Tuesday, 26 March 2013

Size Matters: In Praise of Older Condos

I don't want newer condos to get a complex. Some are fantastic. Condos built in the last five years often have better-designed units. They display a wiser use of space. They often, but not always, have better finishes than their older condo counterparts. They also have lower maintenance fees. This is due, in part, from errors made by the early Toronto condos. Developers have learned from their past mistakes and created newer condos with fewer amenities. So developers have steered away from the extras that are expensive to run, like pools or a concierge in a small building. The other reason the fees are lower in newer condos: Nothing needs to be repaired yet. The building is new after all. So, the funds are not being used to replace the elevator or fix the roof.

Because condo fees in older condo buildings are higher, they can get a bad rap. On top of that, the units often look dated, and need some makeover magic. And let's face it, the condo folk are less inclined to renovate than the house folk are. That's often why they buy a condo - for the ease of living.

Some times with newer condos, though,  there is a misconception that fees will stay low forever, but they won't. A building will deteriorate over time. It's nature's way.  But even before the deterioration begins, most new condos have to increase their maintenance fees 20 to 30% in the first year after registration. Because they don't have a big reserve fund, they often need to increase fees.

Older condos, if managed well, will have a reserve fund in place. They will also have to pay for updating some things like the lobby or replacing the windows.

The real big advantage to an older condo doesn't have to do with the reserve fund. The big thing has to do with the amount of space you can buy. Generally, the further you go back in time in the condo's construction, the more space you will be able to buy. A condo from the 80s, for example, are often huge. Condos now, not so much. And size does matter here. It feels good to have more space. Some new condos are so tiny that if you turn around too fast,  you can break your nose.

And the thing buyers need to remember, if the unit has high maintenance fees and does not show well, then they could potentially buy a unit at a lower price.

Not all older buildings are created equal. Some are knee deep in repairs. Others are well managed and have good funds. Ideally, you want an older condo in the right location, with a solid reserve fund that is thoroughly reviewed by your lawyer.

So, don't think old is bad. There are some obvious drawback, but there are advantages too. Big ones!

Tuesday, 19 March 2013

Wanna Live in the Next Hot Hood? Get Your Pioneer On!

You've scrimped. You saved. You've bagged your lunches, given up your morning latte, and slowly built up your down payment. You, of all people, know how much it takes to save for your dream home.  And now that you're ready to buy, you can practically see yourself strutting through your hip, established neighbourhood where a short walk away you'll find indie coffee shops with paintings of local artists draped on the wall, top notch yoga studios to do your downward dogs and incredible brunch places to make your taste buds dance. But for most of us, this dream is often just that. These days, established, central neighbourhoods are often the terrain of the wealthy or those who are very comfortable living in a tiny space. Even the fixer uppers go for top dollar. 

Often, when buyers come to the realization that they cannot afford  to buy in the awesome neighbourhood they always wanted to live in, the "if onlys" begin to set in. If only I bought in Toronto's Leslieville before the celebrity chefs set up shop and the designer baby buggies were parading down Queen East in proud succession. If only I bought in Montreal's St. Henri neighbourhood when it was still exclusively working class, when the only other person you would see  at night was probably lost or couldn't find the subway. 

But don't think it's all over for you. Instead, get your pioneer on, and do what many of our ancestors did so many years ago, venture out to a new frontier! It may not always be easy, but it sure is easier on your wallet.

To be a pioneer of this sort, you will need to pack a few things. You will need to bring your potential goggles, and you need to have a lot of patience.  Because if you combine those two things with a little research, you could buy a property at a more reasonable price point in an emerging neighbourhood or a neighbourhood that will emerge soon.

In a nutshell, you have to imagine what may happen. Many emerging neighbourhoods just aren't there yet. That's why they are emerging. They may have some run-down homes and lack-lustre main streets, but there is usually a kernel of some thing starting to happen. The artists and young families have begun moving in. Some fresh and creative businesses are starting up. These neighbourhoods are often a mix of low-income housing or industrial wasteland with little in the way of infrastructure. That is, until the hipsters, four star restaurants and the dog-and-baby crowd start to take over. This process does not unfold at the same rate or at the same time in all location. Some neighbourhoods rapidly improve while others are just getting started their transformation started. It is up to you to determine what kind of emerging neighbourhood you would like to jump in on. 

So, if you can't quite afford the fancy part of town, and you are open to an emerging neighbourhood, you better make sure you pick the next hot spot, and not just some crumby part of town. It’s probably best to consider these handy tips on finding the next hot spot:

1.   Take a walk
Don’t just think about a neighbourhood. Go there and walk around.  See if the neighbours take pride in their homes. Look for any new businesses opening up on the commercial strip. Also, daytime and nighttime can make one neighbourhood seem like two different places. Best to do a before and after dark comparison. Listen to your gut. Recognize the bad, but look at what’ s changing. Because if things have started to change, there’s good chance that change will keep going. Momentum is a powerful thing in a neighbourhood. 

