Spot The Speculator #46 – ‘Invested’ in five condos; Just lost two tenants; Exactly 42 bucks in the bank; Asks friend for loan; Starts to cry

Bill Gable at greaterfool.ca 21 Jun 2011 10:13pm [hat-tip ‘Makaya’ and ‘Bailing in BC’] –
“I spent the morning with a friend, who called me and asked me if I could come over and have a coffee.
Thought it a bit odd – it was 8:30 in the morning. This gent and I went to school together, and is a great fellow. Trouble is, he has ‘invested’ in five condos. He just lost two tenants, and he has exactly 42 bucks in the bank.
His wife, also known as “The genius” was at her Mom’s trying to scrounge money. Nice, Mom is 82, and is ill. Don’t ya’ love it?
He then actually had the jam to ask for a loan. After my B/P dropped 75 points to near normal, I replied, very quietly and calmly – “Better call your Banker, and your Lawyer, and your accountant – you are in a zone I can’t even fathom – and no, I can’t lend you any money”.
Even if I wasn’t in shaky health myself, I wouldn’t lend him a sou. He started to cry.
This is the real world. This is what happens when people think they can build wealth by being in debt up to their probiscus.
I felt awful and had some lame euphemism and said my goodbyes.
He called me three hours later. Mumsie “lent” them 50 K.
I thought how lovely this was – your Mom is dying and you take money from her?
Is this what we’ve come to?
Last note – Vancouver people are still seething over the riots here.
Liveability in this burg has gone south a long time ago.
I am not confident in the future of this City and haven’t been for a long time.
If I was in the position to leave, I would.
But – I am sitting here, renting and watching the BMW’s fly down Pacific Avenue.
People walking along the street smoking dope.
Oh, and check craigslist = nice penthouse for 10 K a month!
Ain’t vancouver grand?”

49 responses to “Spot The Speculator #46 – ‘Invested’ in five condos; Just lost two tenants; Exactly 42 bucks in the bank; Asks friend for loan; Starts to cry

  1. I’d like to say that I, property manager, never hear this story in Ontario. But it’s become way too common to hear this exact same story… if I had a dollar for every time I heard a landlord say that they need a tenant this month or they can’t make the mortgage I wouldn’t have to manage property any more.

    Too many landlords are one bad tenant away from some serious financial consequences. Their RE portfolios are stacked like dominos. The only thing that keeps them alive is refinancing every once in a while. Except then of course their carrying costs go up.

    It’s going to be ugly at some point.

    • pricedoutfornow

      Agreed. I work in the financial industry and my business partner and I were just commenting about how many of our clients are going to be “up the creek.” (very bad news for our business). I could sit here all night and type a couple dozen stories of people I know who are up to their ears in real estate debt, and even plain old consumer debt. Sure, some people will be ok, but I think most won’t be. Whenever people tell me that “real estate only goes up!” I just smile and nod. (And note, not many people are telling me this in the Okanagan anymore).

  2. Froogle Scott

    Mortgaging your soul in paradise. Great anecdote, all. Duly noted.

  3. Bailing in BC

    When I read this, I didn’t know whether to laugh or cry.

    I wonder how long ago they “invested” and how far underwater they are.

  4. The story doesn’t perfectly make sense. If the RE market is so “hot” then isn’t it just obvious that they sell a unit? Why isn’t this an option for them? Or are you saying that crappy condos aren’t selling, and only ill gotten gains in China are driving up fancy houses on the west-side?

    • No equity in properties so selling doesn’t gain them anything.

    • Maybe:
      1) Little equity
      2) Bank penalties for ending mortgage before the end of term.
      3) Loss after all costs (both, buying and selling costs money)
      4) Too proud to sell – they like to be seen as big shot landlords (when they are not crying)

  5. I remember a whole lot of crying in the late ’80s too when rates spiked to 10%. This anecdote is a timeless human condition, but not necessarily indicative of something that has fundamentally changed in the past 25 years.

  6. this is just another made-to-believe story that portraits all the investors are “stupid”.

    • Fred->
      You really think this story is fabricated?
      (Why would someone spend the time to create a story like this? Okay, possibly to troll, or as a diversion… So, we’ll allow it’s possibly fabricated but the chances are it’s real.)

      That aside, you don’t believe there are RE investors out there overextended in this way?

  7. There are always investors ‘sailing too close to the wind’ and this is an example.
    Perhaps they were overextended from the get-go such that they didn’t have enough buffer in their monthly cash flow – a few lost tenants and they’re toast. And/or possibly they’ve been borrowing and spending their ‘equity’ using RE_ATM.

