(Yet Another) Conflict of Interest



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I hope I’m not opening a can of worms here, but I think the Realtor-haters will have a field day with this one.

I’ve always thought pre-construction condo sales commissions represent a conflict of interest when they pay more money for less work…

Sometimes I just know when a blog post is going to create controversy.

I’d be lying if I said I didn’t do it by design sometimes, but other times it seems that the hot topics just seem to ruffle more feathers.

When I finished writing last Friday’s post “The Friday Rant: Keep Guessing,” I told my fiancée, “I’m going to get a lot of nasty comments on this one, and there are going to be a lot of personal attacks.”

But you know what?  50+ comments demonstrates the passion of my readers, and the interest level in what I have to say.

Even when people don’t agree with what I write, I’m still enthused.  My reader with the handle Ralph Cramdown seemed to vehemently disagree with Friday’s post, but his responses were respectful, professional, well-written, and intelligent.  And for that, I’m thankful.

It’s the people that have nothing to offer other than, “YOU’RE A FRIGGIN MORON YOU LOSER” that really bother me.  I always approve their posts regardless, but these people just demonstrate their own ignorance, because if they were intelligent enough to actually offer something intelligent, they’d certainly do so.

It’s like having a pleasant conversation about the Toronto Maple Leafs, filled with statistics, factual and empirical evidence, and then having a Vancouver fan yell, “LEAFS SUCK, GO CANUCKS!”

But the computer age has given us the plague known as the anonymous commenter, and often you don’t know if this person is intelligent (well, actually we usually know…), if they live in their mother’s basement, or if they work for $20,000 per year cleaning toilets in St. Catharines and just hate the fact that they can’t afford to own real estate.

In any event, I have a thick skin, I believe in what I do, and I generally don’t care what people write on my blog, even when they attack me personally.

So it is with that in mind that I delve into a VERY touchy subject, and perhaps shed some light on a business practice that many consumers know nothing about.  I’m fully aware that the Realtor-haters are going to have even more ammunition after this blog post, but I want to make my feelings known.

The photo above is no accident – it clearly shows the statistic: 4%.

This, for the most part, is the commission received by a Realtor when selling a pre-construction condominium.

Sometimes it’s more, and sometimes it’s less, but over the last decade, I would say that this is likely the average.

You all know how I feel about pre-construction condominiums in Toronto.  In a nutshell, I think developers are crooked and they deliver an inferior product, the risks associated with purchasing are exceptionally high, and the prices no longer make any sense because pre-construction pricing is now level with that of existing, comparable resale.

So it is my contention that the reason developers offer 4% commissions is simple: they want Realtors to sell over-priced, risky investments their buyer-clients.

And with that, I can expect to endure a lot of heat from Realtors who “specialize” in pre-construction sales, but you know what?  Throw it at me.  I can handle it.

The typical commission paid to a Realtor upon successful sale of a residential property, be it house or condo, is 2.5%.

So why then do we get paid 4% to sell pre-construction?

And when you consider that with most new condo developments, we need to merely walk through the door (or to use business lingo “cross the threshold”) with our clients, sign them in and attach our business card to their registration, and we are “protected” and will be paid a commission, I think you’d agree that there isn’t nearly as much work involved in pre-construction condo sales as there is in resale.

Those who disagree will argue, “There’s a ton of work done before-hand.  We attend previews and launches, we scout locations, and we pick only the best pre-construction properties to show to our clients.”

Sure you do.  And just how are the crab-cakes and chicken-skewers at those “launch parties” you speak of?  How pretty are the girls that are paid to smile and make conversation with you?  It’s such a tough life…

I’m arguing on the basis of my opinion that pre construction condominium investing is a fool’s game in 2012, so I don’t understand why any experienced, reputable Realtor would sell a pre-construction condo to his clients.

King West pre-construction developments are charging $650 per square foot for a building that ‘might’ exist in 3-4 years, but you can buy a comparable one today for $590 per square.  Show me where the advice, guidance, experience, and value exists in leading your client down this deliciously crab-cake-filled road.

Some of my competitors have shot back, “Some of my clients aren’t ready to buy and take possession today, and they just want a place to park their money.”  So park it in the exact same condo that’s actually built, that costs 10% less, and don’t “help them” lock in that juicy 0.00% return.  Or be honest and tell them they should buy a GIC, and ETF, or a REIT depending on their risk threshold, and forego the massive risk associated with an investment that you can’t sell if the market turns, like a piece of paper that promises to one day turn into a condo.