2. Transportation to your location
If you want to buy in an area that will increase more than average in value, see if there are any transportation improvements occurring nearby. Some emerging neighbourhood’s have surprisingly good transit infrastructure. You probably don’t want a highway going through your front yard, but a new bus line or an improved subway station would certainly be a good sign.

3. Look for New Condo Projects Often when there is planned condo construction in a residential area where some community currently exists, that’s a good sign. Developers have already invested their money and faith that this neighbourhood will improve. In fact, they’re a step ahead of you – having bought cheap land that will hopefully increase in value as the condo is built. The increased density as a result of these condos also leads to more foot traffic and a better commercial strip. Keep in mind, however, that there can be a tipping point. Condos can overwhelm a neighbourhood en mass and create grim traffic situations. Especially when the neighbourhood prior to the condos had no or few residents. 

4. Consider the demographics

In some places, a neighbourhood’s  average income could be increasing faster than the provincial average. This is a good thing.  Don't look at the average income. Look at how the average income is changing. If a neighbourhood is changing fast in this way, chances are good that property values will see higher-than-average growth. Statistics Canada, and local economic research firms will give you access to this info.

5. Under Pressure
 Look at the surrounding neighbourhoods. If everyone is rushing to buy in the neighbourhood west, north and east of you, then the pressure will be there for the gentrification to move into the neighbourhood next door when prices go too high. When buyers grow frustrated with one neighbourhood's expensive prices, they start to look further afield. Get there, and cross the tracks before they do.

Just remember, an emerging neighbourhood will not change overnight, though the speed of some neighbourhoods from run-down, dull outpost to hottest hood in the city has happened shockingly fast in some locations. Regardless, you are still a pioneer. It may take some tough years, but at some point you will notice more people moving to your hood, and the improvement. And you can be the smart one who said you got there first, before it was cool and expensive.

Friday, 15 March 2013

What Opinions Really Matter in Real Estate?

Every body has their opinions. Especially when it comes to real estate. I know I do. But I also know my limitations. No one can really tell you flat out that they know where the real estate market is heading. Still, I do work in the real estate trenches, and I have my hunches. And I go on about my hunches often in my blogs. 

But enough about me. Let's talk about those opinions bigger than me. The ones that come from  "experts", those who represent organizations that feel their opinion on real estate matter enough that they make public declarations on the direction our properties are heading and at what speed. 

So, what exactly makes someone an expert? And what makes experts worthy of a sought-after opinion? And more importantly, is there any bias or political bent to their opinion?

For the most part, in Toronto, the media tends to favor certain organizations when it comes to real estate opinions. Experts on high rotation tend to come from one of five groups:

1. Credit Rating Agencies
2. the Canadian government
3. Real Estate Associations
4. The International Monetary Fund
5. Banks

So, let's turn things around a little. Instead of these guys telling us what to think about real estate, let's explore just how credible they are. 

1. Credit rating agencies like Moody's, Standard and Poor, and Fitch Group are all from the United States. They are considered the Big Three, and to some extent, they are a big deal. They have been circulating around the news recently because they claim there will be a flatlining of real estate prices with the potential to fall 44% if the economy tanks in Canada. The thing you need to understand about these guys is that they completely failed to predict the economic meltdown that started in the U.S., their own country, five years ago. And rightly so, they received some flack for that. So now, they tend to be a lot more gloomy in their predictions. I guess they don't want to mess up and miss another potential downturn, if one ever occurs. 

2. The Canadian government likes to pipe in every once in awhile about real estate, but it is not entirely to inform you of the facts. They also use their information to effect the real estate market. And some times it's for our best interest. The respected and coveted Mark Carney has announced that individual Canadians are carrying too high of a debt load, and we need to be careful. And within a short time,  people did take his warning and pulled back on their debt loads. His public declaration changed how we, as Canadians, spend our cash. Other times, it's posturing.  Jim Flaherty, the Canadian Finance Minster, had recently remarked  that the banks should not lower interest rates. It's his government's way of not interfering with the real estate market by making stricter rules or raising rates, but just making remarks that look like they are protecting Canadians.

3. Real estate associations like the Canadian Real Estate Association, the Toronto Real Estate Board or the Ontario Real Estate Association are also quoted regularly.  These folks are often the most optimistic of the bunch because these organizations are largely run by realtors. And realtors can benefit from a healthy market. Still, their data is pretty sound. They have one of most extensive collection of data through the mls, and they hire out other real estate data researchers like RealNet to bring some thorough stats to the table. Their interpretation of this research can often be a little rosy, but it arises some of the best data.