    Spoke to my banker a few days ago and he said that LOC against housing equity is the most common ‘deal’ he does. He talked of people using them to buy second properties (and then formalize mortgage later). These possibly cover some of the ‘cash’ deals that Larry referred to recently: No financing conditions, appears as a ‘cash’ deal in the stats, even though the funds are all borrowed, even the downpayment.

    What is remarkable about the above anecdote is that people are getting into this kind of problem situation despite the rising market. It goes without saying that we’d expect more when things reverse. How many are sailing close to the wind?

  8. Got talking to a family I know. Two kids under five; a boy and a girl. The wife confided that they had dipped into the equity to the tune of 60,000 over the past four years just to make ends meet. 2 bedroom condo in 25 yo building, purchased in 2004 for 200k, now “worth” 350k, family income 3k/month net, mortgage payments 1500/month, strata fees 300, and special assessments rain down like riot debris. $900 last month, $2,000 a couple of months ago… She estimates a couple of k per year. A 2 br in same building costs $1200/month to rent. I asked why they don’t sell and rent for a while. She told me it is because the husband believes renting is just “throwing money away.” He wanted to sell and buy a house in Abbotsford about a year ago, but she did not want to leave the area they have lived in for 7 years. What is going to happen to this family if/when the equity disappears and no more RE_ATM? Even worse, their HELOCs may place them underwater.. and with a boy and a girl in a 2 br, that is no fun. What if rates rise? and the kicker… the sole income earner, the husband, works in construction. I don’t think they realise the dangers they are in thanks to being home”owners”.

    A second family piped up in the conversation – bought 2 br apt in early ’08, same situation – girl and boy under five – I don’t have any more details except what the wife told us: that they have no cable at home and no cellphone plans (just use $10 pay as you go) and that they cut costs in various other ways. I believe they do not own a car. I can’t help thinking they bought just to get on the ladder to own a house. Once again, they are sailing close to the wind, by appearances.

    • I only have cable TV because shaw offered it for $5/mo after we cancelled it. Good for the playoffs I thought. Cable TV sucks and it’s a rip-off. I’d much rather have fun with the kids and save the chores for after they go to bed. Play games, read books, draw, go for walks. TV is just a wasteland, although I enjoy a good show once or twice a week. The internet is a bigger wasteland of course 😉

      • I wish I had the final say on that in our household. For years now I have been threatening to cut the cable. I could not agree more with your perspective.

  9. And they say Chinese people are property crazed, no renting crowd. Seems like when there is a RE fever, everyone is Chinese. 😛

    Anyways to the speculators, man up and stop being girly man! Get off your sorry ass and go find a tenant. Geez….if you can’t handle even this little problem, how are you going to become a RE mongul or at least a REIN star member that purchases 5 or 10 investment properties a year?

  10. As much as I want lower housing costs. I wouldn’t treat a friend like you. Not lending money for monkey business is one thing, but laughing at your FRIEND’s misfortune is another.

    • On the VERY FIRST LINE of the article: “Bill Gable at greaterfool.ca 21 Jun 2011 10:13pm [hat-tip ‘Makaya’ and ‘Bailing in BC’]”

      Illiteracy is unfair to some, and whatnot.

    • Bailing in BC

      Chris -Who is this comment even directed at?

    • Who’s laughing?

    • “I felt awful and had some lame euphemism and said my goodbyes.”

      I for one am laughing but not out of joy, the same laughter I mete on coworkers who were up all night with a screaming infant, or watching some idiot on youtube who hits his head attempting a double flip off a concrete wall. The latter is probably the best analogy.

      If the guy ends up a stain on the road, let it be a reminder to others. I only wish his suffering was more acute so it could be put into a 1 minute video clip.

      • I as well am looking forward to extreme schadenfreude. I will start a site dedicated to outing those (via pics and video) who borrowed too much money in the last 10 years.

  11. the one who spent a morning drinking coffee with a friend at 8:30.

    • Bailing in BC

      I don’t see where Bill is laughing at his friend. Also I wouldn’t call what happened to his friend a misfortune. If a logging truck smashed into your house while you were sleeping that would be a misfortune. If you got hit by a logging truck while running across the highway with your eyes closed, dressed all in black, well, that would be poetic justice.

  12. Woah – “lent” 50K – one guess where that cash is going.

    I understand the position and I understand how people get drawn into it. One of the guiltiest culprits is this really slick new-ish magazine called “Canadian Real Estate.” As an real estate agent myself, I’ve picked up more than a few (probably the majority since it was first published). However, one thing I have noticed is that it really doesn’t have much for regular Canadian home owners or people thinking of buying or selling real estate. This is what I hoped for. Instead, it is one page after another of glorifying real estate investment.

