“A colleague bought a SFH home in the spring in the hopes of flipping it for a quick profit. She now finds herself amongst the ranks of the accidental landlords. She is not happy.”

“A colleague bought a SFH home in the spring in the hopes of flipping it for a quick profit.
She pulled it off the market after the financing from a prospective buyer fell through. With the market having weakened significantly since then, she now finds herself amongst the ranks of the accidental landlords. She is not happy.”

– Manna from heaven at VCI 27 Sep 2012

47 responses to ““A colleague bought a SFH home in the spring in the hopes of flipping it for a quick profit. She now finds herself amongst the ranks of the accidental landlords. She is not happy.”

  1. I still maintain renting out property will produce a cohort of “motivated sellers” in the next 12-24 months as they find out not all tenants are “good”. Not sure who specifically but there will be more than a few.

    • They will find out that there are maintenance costs even with the best tenants and that their cash flow will be negative even with 100% occupancy.

      • I expect in many cases much of the cost is hidden in the form of subpar maintenance. It also heavily depends on the financing costs and equity, so opportunity costs can be conveniently ignored to show a positive cash flow, especially when the only “opportunity” sought is a high interest savings account.

      • Also, from personal experience, costs can be kept lower by leaning on relatives to lend a hand with property management. Especially useful if said owner is not (always) local. (Situations like this exemplify why “foreign ownership” is a much greasier pig than one realises.)

      • Jesse, what you describe is not lower costs, but accounting tricks.

      • Ralph Cramdown

        There are two situations where lack of maintenance makes sense: If the property is to be redeveloped in a few years, or if values are rising so fast that you’ll likely be selling to a moron in a few years. In both cases, it’s the tenant who takes most of the hit, with the landlord playing a version of russian roulette (if the tenant leaves early, he’s stuck with a deferred maintenance nightmare which will only rent at a significant discount, and to a subprime tenant).

        Professional buyers of rental properties tote up all the cost of deferred maintenance and needed improvements, estimate a rent, target a cap rate (including maintenance and vacancy allowance) and infer a maximum purchase price. Of course if the market’s hot enough that you’ll be selling to an amateur or someone who figures capital gains into his calculations…

      • “what you describe is not lower costs, but accounting tricks”

        Yes some are accounting tricks, bubbly. But in terms of operating cashflow it can be made positive by deferring expenses, getting goodwill (slave labour) and improperly accounting for opportunity costs (which cashflow statements won’t account for anyways).

        Actually the opportunity cost one is not in the standard repertoire of basic accounting, it requires some insight into alternatives beyond a specific asset’s ledger. A danger for those too focused on “the books” without coming up for a look around every once and a while.

      • FYI, DearReaders/IllustriousEd… ‘Nem’ knows a thing or two about the “RollingBreakEven”,,,

        http://en.m.wikipedia.org/wiki/Buchwald_v._Paramount

        [NoteToEd: Art won it. It was the principle. After all. TeeHee!]

      • I forgot… Always eschew “MonkeyPoints” and insist on a Fixed% of FirstDollarGross.

        That’s it. ;)

  2. There’s an odd one in my neighbourhood. It appears to have an apartment on each of the main and 2nd floors, and a basement with two beds, two baths, two kitchens, two entrances but shared living and dining spaces?!?!?

    The for sale sign appeared a few months ago. The additional for rent sign appeared a week ago — half a basement for $2,000 anyone? I walk by it twice a day and always break into “Trailer for sale or rent. Rooms to let, 50 cents…”

    • much appreciate the ‘King of the Road’ reference lyrics, Ralph. Very apt and amusing, totally in line with the synchronous demographic (song written in 1964, children born of that era in house hock up to their necks, circa 2012)

  3. LOL !!!

    I managed a 16 suite apartment 20 years ago in return for free rent……..at the time I needed the money……..but I eventually quit after 2 years at it, when one evening between Christmas and New Years Eve a pipe on city property collapsed, which caused flooding on the ground floor suites at around 100 AM.

    I had disaster services come in as well as plumbers, and by around 500AM everything was under control. Thankfully it was a weekend so I could go back to bed. 2 days later the same thing happened again………..

    You accidental landlord colleague should swallow her pill today………..

  4. This is how renting gets even smarter-er.

  5. This is actually good news for renters. As swath of non-shitty rental property is going to hit the market and be subsidized by landlords. Many will not just be basement suites now. The cost to rent should be a third the cost of owning for most of these properties.