And hence the conclusion to my argument: builders offer 4% commission to entice Realtors to sell their over-priced crap.

There.  I said it.

This is a massive conflict of interest, in my opinion.  Realtors are being paid more to essentially do less work than they would for a comparable resale transaction.

And it doesn’t end there!

Back in 2008 or 2009, the building down the street from me on Richmond called “The Modern” was offering a whopping 6% commission to agents during a special one-day promotion.  So if a Realtor sold a pre-construction condo at 320 Richmond Street instead of a resale condo across the street at 323 Richmond Street, that Realtor would receive 240% of the normal commission.

Am I going out on a limb by saying that this might entice some Realtors?

The simple truth is: many Realtors are hanging on by a thread.  They might see the potential to get paid for doing 2.4 deals instead of one by simply selling a piece of the giant hole in the ground and all the risks associated with it.

I take a sh!t kicking because I’m brutally honest, and sometimes people don’t like honesty.  People don’t want to know that I think their condo at 4K Spadina or 25 Telegram Mews is a pile of junk, and they respond, anonymously, by attacking me.  But what’s the alternative?  A glad-handing salesman who gets paid 240% of a normal commission to sell you something that isn’t a good investment and comes with a mountain of risk?

It’s no coincidence that developers pay Realtors 3%, 3.5%, 4% or 6% to sell their projects.

Do you know what the people working at the sales centre get paid?  The people who actually work for the developer?  How about 0.1% – 0.5%.  Or a flat rate like $1,000 per unit.

So again, I ask, is it a coincidence that the developers pay cooperating agents, or “buyer agents” 4% to bring in their clients under contract and put them into pre-construction units?

I don’t think so.

I think that it’s very easy for a Realtor to be lured in by the big bucks, and developers know this.

Look, Realtors are salespeople, like any other industry.  Personally, I don’t consider myself a true salesperson first.  I would never sell pre-construction, whether it’s 3% or 8% because I don’t believe in it, and I intend to be successful into this business for the next thirty years so I’m going to satisfy all my clients.

But like any other industry on the planet, there are those people who are in it for the short term, and the immediate pay off.  Lawyers, doctors, accountants, tradespeople – there isn’t an industry on the planet that doesn’t have somebody cutting corners and/or taking a quick buck.

I’m just pointing out what I consider to be a bit of a blight in my own industry as I continue to be unbearably honest about every facet of real estate.

Is it a “conflict of interest” by definition?  Or is it just a scene from Boiler Room where Giovanni Ribisi and Vin Diesel sell shares of companies that don’t exist because they get paid ten times the commission?

Either way, some of the blame has to fall on the consumer.

So do your homework – on both your agent and the property they’re trying to sell you…

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26 Comments

  • JH February 22, 2012

    Along with yesterday’s post, this drives home two big incentive problems:

    1. Buyers’ agents are paid based on the selling price of a unit.
    2. Buyers’ agents are paid by the seller.

    The first point clearly leads to a financial incentive to get your client to buy an expensive unit. Not one that is good value, or one that is appropriate with regards to fit, amenities, budget… just one that will cost as much as possible so as to drive up the achieved commission.

    It’s not quite that cut and dry, of course, since the time factor comes into play. An agent will likely not be interested in spending an additional fifty hours of work to put a client in a unit that’s ten grand pricier than one they have a good chance of buying now – there’s a magical time-vs-payback sweet spot, and really, that’s what a self-interested agent is looking to maximise.

    The second one incentivizes agents to act not in their clients’(*) best interests, but the developers. I’m not familiar with what the rules are here, but one could easily imagine an incentive structure that includes additional bonuses for, say, agents that broker deals for at least X clients in a given time period, etc, making the situation worse.

    The obvious question then is: How can you incentivise an agent properly to achieve the maximum utility for thier client, the buyer? Any takers?

    *) As an aside, in the scenario described in today’s post, it becomes hard to tell who is the client. If the buyer’s agent is getting paid by the developer, there’s an argument to be made that the agent is actually acting with the developer in the role of paying client, and the buyer is essentially a product being ‘sold’ to the developer. It’s similar to people’s somewhat self-entitled misconceptions of how a business like, for example, Facebook or Google works. Most consumers *think* that because they are the company’s users, they’re also their clients. For most traditional businesses, that’s how it works. Increasingly though, that dynamic is changing, with more and more control being shifted and customers being turned into marketed commodities. Just my 2 cents.