    You might find the “horror” stories – but these are limited to bad tenants and properties that required above-average repairs, etc. What you don’t get into, of course, are the ultimate failures. They have a feature on the successes every month – the people who invested and made it in the world of “professional real estate investing.” They don’t analyze the failure rate or feature people who have gone broke trying to play the market.

    The upside, of course, is that Speculator #46 can sell. He may only have $42 in the bank (well, now $50,042), but he can unload that property, get his accountant to work the numbers, even with negative equity if that is the case, and still come out with food on his table. He took a risk, he failed, now it is about making the wise decisions.

    The problem is the 50K. He’ll likely pocket a few grand to eat and pay debts, try to replace the renters and, here’s the kicker, he’ll use the remaining as down payment for a 6th, or maybe even 7th property. The REAL problem is that these people read 5 pages of Kiyosaki and think they can make millions in real estate. What they don’t read is his 500-page collaborative real estate bible that reveals that to actually make money in real estate you need more than greed to keep you going. You need timing, brains, money, and the right people. Most have none.

  13. I have an update on the Surrey home/condo owner who is approx 900k in debt on two properties, a fake car loan, a real car loan and a motorcycle loan. Well her ability to borrow more has just ended and she’s still trying to get a kitchen in her basement so she can rent that space too. She just did a budget and concluded she needs to come up with just over 9k per month for all her monthly payments! Crazy she didn’t do this before buying a second property!!! Again she’s lucky if she can break 50k per year at her new job (38k base). So incoming she has…$1050 rented condo (without strata approval), Carriage house above garage $750, roommate (my ex) $400, and if she can finish the basement $750. So let’s just say 3k total on a good month! She also just told my ex, she needs to raise her rent to $700 and have another roommate move in…my ex told her that’s fine, I’ll rent my own apartment if I have to pay that much and live with a stranger. It’s really not a matter of IF this person will default on her loans, it’s just a matter of how soon!

    • Hmm, do I see sour grapes from a poor renter? 😉
      Stuff like this does not happen. All real estate “owners” are really moguls. They did the “math” and like the other 70% “owners” will be stinkin’ rich in no time.

    • Agree with bubbly. All these anecdotes we’re hearing… I’m more than a little skeptical. I just can’t see how an owner, proven to be an echelon above the renter class due to the fact he or she owns, would be making such horrible and risky financial decisions. It just doesn’t make any rational sense.

      • i also don’t see how any fine young national athlete or young woman on a full ride UBC scholarship could ever make any errors in judgement. it’s all lies.

      • Common sense isn’t as common as you think.

      • lol i just found this comment

        we found the one person that never got the sarcasm..

  14. This being a bearish blog, I’m not particularly surprised by the bearish slant. That being said, some of you need to give your heads a shake and reexamine what it means to be a RE investor, in fact reexamine the very fact that RE is an investment.

    There seems to be this naive idea among some bears that housing will return to the fundamental idea of it being shelter, that it will be priced accordingly to that utility. This will never happen, here or elsewhere. RE is an investment class, it always has been, more so in recent years with the creation of an entire derivatives market for the RE sector.

    Vancouver RE may very well cost 66% less one day in the future, thats a possibility that I cannot make a credible argument against. However, in that scenario I can promise you that there will be no shortage of buyers looking to get into the rental business. Even though one day the ownership cost in Vancouver may be cheaper, I do not think that living in Vancouver ever will be. When a more astute group of RE investors begins to buy towards the hypothetical bottom they will demand a certain yield out of the property, hence keeping rents moderately high compared to local incomes. This is the scenario unfolding in the US right now. This city will be no different.

    • I think that many local “investors” have no idea what it means to be a RE investor. They buy houses at outrageous prices and rent them out for a 2% yield. Some of them keep borrowing just to pay month-to-month expenses, because their “investment” is killing them. And a lot of them would be destroyed if prices suddenly went the wrong way.
      Mickey Mouse knows more about investing than these RE sages.

      • To build on bubbly’s comment — what really distinguishes today’s market from times past is that so many people want to be “RE investors”. In the past this kind of activity was reserved for the financially literate and moneyed few. Not so anymore.

    • I think what people are upset about is that housing has become a state-sponsored vehicle for speculators. Sound investments are always welcome in any market.

      • not to mention the fact that a lot of us who are 5th and 6th generation canadians are actually excluded from this speculative, gov’t guaranteed activity, while people who’ve been here for 6 months are off getting mortgages and lining up for condos for a week, and then doing it again the next month.

