“He accepted an offer recently, $12k less than he paid a few years ago but he isn’t calculating the RE fees, property transfer tax, and the work and cash he’s put into fixing the place up which is upwards of $50k.”

Posted on 12 November 2012 | 34 Comments

“Husband’s colleague recently listed his house, the wife is a bit of a shopping addict and they are debted-out. Accepted an offer recently, $12k less than he paid a few years ago but he isn’t calculating the RE fees, property transfer tax, and the work and cash he’s put into fixing the place up which is upwards of $50k. He’s hoping the house inspection won’t give the buyer further negotiating room.”
- terminalcitygirl at VREAA 23 October 2012 at 7:33 pm

This entry was posted in 11. Regrets about Investing in RE and tagged , , , , , , , . Bookmark the permalink.

34 Responses to “He accepted an offer recently, $12k less than he paid a few years ago but he isn’t calculating the RE fees, property transfer tax, and the work and cash he’s put into fixing the place up which is upwards of $50k.”

  1. PetrSyk | 12 November 2012 at 7:28 am | Reply

    Same story here: my friend’s wife is a Certified General Accountant. They sold their condo last year. They were bragging to me about how much money they made from the sale. She subtracted the selling price by the buying price and that’s how much she claimed was their profit. She didn’t account for 5% RE fee, all of the renos (granite countertops, stone in the kitchen, they knocked down an entire wall!, time to renovate), increase in condo fees. I chuckled when she told me that but maintained composure.. Alright, I laughed my ass off afterwards. It appears she still doesn’t think there were any accounting errors in that calculation:)… Tough to be a bear when every single friend is a bull. The argument that house prices will fall is too convincing.

    • LJ | 12 November 2012 at 7:33 am | Reply

      You could also include property taxes and interest paid to the bank as incurred losses in that calculation. Money they will never see again…

    • Froogle Scott | 12 November 2012 at 9:06 am | Reply

      Capital gain (sale price minus purchase price) is not the same as profit. A CGA doesn’t understand this? Here’s the Investopedia definition of “Profit” (italics mine):

      A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.

      Calculated as:

      Profit = Total Revenue – Total Expenses

      Profit is the money a business makes after accounting for all the expenses.

      The commenters are right — there are many things that must be taken into account under the umbrella of ‘expenses’, and all of them must be deducted from the sale price before you can start to talk about any profit. Mortgage interest is the big one, and renovation expenses for those who do renos.

    • Liggsie | 12 November 2012 at 9:36 am | Reply

      To do a complete analysis of the sale, it’s necessary to not only factor in 5% RE fee, renovations, etc on the negative side, but also, saved rent on the positive side.

      These scenarios are complicated to discuss, because almost everyone has a different interpretation of what should be included.

      • Froogle Scott | 12 November 2012 at 10:47 am |

        Saved rent — I wondered if someone was going to mention that. You’re right, these scenarios are complicated to discuss, and there are different, and competing, interpretations. I’ve been trying to capture and write about my own situation for a year, and new wrinkles keep occurring to me. It’s not an easy thing to wrestle down.

        As for saved rent, I’d counter with opportunity cost, as El Ninja points out below. And what about this: if you are going to reduce owner costs by saved rent, isn’t it also consistent that renter cost be reduced by ‘saved mortgage interest’, ‘saved property tax’, and so on? The only problem being that depending on the numbers, you can end up with a renter who lives for free, or is even (theoretically) making money by renting! (I.e., voodoo.)

        That said, I’d certainly be interested to hear any further insights about the notion of saved rent. I’m not currently a believer in its validity, but I’m interested in hearing arguments, pro and con.

      • Liggsie | 12 November 2012 at 11:50 am |

        @Froogle Scott – yeah, I completely agree that opportunity cost should be included. Even if it’s only grossed up at a risk free rate of 1% or so.

        As a country, we might not have such a collective obsession with real estate if there were more understanding of this nuance. Right now, so many Canadians simply reduce it to “Well Joe bought at price X and sold at price Y; he made a profit of Y – X and didn’t waste any money on rent! I’ll do it too!”

      • CanAmerican | 12 November 2012 at 11:50 am |

        @Liggsie, isn’t it usually more expensive to buy than rent ? My experience is that usually people are counting on things like stability, certain school district, hope of capital gains or some other thing in exchange for paying the extra to buy rather than rent.

        CanAmerican

      • Liggsie | 12 November 2012 at 11:55 am |

        @CanAmerican – the short answer is, “it’s complicated”. Without getting into the non-financial aspects such as the additional freedom that comes with owning, or proximity to schools, etc, only looking at financials, one must consider total cost of owning (mortgage, strata, property tax, insurance, maintenance) vs rent price, possibility of capital gains, transactional costs, opportunity cost with saved money, etc, etc.