  • Ralph Cramdown February 22, 2012

    Gee, thanks for the hat tip, David. Here I was thinking I was on the verge of getting banned… Congratulations on your engagement, BTW.

    Better incentives? Well, the buyer could just pay the agent a flat $/hour for his expertise and work, rather like we do with most lawyers. Maybe a success bonus on top. Would buyers like that? It’d probably have to be a few hundred an hour…

    How about a % of the increase in assessed value, less improvements and the citywide average assessed value, over the first five years of ownership. It’d be a great way of creating incentive when you want to find the next hot pocket. Would buyers like that? Would agents? It’d probably have to be 10% or more to make it worthwhile.

    Buyers love that their agent is “free” I suppose, even though the fee that they indirectly pay him is subject to the Land Transfer Tax, is financed over 30 years (along with the appliances) and becomes part of their assessed value for property tax purposes.


    • David Fleming February 24, 2012

      @ Ralph

      I would never ‘ban’ anybody from my blog, and I approve 99.9% of all comments (sounds cliche, but I really do only delete on in a thousand).

      Although, I came close to a “ban” last year, if you could call it that.

      This one reader, who was very active with his comments, seemed to have turned on me once I wrote about the building where he lived. He then started posting two negative responses to EVERY subsequent post that I wrote! I didn’t mind, because ultimately I’m after all comments, links, RSS feeds, trackbacks, etc, and any content is good content, but eventually this guy started going back every day and posting negative comments on stuff I had written 2-3 years ago! He was now retroactively disagreeing with things I had written, just for the sake of doing so. He was spending hours and hours per week literring my blog with hate! I finally emailed him and said, “Surely you have better things to do with your time. I know I’m really cool, and downright awesome, but your infatuation with me is misplaced.” He never posted again.

      In any event, I welcome any comments, whether they agree with my views or not.

      On a long enough time horizon, every single reader will disagree with something I write. And how could it be any other way? Show me two people in life who are 100% aligned with everyting they do or say.

      The day that I start to write all positive, glowing, generic posts that satisfy 100.00% of the readers is the day that my blog becomes like every other Realtor’s boring site…


  • Joe Q. February 22, 2012

    This is a great post, David — your honesty is appreciated.


  • RPG February 22, 2012

    David this is why I read your blog every morning with my coffee. It’s the first site I log onto eeach day. Your “telling it like it is” platform keeps me coming back because I just don’t see anybody else doing what you do. I’m curious though: do your colleagues consider this whistle-blowing?


  • Kyle February 22, 2012

    Even though i’m sure it is verboten, i have to ask how prevalent is the situation where buyers’ agents are kicking back some of their commisions to the buyer? I imgaine if Developers are doling out 6% comissions, there are plenty of realtors, thinking, i can give my clients a 3% discount, and still be making off like a bandit.


    • David Fleming February 22, 2012

      @ Kyle

      I don’t know of any agents that do that, although every agent runs his or her business differently, and I’m sure it happens.

      Part-time agents, new agents, and the fly-by-nighters might do this, but no reputable, experienced, valuable agent would. It’s like devaluing oneself, and it sets a precedent.


  • Daniel February 22, 2012

    I also start my morning with coffee and your blog, but I definitely check tsn.ca first! Your a close second.


  • Anthony February 22, 2012

    David, I like your ability to raise consciousness to different matters but this one I have to completely disagree with. Let’s talk stats because you like to compare it to hockey stats:)

    The stats are black and white. Either investors make money in pre-construction or they don’t. The fact is they do. And as long as they do, there is a need for this service.

    It’s not the fact that developers pay 4%, therefore they have a hidden agenda. No. This was a standard when pre-construction was much cheaper many years ago. I do agree with you that finding a good value from pre-construction is harder these days. However it can be done.

    STATS

    3 years ago my clients bought into the King West Life project.
    One bedroom just under 600sf was selling at $230,000. Now they are worth $280,000-290,000. A one bed and den was $290,000 with parking and locker. WOW yeah! Great value definitely. Now they are worth $375,000. Factor closing costs (which isn’t much for this developer), land transfer taxes etc…there is still a good profit for a 3 year wait.
    This beats any GIC, REITs hands down.

