (they) ever made’.
Frank and Cynthia bought in 2008, after the speculative mania was very clearly established (they admit they ‘overpaid’), and they could very well have lost much or all of their RE equity at any point during the 36 month holding period.
If somebody goes to Vegas, puts $1.6M on Black, gets lucky and doubles their money, is it correct to say that the action was “the smartest financial decision they ever made”? – vreaa