    • We were going to go check out one of these “accidental landlord properties” last weekend-a townhouse that was on the market for $749k, suddenly for rent for $2000. We were worried about what would happen should they decide to put it back on the market-we don’t want to have to move in a year when we have some stability where we are now-though we definitely need more space. It’s a toss up-do we move into a property that was recently for sale, and hope the landlord doesn’t relist? I doubt they would be willing to sign a 2 or 3 year lease-I would think they are hoping to try the market again in a year or so.

      • They probably will but I doubt they’ll have any more luck, at least not at the amount of money they probably want / need.

        Question is how quick the landlord will be willing to eat his “profits” just to get out from under the monthly carrying costs.

  6. What’s up with the landlords who don’t maintain their places? My wife and I have been looking to rent an SFH in Kerrisdale/Dunbar. Two of the houses we’ve gone to look at had beautiful photos (taken from the realtor listing when the bought the house, 2-4 years ago).

    When we get to the house to have a look, it’s obvious that *nobody* has done any maintenance on the yards, or any (exterior) maintenance on the houses. Blackberry vines growing out of the gardens, weeds throughout the garden & lawn. Dead grass, patchy. Once-beautiful gardens looking horrid. In both cases, the lovely gardens/lawn had been highlighted in the ad.

    In both cases also, paint was peeling off the steps, the deck was in poor condition (paint peeling). Who buys a multi-million dollar house, and then just lets it start rotting away?

    The houses looked about what you’d expect a cheap, student-rented house to look like. Not a premium-priced rental. Naturally, we didn’t rent either place.

    • People don’t have money, by and large, that’s why. If you go balls to the walls to be able to afford the mortgage even a $20 bucket of paint and some primer will be something you have to think about.

      Wasn’t there a story here on VREAA sometime last year about some houses in West Van where people were basically living on their moving boxes because they couldn’t afford the fitting furniture after “buying” the house?

      I expect to see more of that in the coming years and it will hit BC all across the board. Expect to see a serious dip in the GDP soon.

    • Welcome to the University ghetto areas.

    • M, it’s likely that the houses you were looking at were bought by specuvestors who will tear them down/flip them soon, or WOULD have done so before the market started crashing.

      As I’ve mentioned on this blog before, my husband and I spent most of last summer hunting for a decent rental in your area that wouldn’t be sold out from under us. Ideal renters, we couldn’t find any security of tenure because of the specuvesting.

      Finally we thought we’d found a place where the landlord didn’t want to sell for a few years, and, though absentee, had a local “property manager.”

      Shortly after we moved in, there were three sewage floods in the basement. We’d asked the property manager point-blank before we’d moved in if there had ever been water damage in the house, and she had said no. Turned out there had been two identical floods the year before we moved in.

      We spent months managing the restoration of the basement ourselves.

      The property manager then repeatedly tried to bully us in making an insurance claim for our own goods (very little was damaged, we’d hardly unpacked) so the owners’ claim would have more force.

      Comes time to renew the lease recently, and they want to raise the rent on us. Then we negotiate a lease that is supposed to go month-to-month, like most standard BC leases. The property manager agrees, but then we discover she is changing the fine print in the copies of the lease she sends us.

      We’re counting down to another life we’re setting up beyond Vancouver…. This place is insane.

      • epte -> Sorry to hear about your planned move. You know our feelings about this already; our RE market is ejecting many citizens, and this is a very bad thing for the city.
        All the very best wishes for your future, wherever you end up going, and please drop the blog a line at some point.
        Is the decision to leave already taken?

      • “We’re counting down to another life we’re setting up beyond Vancouver…. This place is insane.”

        epte -> Congratulations on your planned move. I hope you find or have found a place where you can enjoy a happy, fulfilling life. Please keep us posted so we can enjoy it vicariously.

      • UBCghettodweller

        “We’re counting down to another life we’re setting up beyond Vancouver…. This place is insane.”

        Amen to that. Roughly two years until I defend my PhD. Anywhere else in North America will be (a) cheaper (b) more sane (c) have more job opportunities for a molecular biologist like me (d) less elitist and exceptionalist. Many cities will qualify for points a through d.

    • VREAA Host and Jeff Murdock — thanks so much for your kind replies.

      Yes, the decision to start up another life beyond Vancouver (including a place elsewhere) has been taken, and a lot of it has had to do with a lack of opportunities here and much better RE options elsewhere.

      But we’ll still be here part of each year for at least a while.