        People often differ on this list, and sometimes flat out forget to include items. A common refrain is “well, my mortage payment is less than my rent used to be” as justification for buying a condo at an exorbitant price – but that often leaves out the other items mentioned above. And then, to sell the damn thing can cost about 2 years worth of rent.

      • YVR Housing Analyst (@YVRHousing) | 12 November 2012 at 3:59 pm |

        Interest costs are one consideration, along with all sorts of others, but OTOH renters have (whether renterbears like it or not) been paying other peoples’ mortgages, and interest rates are quite low right now… Doing these sorts of calculations ex post are horrible at accounting for the risks that owners have borne (and of course most have avoided).

        If the market heads for a prolonged recession it won’t just be the expenses you list that are up for consideration, it will be the distinct lack of liquidity.

      • YVR Housing Analyst (@YVRHousing) | 12 November 2012 at 4:03 pm |

        “almost everyone has a different interpretation of what should be included”

        That’s nice but it’s not “interpretation”, what’s included should be obvious to any investor who properly segregates costs. That some aren’t doing the accounting properly isn’t interpretation, these are mistakes that would get an investment manager fired.

    • PetrSyk | 12 November 2012 at 2:13 pm | Reply

      Yes. Definitely not an exact quote from her. She’s probably better than I gave her credit. Capital gain is profit on stock, bond or real estate where the amount realized is greater than purchase price. Capital gain probably correct word usage. I didn’t have time to write down everything they would pay for that renters don’t but am very aware. Possibly include realtor fees, interest on mortgage, maintenance, electricians, plumbers, property and education tax, sewer, condo fees if applicable, home insurance, alarm fees, appraisal fees, home inspections, property surveys, land transfer tax (could be charged PST in some provs from my understanding), legal fees, GST where applicable, CMHC fees if applicable, title insurance, interest adjustments and mortgage life insurance. Probably missed/duplicated some stuff in the list, some only applicable for houses or condos. It’s not cheap to have a mortgage on a home (hate the word homeowner because most people don’t own their home)

      • Froogle Scott | 12 November 2012 at 5:52 pm |

        Perhaps “capital gain” and “profit” are roughly the same thing. I’ve spent a bit of time on the Canada Revenue Agency website — what better way to spend two hours on a stat holiday? — and it appears my previous understanding of “capital gain” was somewhat off the mark, at least when it comes to houses and the CRA. It doesn’t change the main thrust of what I’m arguing above, and what you imply here and in your original comment, that profit is only what is left over (if anything) after accounting for all the expenses.

        The CRA defines capital gain as the sale price minus the “adjusted cost base” and “the outlays and expenses incurred to sell the property”.

        “Adjusted cost base” is CRA-ese for the purchase price plus any subsequent capital expenditures, like renos. However, in typical CRA fashion, they don’t have clear and comprehensive information about all the expenditures that can qualify for adjusted cost base, or for outlays and expenses. By contrast, I found a realtor’s web site that seemed pretty adamant that mortgage interest and property tax would qualify for outlays and expenses. Reliable information? Perhaps not.

        Anyway, what the CRA guidelines seem to mean is that capital gain, somewhat like profit, is only what is left over after accounting for all the (eligible) expenditures/expenses. I realize a primary residence is exempt from capital gains tax — I’m just using the CRA definition of capital gains to try to get a handle on how it might differ from profit.

        Maybe I’m just getting myself tangled up in semantics. I think the key point remains this: doing a simplistic calculation that subtracts the purchase price of a house from the sale price, and then assuming the difference is all profit, is bad arithmetic, and wishful thinking.

        Hmm… bad arithmetic and wishful thinking. Two things that probably go hand-in-hand with a speculative bubble.

      • MM | 12 November 2012 at 9:06 pm |

        as does the desire to brag

      • Naked Official #9000 | 12 November 2012 at 11:09 pm |

        @MM – very good point!

        i can’t tell you how many times i had to endure boasting sessions – not only from friends, but from customers at work – just ridiculous. these people, pitying the help, reassuring us that “if you work hard, you’ll get there!”

        no, i think i’ll just wait for prices to come back in line with incomes, thanks.

    • YVR Housing Analyst (@YVRHousing) | 12 November 2012 at 3:55 pm | Reply

      Not doing proper calculations is all part of the built-in defense mechanisms designed to protect internal torment. Even amongst those who one would assume would know better.