    Let’s look at North York :) The Tridel Hullmark came into the market at $530/sf. At the time it appeared to be so expensive. Now, those people are up on their investment.

    There are many many cases where investors have made money from pre-construction condos but I don’t think I need to go on and on.

    You should be very careful not to pigeonhole or label a whole segment of the market as no good and agents who are selling new projects as not having the interest of their clients at heart. Many investors know what they are getting into. They want pre-construction. They want time for the market to grow while they park their money. Population growth is a driving force for property appreciation. They also want more time for the economy to turn around. They don’t want to take on a mortgage. What are you going to do? Not service them? At the end of the day, they do have the right to control their destiny no?

    For instance, what if you thought there was no opportunity but it turns out to be a pot of gold at the end of the rainbow. The blame will then be on your shoulder because they’ll say, “I told you I should have invested in a new condo, but you said no.” I know I wouldlove it if my clients made money from my advice, but it’s a dangerous endeavor and you can either be a hero or Mr.zero.

    I am very very selective of the new projects. I don’t post every condo launch on my website as so agents do (increase exposure = increase business right?) I when I choose a project to promote I truly think there’s value there. Just the other day I wrote this article, http://www.torontocondospace.com/torontos-best-out-of-sight-condo-area/
    There’s a lot of thought and examination there you see. It’s not just easy work, if you really want to be on top of the products. There is a lot to understand and I cross reference the price, the locations, the quality before I rank which are good value, which are market value, which are expensive but special (ie. Bisha) etc. So I think I earn my commission by doing my homework and knowing the products. I make 4% but have a hand in helping my clients making $50,000 or more. Who is better off at the end of the day?

    There is profit in pre-construction. But the developer is squeezing more out of investors. I can agree with you there. But opportunities still exist. We just have to find them or park the money at market value and hope that the market will continue to grow to pull the profit out down the road.

    Tell me what is so great about resale condos that makes them worth the 2.5% of hard work? You are paying market value on resales most of the time unless the market is sluggish, but it hasn’t been. There isn’t much of a deal where a buyer can save $20,000-30,000. At the end of the day, your clients are buying something that is set at market value. New condo prices is a projection of where future prices might end up since they take 3-4yrs to complete. If the resale market grows or wildly shoots up like it has been, it will add the margin to the pre-builts. If the resale market stalls, even the people who buy resale won’t make a profit. So we are all in the same boat regardless!


    • Ralph Cramdown February 22, 2012

      Um, you won’t get home from work one day and find the ceiling in your resale condo is a foot shorter than it was when you left in the morning?


    • Chuck February 23, 2012

      In my eyes, no matter how you slice it, you’re selling glorified lottery tickets with most of these developments.

      It’s a dice roll.

      And agents are getting paid far more than most people would consider fair as an enticement to bring buyers.

      Pre-con is selling the possibility of a return on investment. It’s risky no matter how you slice it.

      And any buyer who truly believes the market is going to be be as high as it is now in 3-4 years deserves what’s coming for them. Good or bad.

      But I wouldn’t go near anything in pre-con right now. David — please post your link to chocolate cake and cake mix — love that analogy.


    • Mad Max February 23, 2012

      Anthony,

      You, unfortunately, seem to have a very dangerous view that seems to pervade your profession like a plague.

      I will start with your definition of statistics. You have presented a couple of anecdotes. These are not statistics, there is no science here. You have presented a couple of cases where people have made money. There are people in pyramid schemes and Cutco knife marketing schemes that make money also.

      Which leads me to point two. Even if the stats, over a period of say 5, 8, 12, 15 years did, indeed back your thesis, it is backward looking. You are referencing a period of time which characterizes one of the biggest credit bubbles in financial history (albeit the Weimar Republic or Zimbabwe a few years ago will be hard to surpass). My point is, the macroeconomic environment (primarily) that being debt monetization, national and local supply demand imbalances due to immigration and organic demand growth (secondarily), and a couple of other factors have created a more violent cycle (so far to the upside)in the last 15 years or so than what would be considered ‘normal’ in other business cycles. As a result, the phenomenon you are discussing, of prebuild condos, works until it doesnt. Housing prices in the US in overbuilt large city suburbs went higher until they didn’t. Bubbles of this nature normally extend further and last longer than analytical market participants anticipate.