4. The International Monetary Fund have quite a bit else to do besides comment on real estate, and yet they do any way. With a mandate to stabilize and supply money to nations around the world, the IMF still has a thing or two to say about real estate in Canada. Like the credit rating agencies, these guys tend to make macro-sized remarks on national real estate. Yes, there are important things that happen on a national, marco level that can effect the real estate market across Canada, like raising interest rates, but to suggest that a nation's real estate will act the same  all over the country is a bit too simple. I believe micro real estate markets say a lot more about a property. We can learn more about the value of a house based on its neighbourhood or a similar sold on the same street. To say a condo in Vancouver will function the same way as a cottage outside of Halifax is a bit of a stretch. Even in the U.S., the real estate collapse was not the same in Florida as it was in Texas or even Washington State. Cities and suburbs didn't perform the same. And condos and houses act differently too. Like the Credit Rating Agencies, the IMF has been questioned on it's poor predictions in the past. And they fall on the side of gloomy as well. 

5. Banks are more in line with real estate associations. They receive good data, and they tend to give rosier predictions. Not always though. Banks will dare to publish less than happy stats. And not all banks will say the same thing.  Yes, they rely on mortgages to generate money. So, they would prefer to present data that will sell more houses and condos,  but they also need to keep their investors informed. They have to be a credible source of the real estate economy so that their investors trust their opinion. 

All in all, predictions are a funny business. We will usually have a rough idea of what may come, but usually no one really knows. And there is no opinion from any expert that does not have some kind of biased or political slant, even though the data may be sound.  Buying or selling real estate always carries some risk. But that's how money is made.

Tuesday, 5 March 2013

Buying a Condo New? Get Ready for the Age of Incentives!

People like new. And I'm a lot like people. I like new gadgets, new cars, new appliances, new mattresses, fresh, new towels, even a new toothbrush is a little exciting for me. I know that makes me a bit of a sucker for capitalism, but I've grown to accept this side of myself.

When it comes to condos, people like new as well. And by new, I mean new new. Condos that have not even been built yet, but the plans or the price for the development are so exciting that a buyer just has to get in.

With the exception of a blip around 2008 and 2009, a certain pattern has emerged when buying a condo during pre-construction. Traditionally, in developments that have a bit of buzz around them, the early bird gets the worm. Usually, the sooner you buy, the better pricing you have. Whether you are pre-VIP or VIP, or any one of the first buyers, you are taking a greater risk, so you may find yourself being offered a better price than for those who wait. Then, if your pre-construction condo development does well, and begins to sell out quickly, the units sold toward the end of pre-construction tend to go up in price and cost more than the earlier purchases. So, in a strong market, it's good to buy early, though riskier too.

Because this pattern has been the case for so many projects, developers have grown rather confident in Toronto's love for new.  And that confidence has been reflected in pricing.  In the past few years, many developers have been projecting what they think their units will be worth once the building is constructed and ready for occupancy. So if you buy a project in 2013 and construction will not be done until 2016, then you would be paying what the developers thinks a condo will cost in 2016 based on the sales of recent years, which has been pretty good. It's asking a lot, I think, especially since we don't know where prices will go in the future. Between now and 2016 may not perform as well as between 2010 and 2013.

It has not always been like this. Five to ten years ago, it would be very wise to buy off the plans before a condo was built. If you bought in 2004 and the project was not done until 2007, then you paid 2004 prices. You would have gained the price appreciation over those years, plus you may gain from buying earlier as well.

But now things are starting to change a little. Some condos continue to climb and some have leveled off or even slipped in price and others have done well. Condos that are low-rises or town homes have risen over 13% over the past two years. High-rise condos have risen less than 1%. Don't take this info too much to heart though. Every condo is different, and some high rises do well and some low rises don't, but statistically speaking, low rises do better. Any way you slice it, the market is not as straight forward as it used to be.

And because inventory has started to build up in some quarters, like high rise condos, a good thing has happened: The developers have woken up from their dream. They have not lowered any of their prices, BUT they are starting to offer incentives. So, for pre-construction condos you may start to see free upgrades to granite counters. You may get a storage locker thrown in with your purchase. They may waive assignment fees. They may ask for less down than they did before, or they may even offer cash back if you buy within a certain time.

It's the developer's way of saying, maybe we're asking for too much. They won't lower their prices since some early buyers have already bought in, but they will offer other goodies so that they technically sell at the same price, but the buyer now has other perks that effective lowers the cost of the purchase or offer them more with their transaction.

Now are all developers doing this? No way. Only some. Are they always in projects that are floundering? No. Some developers are just quicker to the incentive game than others. Prices are not necessarily falling, but there are fewer sales, and like the banks who have dropped their interest rates, they are trying to bring customers to the table.

So, if you are the kind of person who likes to buy off the plans, we are not going to be returning to the good old days of the first part of the last decade. Developers are still very confident in their products. I don't think this is a sign of any kind of crashing market to come. However, you or your agent may be able to negotiate some nice perks in some developments now that incentives are appearing more and more.