      Many thanks to this blog for offsetting the RE insanity around us and giving us so many good laughs through a lot of upheaval! I’ll stay in touch no matter what.

      • Good luck!!
        Let me assure you that you are not alone. Many academicians and intelligent people that I know in my circle have felt exactly the same and many have left Vancouver.
        There have been no regrets among the one’s that have left.

  7. Well, at least it’s cash-flow positive, right? Right?!?

  8. Wow! I don’t know if this has been posted already but I was very impressed by how bearish the article is. Sentiment has definitely changed:
    http://tinyurl.com/9rq9wwu

  9. @Bally
    Um, not sentiment Bally. Have you checked the monthly sales for the past 6 months? Nothing to do with sentiment and everything to do with facts.

  10. And now I predict rental prices will be on the decline in the foreseeable future as a many Condos are going on the market as new rentals.

    BTW, can someone confirm the number I read last week, that is, that there are apparently 5500 Condo Units about to come on the market? I am not sure if that was Vancouver proper / lower mainland, but damn, either way that’s a pretty high number and I bet a lot of them were presales.

  11. There isn’t much evidence that headline rents will come down substantially. What may happen, though, is landlords willing to take on riskier tenants than has been the case recently. From the investors’ aggregate POV, net rents (after all expenses) will come down more than the headline number.

    For some investors, cashflow negative is a big deal. Say you have a landlord who is facing higher costs because he either cannot negotiate a better mortgage rate at the bank (because banks have to “manage risk properly” now) or is seeing some added assessments, taxes, or maintenance costs. He tries to increase your rent but you point out similar units at or below the rate you’re paying and you threaten to walk. In some cases the LL would sooner take more risk by increasing the rent for a lesser-quality tenant than take the known loss today, perhaps because he cannot afford any cash flow loss at all. Rock, meet hard place.

    That’s why I think some properties pulled off the market and re-rented are in effect delayed (I wouldn’t use the word “shadow” though) for-sale inventory. Landlords will be able to survive renting out for a while, even at a slight negative cashflow, but some will turn into must-sells when they get hit with some sort of earnings impairment, either expense or revenue. That wave can take a while to work through but shell shocked landlords will be the ones to watch, the “motivated sellers” who will be setting the marginal price. That’s in addition to the ones who are highly leveraged and hoping 2013 will bring more favourable selling conditions, and will take a more significant loss over a short period.

    “there are apparently 5500 Condo Units about to come on the market”
    Completions are slated to increase over the next year:
    http://housing-analysis.blogspot.ca/2012/09/july-2012-cmhc-data-vancouver-cma.html

    t’s actually worse, it’s about 3000 additional units compared to the current completion rate, in absolute terms it will be closer to 12-14K for multi-unit completions (including the ones that are under construction but in reality can be completed quickly).

    • Surely you can see why CMHC’s rental prices don’t reflect a real average price with so many brand new units coming on the market (hence the discrepancy between your charts on Sep 26 post). I never trusted their data, especially when they’re in bed with private developers and investors.

      • if you have some evidence CMHC’s data are inaccurate or corrupted post it here. The method by which CMHC estimates starts and completions is transparent, you can go to their website and read about it, or even better email them to get the method. I’ve done the research and determined their data are on balance an accurate reflection of the market as a whole. You can reach your own conclusion if you like but I stand by the dataset for making determinations about future supply.

      • The rental survey data are made predominately of older vintage units. Further I have taken a quick validation poll with some of my property management contacts and confirmed the CMHC data are roughly in-line with what they have done. CMHC surveys rental data from purpose-built units only, they do not include rentals from private units or those under 3 units. Given the few number of purpose-built units in the past 10-20 years, the rental survey is mostly a same-unit survey, with a slight upwards bias. These units are likely kept in reasonable condition, however, whereas the overall market may be depreciating more than this.

        The discrepancy to the CPI rented accommodation is a bit of an enigma.

      • CMHC value adjusts their data, meaning they divide the rental price by square footage to quantify real adjusted price. This is ok if you’re measuring for value, but not for actual prices paid. You can always tell because if you plot any quarterly or monthly index, it’s fairly smooth. Rent prices have seasonal movements and can be volatile with home prices.

        The reason I say this is because I analyze the same quarterly data that the Bank of Canada uses and compare them to offer prices on Craigslist/Kijiji. The two are closely correlated while CMHC’s data is always off the mark.

        Remember one of CMHC’s primary mandate is to provide affordable housing with private sector investors. How successful would it look if they were reporting higher rent prices? Not good.