      This is what drives me nuts about your profession – you people are salesmen, not analysts, yet you present assertions and ideas as if you were quants, running regressions on prices, looking at historical corrections, comparable geography/economy matrices (Australia?), and running it in a scientifically acceptable way. I wish you all were more of the latter, we need more. To present anecdotal evidence as ‘statistics’ and then ignore the context of the world we have been living in discredits any of your comments.

      MADMAX


      • George K February 23, 2012

        I’ve been waiting to see how long it would take for one of your (former?) allies who sells pre-construction to write a modest 1000 word response in defence of their position. I read the comment above, and he’s missing the point. He said “Three years ago,” but we’re talking about today here. Subsequently JC and Chuck have commented that they agree with you, and that they don’t sell precon condos. Great comment from MADMAX. I’d like to see more from him.


  • JC February 23, 2012

    Time value of money.
    2.5% in a month or 60 days, vs 4%, some payable now, some in 3 years and the rest probably 4 years out.

    To be clear, we’re talking condos not new homes. There are a number of home builders that do not co-operate at all with Realtors and those that do, often offer a pittance. $500 for example. (on a 300K+ home).

    The condo builders sure know Realtors. Just like sandwiches at open houses get agents into Agent Open Houses, paying $$ gets them purchasers. They also know, like most of us, that if they only offered 2.25 or 2%, Realtors would give them a wide berth. Even though they aren’t supposed to show based on commission payable, we all know that they do

    Personally, I sold one pre-construction condo ONCE. I would not want to do it again. It took me over 4 years to get paid in total. 1/3 on acceptance of the offer, 1/3 upon closing, and the last third was payable when the building was registered, which was close to a year AFTER my clients had taken possession. I think I was paid 3%. To be honest, that extra cash didn’t really make up for the wait – especially since the way splits work, my broker ended up with more of my money than they would have had I been paid the total upon closing. Since, as you know, sales levels revert to zero every January 1.

    Then there are the builders out there that routinely stiff Realtors (and their staff) to screw them out of the money they promised they’d pay. A friend of mine had to take one of them, a fairly prominent name to small claims court to get paid. It took 3 years and a lot of work but she did it. This guy tried every dirty trick in the book to get out of it.


    • JC February 23, 2012

      Okay, perhaps there are not a large number of builders that “routinely” stiff salespeople, but the one I know of in particular goes through staff at an incredible rate because he doesn’t pay them on time/all all either. Realtors are shocked to discover that their Broker won’t back them up dollar-wise to launch legal action against them, so it would seem that some of them just give up and move on.


      • David Fleming February 23, 2012

        @ JC

        No, I’d stick with your original point. There ARE a lot of builders who routinely stiff Realtors. Sometimes it’s for no reason other than, “Too bad, sue us.”


  • HS February 23, 2012

    Good article. Everyone’s raised some interesting points. Here’s my 2 cents.

    Pre-construction condos can be a rewarding investment but there are a lot of factors to consider other than “my client made $50,000 on a project he bought into 3 years ago”.

    There are many people who have made a ton of money by investing in preconstruction condos but as MADMAX so eloquently put it, the landscape is very different today.

    There is greater risk associated with such an investment today for the following reasons:
    - There are over 150 condos under construction in Toronto at the moment (Highest total in North America… Scratch that, highest of any city in the world)
    - Layouts are becoming smaller and less functional
    - Preconstruction condo prices $psf are at an all time high

    Preconstruction condo builders are exploiting the booming Canadian real estate market by charging purchasers prices that would ONLY turn a profit 4-5 years from now if the market were to keep increasing at the current rate. Essentially they are charging tomorrow’s prices.

    Now I’m not an economist but since we’re allowed to pretend that we are on this blog I’ll give it a shot.

    I think it’s pretty naive for anyone to assume that we are just never going to have a year where the market cools off for a bit or even takes a step or two backwards before it starts moving again.

    The US financial crisis, the pending major European financial crisis, historically low Canadian interest rates (for 3 years) should all be red flags for investors and agents who work with investors.

    This doesn’t mean that you should avoid real estate investing altogether but you should definitely stay away from high risk investments unless your investment strategy is very long term.

    By selling a preconstruction condo to an investor client and assuring them tha they will make a profit by assigning or flipping after closing you would be doing them a great disservice.

    And I’m sure if condo builders were cooperating at the same common commission rate of 2.5% a lot of realtors would be singing the same tune. But that additional 1.5% of commission and as Dave mentioned, having to do little/no work at all other than walk into the sales center with your client and watch the salesrep as they go through their extravagant presentations usually gets sme people to turn a blind eye to the risk factors involved.