  2. an observer | 12 November 2012 at 9:40 am | Reply

    Don’t forget PTT at 1% for first $100K and 2% on balance for the initial purchase. People don’t realize that even a 10% gain is almost completely wiped out once you look at the expenses and fees involved in the buy and then the sell

    • UBCghettodweller | 12 November 2012 at 11:44 am | Reply

      This is exactly why I’m glad I didn’t purchase a condo when I first moved to Vancouver four years ago. The small gains made on property value over that time would be essentially wiped out by interest on the mortgage, Strada feels, taxes and other fees. Renting is expensive- owning far more so.

    • CanAmerican | 12 November 2012 at 11:52 am | Reply

      Different jurisdiction, but a Redfin realtor indicated to me once when assessing a deal, that it costs a seller in WA approximately 8% on average to sell a house when all costs are factored in.

      • vreaa | 12 November 2012 at 7:28 pm |

        8% is a jaw-dropping ‘spread’.
        People are happy to pay this outrageous price for ‘trading’ when prices are flying upwards… watch it get questioned on the way down.

  3. Angleterre | 12 November 2012 at 9:51 am | Reply

    To play devil’s advocate: what’s the enjoymernt they received from the house – its hard to account for that. Did they buy it as a flip, or as a home? If someone loses $80k in a case like this, is it worse than someone who rented at $2k a month for 4 years? In both cases, that money is gone.

    • El Ninja | 12 November 2012 at 10:15 am | Reply

      To play devil’s advocate, “enjoyment” is irrelevant; a renter could have enjoyed it as much as an owner. As for the lost money, the owner bore the opportunity cost of tying up capital in the home, whereas the renter could have productively invested his/her capital elsewhere, “losing” only the monthly rent.

      • Angleterre | 12 November 2012 at 4:47 pm |

        IMHO you can’t dismiss “enjoyment” that easily. For instance, some people really enjoy doing renos about their house or restoration. It becomes their hobby. Ditto with gardening (though they could do that ina rental I suppose). Given the state of the markets over the last few years, any return for your average mutual fund holder wouldn’t have been stellar over the last 5 years.

      • vreaa | 12 November 2012 at 7:34 pm |

        This “enjoyment” of owning is part of what many of us refer to as the ‘ownership premium’. It varies from person to person. In short, it’s the price one would pay, in a ‘normal’ market (where prices were only going up at the rate of inflation), over and above the cost of renting, to own rather than rent. For some it’s large (25%?, more?), for some it’s small (5%? 0%), and, for the footloose and completely commitment averse, it may be negative (they’d pay a premium for the pleasure of renting over owning).

  4. terminalcitygirl | 12 November 2012 at 2:02 pm | Reply

    I posted on another thread a few days ago that the buyers financing fell through, 2nd time this has happened. The mortgage is up for renewal end of November with a higher interest rate (unless they go variable) plus penalties if they do manage to sell. If the house doesn’t sell by end of month, they will pull it off the market over Christmas and relist next spring.

    • Froogle Scott | 12 November 2012 at 6:08 pm | Reply

      Sounds like the story only gets worse from here. It can be delicate trying to give advice to people in these situations, but the advice might be: don’t chase the market down. If they truly need to sell, it’s probably better to lower the price now, than lower it a lot more later. Keeping in mind that every month they don’t sell is another month of all the expenses to carry the property.

    • vreaa | 12 November 2012 at 7:39 pm | Reply

      Thanks for the update, tcg.

      And agree with Froogle regarding a strategy for lowering the price.
      Any serious seller should use a ‘Dutch auction’ approach, the kind of thing you see in sports equipment consignment stores:
      Publicize the property and its price as broadly as possible, then start dropping the price by ‘x’ percent every ‘y’ days, until it hits a bid.
      If it doesn’t hit a bid after a month or two, increase ‘x’ and/or decrease ‘y’.
      Eventually it’ll sell, at ‘market price’.

      • rp1 | 13 November 2012 at 12:30 am |

        I disagree and think this is would be a disastrous strategy in practice. I would list 10% lower than all comparable properties, including ones that are not quite as good.

      • vreaa | 13 November 2012 at 6:21 am |

        rp1 -> I don’t see how the strategies are incompatible… you may choose to start anywhere you like. And even if you don’t start at 10%-off comparables (a fair suggestion), if you choose ‘x’ and ‘y’ correctly, you’d hit 10%-off fairly soon (and keep dropping thereafter if it doesn’t sell at that price level).
        The point is you have to have a way of swiftly discovering the true market price of your property.

  5. terminalcitygirl | 12 November 2012 at 9:10 pm | Reply

    I hear you guys and have suggested to my husband he gently recommend a similiar strategy which he will do if an opportunity arises. The sad thing is his colleague sees the forecast of falling prices and believes the market is headed down but just for everyone else. I’m sure they’ll be able to tread water for years if they have to, they took in some foreign students for a while and both have fairly secure jobs but their current course doesn’t bode well for any sort of retirement plan – they are in their mid 50′s.

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