  15. Burt – rents usually track incomes because no matter what RE investors WANT, an economy needs people to spend money. In a global economy, the macroeconomic picture does mean that the percentage of incomes spent on housing one city can rise beyond what it could in aggregate and still not halt production, but if someone’s spending 80% of their before tax income on rent, they’re going to starve, and so are all the local businesses. So you can’t just pick a rent out of the air and think you’ll get it. Rents in most American cities are pretty in line with local incomes, with a few anomalies.

    • Agreed, we are having parallel thoughts. Vancouver is and will be a desirable place to live, arguably the most desirable place to live in Canada. There is steady demand for RE here, ownership demand is temporarily stronger. I don’t think the overall demand will ever wane much, only the price the demand will come in at will change.

      The current scenario in Vancouver is such that prices are an (X) amount too high, rents are a (Y) amount too low, and incomes are a (Z) amount too low. These 3 factors are critical in determining any sort of valuation in RE, here or anywhere.

      Inorder to attract investors the city will need to rebalance those 3 factors. My personal observation leads me to believe that prices will likely come down but incomes and rents will do quite well. Vancouver’s desirability factors will remain long after any sort of RE bust, in fact I would venture to say that a RE bust would be hugely advantageous for many investors. The demand to live here will continue to be strong, providing solid opportunity to get in to the property management business.

      Simply put, I sooner see Kits condos being worth 50% less than I see Kits condos renting for 50% less.

    • @Burt if you think rents and incomes are due to increase significantly, that would be a departure from BC’s experience of the past 30 years. After 10 years of “pro-business” Liberal rule, real wages haven’t markedly increased, and it’s hard to claim that 8% unemployment is a breeding ground for aggregate wage growth.

      I will state one thing: IF prices are to remain firm, rents and incomes MUST advance significantly, and soon. The longer revenue stagnation persists the tougher it will be for certain landlords to stay solvent.

      I’m not necessarily disagreeing with your premise, only that a lotta things gotta go right for that scenario to happen.

      • Not sure if I think that real rents and wages are to increase, rather I believe they would weather the RE crash much better than asset prices will. In US markets I keep my eye on prices are down 50-60% where as rents are down 10-15%, making the yield exceptionally attractive.

        Should RE crash here I think the scenario will be quite similar, rents will remain rather strong because of a steady demand. Lack of financing and accessible capital will keep amateurs at bay while the demand from savvy investors will keep the RE industry busy.

        I believe there is a significant amount of people waiting for the opportunity to live in Vancouver. The costs are currently keeping many at bay, but I do think that with declining RE values strong demand will persist.

      • “rents will remain rather strong because of a steady demand. Lack of financing and accessible capital will keep amateurs at bay while the demand from savvy investors will keep the RE industry busy.”

        “Savvy” investors” require a significantly higher yield than what is currently the case. The demand in the US is being clamped by cash-only investors and from what I’ve seen they’re over 10% yield. Rents appear to be strong in the US too, but the inventory overhang is still substantial. If Vancouver is to be propped up by “sidelines” investors, prices have to come down substantially.

        In terms of desirability, I have not seen any evidence that Vancouver is any more desirable as measured by income-rent ratio. If the city were becoming more desirable we would expect this ratio to increase, indicating people are willing to pay a larger share of their disposable income for the utility of living in paradise. Yet rents and incomes have tracked each other closely, indicating at least to me that people have placed a desirability cap on living in the city.

        It may take a while, but the marginal price is eventually set by the investors, whether by them running out of cash to buy or by increased opportunity costs. It has happened twice in the past 30 years and I see no rational argument for it not occurring again at least one more time in the next decade or so.

      • Burt got owned.

      • who doesn’t want to live here?? haha fuck demographics

      • Burt’s point, that rents do not fall nearly as much as prices, is borne out by US data. Notice how this happens later:

        http://www.calculatedriskblog.com/2009/11/more-on-falling-rents.html

        http://www.calculatedriskblog.com/2010/01/apartment-vacancy-rate-highest-on.html

        http://www.calculatedriskblog.com/2010/06/have-residential-rents-bottomed.html

        That being said, household formation does contract, leading to a very high vacancy rate. Is by no means an easy ride. But experienced landlords in a sound financial position are easy to pick out and are preferred 😉

      • Derp Derp, a nice collection of rednecks on you pic. 🙄

      • @bubbly – they don’t look like rednecks to me..

      • Now you are being politically incorrect. You shuld get some sensitivity training.

  16. Pingback: “Dipped into the condo equity to the tune of $60K over the past four years; Won’t sell and rent because renting is just “throwing money away.” ” | Vancouver Real Estate Anecdote Archive

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