  12. I have two colleagues who have mused about becoming accidental landlords if their properties don’t sell (haven’t listed yet, but have heard enough to know the market is cooling). Both bought (and live) with a sibling, and living situations for both have become less than happy.
    (I myself wonder why renting out a property with a sibling would be any easier than living together, when the number one issue cited by both was unequal division of responsibility. I can’t imagine a worse arrangement.)
    My favourite part of their respective plans is that BOTH are considering renting after they move out. One rented prior to buying, so it’s not a huge deal that he would consider it. But the other has never rented, and was amongst the most vocal against it just a year ago. She’s still not sure- keeps coming up with reasons why it won’t work, but the cracks are there.
    I know this anecdote doesn’t seem like much, but this is a MAJOR shift in my little world. And proof of how people are so irrational- they buy when prices are high, but consider renting when prices are (presumably) lower.

  13. I visited a few open houses today. At every single one of them, I was the only visitor. The used house salesmen seemed generally lethargic. When I talked to each of them, I always got the same sales pitch – buy now, do a few quick fixes (or not) and sell higher. It’s all about flipping. Nobody assumed that I may actually want to *live* there. They were not concerned about quality of life for me, or having a family there, or entertaining guests, or proximity of amenities. It was always about selling down the road, one or two years from now for a profit of few hundreds of thousand dollars.

  14. I like it – “accidental landlords”! The owners that we are renting from are from the same types. Nice people, almost new expensive home – 3 years old. But they defer the maintenance (and the home is definitely not planned to be teared down) and I really do not get why. I am a responsible renter and when I see that some small problems now can cost them thousands in the future if not fixed promptly, I told them, but they are not doing anything. The home is not aging gracefully, the cheap labor and materials are showing, I am very glad to have this experience of actually living in one of these new Mac Mansions versus seen one on an open house. Now I know that I would not want to buy one.

  15. RoboRedaktor. ‘Purgatory’. Thank you.

  16. “Olga62″ – do you care to share the area/age of the home? Just part of my theory that many homes built during the boom recently have had problems such as leaking, cracking stucco, etc. I should not just say theory as I have had friends with issues in the newer homes. I notice on my trips to Vancouver many homes on the westside that look utterly terrible in terms of curb appeal and upkeep – like they were in Detroit! Really some of these investors have no interest or responsibility in the upkeep of the properties. The weeds/tree saplings growing up out of gutters is real sexy!

    • Its in West Richmond, the age is about 4 years. Our price to rent ratio is 407!

      • My parents are in same boat. Nice home, stuff growing in the gutters that really needs to be fixed. Price/Rent is 500. Really great house. Current assessment is 1.6M but real worth is closer I would say to 800.

        There is a big disconnect where tenants are in a property. There is no reason that the property should be run down when you have responsible people in it. However, a tenant does not likely feel that they should inevest in the upkeep (even though it is a periodic cost that they are ultimately paying for in their rent) and the landlord does not want to spend on these periodic items. So – what you’re left with – is rent that is too low and a place where nobody wants to pay the maintenance. I think many people would actually be happier to pay a little more and have the maintenance work done properly. Here in Switzerland, maintenance is the responsibility of the tenant and you are charged every month an estimate for the year. When you get to the end of the year, you either have to pay up the extra or get a refund.

      • YVR, when you say maintenance is charged to the tenant, is there an interior vs. structural breakdown on that? Is the tenant with the bad luck to be in the house when the roof starts to leak, really on the hook for a whole new roof?

      • AG Sage – That is a good question. I believe fundamental breakdown in the structure of the building would not likely pass to the Tenant. However, you really have to understand that buildings here are built to stand for 500 years and when you look at the roof structures, they really should not be leaking anyway. I do remember there was a full exterior cleaning of the building that was done every 3 years on my last apartment where the landlord let you know if was coming and it was built into the estimates for the year. As well, there could be breakdowns in the elevator and all of these costs are passed on. Think of it like a strata where there are common maintenance items and these are allocated to the owners – the only difference is that is allocated to the tenants.

        I have to say it works. What I may not like now is that I may want to change out certain appliances in the kitchen but there is really no way to do that. You really are stuck with what you have.

  17. Pingback: “I visited a few open houses today. At every one, I was the only visitor, and the sales pitch was the same – buy now, do a few quick fixes and sell higher. Nobody assumed that I may actually want to live there.” | Vancouver Real Estate Anecd

  18. Pingback: Real Estate : Accidental Landlord |

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