    Dave’s right. There’s a lot of psychology involved in the marketing. The sales centers are usually very fancy and the girls usually pretty hot.

    But anyways, the last time I sold a preconstruction condo was in 2009 and since then ive been advising investors to look at resale.

    There are way more benefits; you get your keys right away, what you see is what you get, you can put down less than the mandatory 20% for preconstruction condos, you can rent out the property right away and start seeing a return, you can use the equity at any point, you purchase at today’s price.

    That last benefit “purchasing at todays price” is a win-win for the investor because if the market goes up over the next 4 years then he realizes an equity gain but if it slows down he/she just wouldn’t see as large a gain as opposed to a preconstruction investor who may realize a loss/ no gain since they bought at tomorrows price.

    I’ve purchased 2 investment properties in the last year and none of them were preconstruction condos. One was a resale condo which I plan to furnish and rent. The other was a preconstruction 3 bedroom home in the suburbs which only takes a year to build, has almost 1/3 of the development levies new condos require, no occupancy fee/period and require only a 10% deposit.

    The commission I received from buying the builder house, $0. If they were offering 4% I’m sure all the VIP agents in town would have been lining up for a week.


  • Anthony February 23, 2012

    Madmax,

    Let’s back track. David said he doesn’t believe that there is value in pre-construction. I’m not sure exactly when he decided on that. Was it yesterday or three years ago or further? I don’t really know.

    “You, unfortunately, seem to have a very dangerous view that seems to pervade your profession like a plague.”

    I’m confused by this statement. What is my view exactly? I just commented on a post to say I don’t think the prebuild should be ignored entirely and you say I have a dangerous view which pervades profession because we don’t share the view that the investment world will combust shortly? If it does go in the way of the doo-doo bird, it won’t matter whether someone buys prebuilds or resale. And I think you’ve lost that point. Are you a real estate agent to tell me that prebuilds are not as good as resale? Because I can quite easily prove you wrong. There are some prebuilds selling less than the price of resales. Or are you just here to bemoan about us agents.

    I came on here to state that as of roughly 4 years ago after the economic crisis of 2008, my investors are UP on their pre-construction investment if they sold their unit today. From my PERSONAL experience I found that pre-construction can be profitable and stated a couple of examples. Maybe I shouldn’t have used the word stat and used a better choice of words like example A or B. But let’s not wrap your head around “technically”. I’m not going to spend hours putting stats together for a blog comment. However let’s just hypothetically pretend that if we looked at the stats for pre-construction condos from Oct 2008 when the stock market crashed and onwards during the instability of the financial crisis which has lasted to today, that 50% of the investors are up on their investment. Given your philosophy that we are not in a “normal” business cycle for quite a number of years, how do you explain the profits in the last 10yrs? You’ve seem to concluded that anyone who believes in prebuilds today is a moron and that the model of pre-construction profits is nearing an end.

    “As a result, the phenomenon you are discussing, of prebuild condos, works until it doesnt”

    Are you saying that the strategy for buying prebuids HAS come to an end OR is coming to an end? Can you clarify this statement?

    Not to belittle your wisdom but you don’t know where the world is heading tomorrow or the fate of the economy. You are a guesser just like everyone else but worse then that, you are judgmental on my profession as having a dangerous view or a view that isn’t in agreement with your economic commentary. You are like those economist that predicted Vancouver’s real estate would collapse for the last 25 years yet it hasn’t. And during this period people have pulled out large profits. Yes there are RISK inherited in every investment. What’s your point beyond that? There were risks in 2008, 2009, 2010, 2011 and so forth. When there is HIGH RISK and high uncertainty in the market, that’s when the profits are bigger than in a “normal” stable market because it can go either way. Anyone who rolls the dice during a high volatility period is either going to make a lot of money or loose a lot of money.

    Look at the winter of 2008 when everything stopped. Are you saying that anyone who invested during that “uncertain market” is an idiot because they should have waited until the dust settled? Those are the people that pulled out the biggest profit before the market spiked the follow year. And the people who waited for the dust to settled are still sitting on the sideline because they have been priced out of the market waiting for a correction…which may or may not come.

    Just because a possible bubble MAY be forming in the last number years doesn’t mean investors are insane to invest in pre-construction or resale for that matter. As long as they cash out and make the profit before the correction then they have solidified their gains.

    Your position is that the bubble is definitely there and it has been building for years but hasn’t exploded. Other then that, there is no conclusion and who really knows when the big correction will come IF it ever comes. And during the time frame until such event, the opportunities MAY still exist. It will only be realized in time when we look back.

    Finally your comment here is puzzling..

    “This is what drives me nuts about your profession – you people are salesmen, not analysts, yet you present assertions and ideas as if you were quants, running regressions on prices, looking at historical corrections, comparable geography/economy matrices (Australia?), and running it in a scientifically acceptable way.”

    I don’t know where you saw anything in my rant that was an analysis of the economy. Please quote where I was being an economist. In my post I only talked about MARKET VALUE. I talked about how I compared different projects to find the ones which I think has value. And I talked about profits from my clients investments. I seems like you are frustrated by RE agents. Well guess what, I can say the same about people like you who want to play “let’s predict the economy because MADMAX has a right to and RE agents don’t”. I’m frustrated that economist can’t seem to accurately predict the market each and every year for the last 5 years. And I’m frustrated that they’ve put the scare into people to the point that lives have been ruined because these people listened to “economist” and now they are priced out of the market instead of jumping in on it in 2008, 2009, 2010…when prices were lower. But the economist said the market will trend downwards 10% or 25% by the end of the year. So i feel your frustration. It is NUTS as you put it.

    Thanks for your comments.


  • Mad Max February 24, 2012

    Your view I was referring to is simply that of the idea that anecdotal, non scientific evidence, based on an impossibly small sample size represents a state of the market that will be portended into the future. ‘Why will pre-builds continue to be good investments? Because I can name a few that did over the past few years.’ This is basically your argument. Ugh.

    You just don’t get it. “…that 50% of the investors are up on their investment. Given your philosophy that we are not in a “normal” business cycle for quite a number of years, how do you explain the profits in the last 10yrs? You’ve seem to concluded that anyone who believes in prebuilds today is a moron and that the model of pre-construction profits is nearing an end…”

    Please re read my post. If only 50% are up in a real estate bull market in 4 years, that is terrible. As a sidebar, the S&P 500 is up 63% since October 2008, which were not even the lows (March 2009). The wash of monetary stimulus has helped drive UP the prices of real estate in Canada, how do you not follow what I am saying? I think you are confused here. Re read my post.

    I never said I was bearish. I said its dangerous for you to extrapolate the past into the future. That’s it. Your usage of the term ‘statistics’ is also dangerous. You have not presented any statistics whatsoever.

    Never said I could predict the future. I said take the last 5 years in CONTEXT.

    As Lord Keynes once said “As the facts change, I change”. To be anchored to a view, a recent narrative, regardless of context or facts, and to assume this will continue indefinitely into the future is how investors get laid out. But corrections are part of a healthy market and financial penalties are required for systematically flawed investment decision making.

    MADMAX


  • Anthony February 24, 2012

    Mad Max

    Has David shown us any stats or examples of clients who have lost money in prebuilds to conclude that it’s a waste of time? No as far as I see, there was no such data to base this topic on. None, zilch, zero. And everyone seems to think yeah he’s right without a shred of evidence. Yet you’ve seem to completely uncritical of this and be critical when I’ve tried to back up my claim at least with some example. Having two examples is yes not representative of the overall picture, but that’s two examples more then the subject of this debate has.

    It doesn’t take a genius or a RE agent to tell you that the market 4 years ago was cheaper then today, therefore anyone who bought property back then would have a gain. Maybe not 100% of everyone, but for the most part. Where have you been in the last four years? To say that my two examples isn’t indicative of the overall market is just ignorant.

    “the idea that anecdotal, non scientific evidence, based on an impossibly small sample size represents a state of the market that will be portended into the future”

    Your assumption that I extrapolated my clients profit to mean there will be future growth is wrong. You conjured that up all by yourself. I merely state a snap shot of this point in time, that they are up on their investment so it was a good move to but prebuilds contrary to this post’s pessimistic opinion. I didn’t state nor guarantee this trend will continue or last.

    To recapitulate…your gripe are of two things:

    1. I’ve used my clients growth as an example that the market will continue on it’s path. – Wrong assumption my dear. It was only to say some investors made money buying prebuilds contrary to this topic. There was NEVER an attempt to extrapolate into the future. You were falsely reading in between the lines.

    2. My examples are non scientific, due to a small sample of the population. – True, but you must be ignorant to not believe in profit growth in the last 4 years of a hyper-active market.

    The problem with economists is that they can’t seem to predict the TIME of when the bubble will burst. And who really knows how many more years of growth there will be 2, 3, 4?? 4 more years from today means 8 years since the economic instability of 2008. That will be 8 years of growth. That is a time frame that’s long enough for profits to be taken out. The analogy would be like a stock market chart. You enter the market at a point, ride the bullish market and cash out before it goes down. That’s all real estate is. It’s just another RISK investment like the turbulent stock market.

    Again, if that is ALL that you wanted to say was the conditions are bubbling and a crash is on the horizon…thank you but I already knew this from countless analyst, economist who have been saying what you are saying for YEARS! Surely one day you will be right. Now do you want to tell us when it’s going to happen so I know not to plan my vacation?

    Now this debate of the economy has sidetracked the original topic which was prebuilds are not a good investment, it would be nice to back that feeling up with some data rather than taking pot shots at agents who service clients that want to buy prebuilds. I think David has simplified and generalized too much then concluded as a whole that there isn’t any value in prebuilds, but on top of that he slandered that any agent who sells prebuilds are selfish self-interest bastards motivated by the 4%…and crab cakes. I think you’re being a little over the top?

    The TRUTH is..there are some prebuilds which per square foot are way over what the comparable resale prices, but then there are some that are slightly over and some are under. It’s on a project to project basis. To single out ONE case to represent the whole market…well wasn’t that what MAD MAX griped over?

    David said, “King West pre-construction developments are charging $650 per square foot for a building that ‘might’ exist in 3-4 years, but you can buy a comparable one today for $590 per square”

    Mad Max said, “…based on an impossibly small sample size represents a state of the market (is misleading)”

    Anthony says, “Touche!”


    • Mad Max February 27, 2012

      Christ dude, you have written a zillion words and not said anything.

      Its pretty simple – the newbuild flip game is f-cking over.

      NOt wasting anymore time speaking to a broken record.

      You should be in politics – mindless drivel, repeat.


      • Simon Sez February 27, 2012

        This is my first ever post and i’m going to be blunt: The most amazing part about this website is that bottom feeding agents like Homelife Anthony are spending hours and hours posting on THIS site instead of their own. Meanwhile David Fleming is already writing his next blog post or he’s out selling real estate. David has done such a good job of attracting readers, commentors, and interested people that other competing agents are actually HELPING him build his website. Unreal. I used to read a couple other RE blogs but I can’t anymore because all the agents do is spread happy happy joy joy like Anthony. MAD MAX is right: just beacuse you keep coming back and adding 2,000 more words doesn’t make you right. David: keep up the great work. I love reading other Realtor’s views on your site! LOL.


  • Anthony February 24, 2012

    @Mad Max

    Mad Max said, “As a sidebar, the S&P 500 is up 63% since October 2008, which were not even the lows (March 2009).”

    You are aware that the 63% is just a recovery from the crash right? So the day before the crash up to today, the S&P is still down overall. Let’s say if I had $20,000 invested prior to the crash, I would have maybe $18,000 or $19,000 today. My investment would be in negative growth. In comparison the the RE market during this time, the gains have been tremendous.


  • Joe Q. February 24, 2012

    I read today in the G&M that 80% of new condos in downtown Toronto are bought as investments.

    And back in May, Urbanation reported that index prices of new condos in the Toronto CMA had increased 8.4% in the previous year, while condo index rents had only increased 1.1%. That’s a seven-fold difference.

    http://www.marketwire.com/press-release/urbanation-launches-inaugural-condominium-rental-market-overview-essential-new-tool-1515417.htm

    Urbanation also estimated that 7,000 new condo units will be going on the rental market each year for the next several years at least. That’s about a dozen 15-storey buildings’ worth of rental units coming on the market every year.

    Imagine investing in a company whose price-to-earnings ratio went up 7x in the previous year, whose revenues are basically flat, and who is planning on issuing thousands more shares every year for the foreseeable future. The mind boggles.


    • HS February 25, 2012

      Interesting point.. Lets see if it sparks a 2,000 word comment from Anthony


  • Anthony February 25, 2012

    Have my comments been 2000 words? =)

    I do have something to say about the Urbanation report. But the Leafs are more interesting right now…even if we’re down 2-0.





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