David Setton : Answers In Real Estate

Welcome back to my 7 part home buyer's guide designed to teach you everything that you need to know about buying a home in Vancouver.

Whether you are purchasing your first home or your third, this series will help you to navigate the complexities and financial implications of your purchase. Part 1, Are You Financially Ready, can be found here. Parts 2 and 3, Consider your Mortgage Options and Mortgage Default Insurance, can be found here. Parts 4 and 5, Government Programs and Finding a Home can be found here. This newsletter contains the final sections, Parts 6 and 7, Making and Offer and Closing and Related Costs.

Part 6: Making an Offer

After seeing many different homes, you have finally found one worthy of an offer! What are the next steps?

What is an offer?

An offer is a formal, legal agreement to purchase a home and is legally binding once accepted by the seller. Offers to purchase a home can be made conditional on factors such as financing or a home inspection. If any of the conditions are not met, you can change or cancel the offer, even if the seller has already accepted it.

Do you have your money ready?

You will need to present a deposit within one week of having an accepted offer (after subject conditions are removed) or right away if you are writing a non-subject offer. The amount varies based on the home's purchase price and the market. It is usually around 5%.

Do you have up-to-date identification?

The federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act(PCMLTFA) requires REALTORS® to identify clients involved in the buying and selling of real estate. REALTORS® need to record your name, address, date of birth and occupation for their files which are kept for at least five years. They need to see valid government-issued ID. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) provides more information about the Act on its website: www.fintrac-canafe.gc.ca.

Part 7: Closing and Related Costs

Closing costs are the legal, administrative and disbursement fees associated with buying a home. Understanding these fees will help you budget more accurately. Remember these are additional costs over and above the price of the home.

How much land transfer tax will you have to pay?

The land transfer tax is a one-time tax levied by your province when you purchase a property. The tax is based on a percentage of the purchase price of the property, and varies from province to province. Some municipalities also charge a land transfer tax (for example, Toronto).

Have you budgeted for the associated legal costs?

Legal costs cover your lawyer’s fees or notary’s fees. These may include:

• Reviewing the terms of the offer

• Conducting a title search on the property

• Registering a new title

• Obtaining relevant documents, such as surveys and evidence of liens on the property

• Checking the statement of adjustments for taxes, utility and fuel bills, and other costs that have been pre-paid by the seller at the date of closing

Do you need a home inspection?

A home inspector assesses a property’s condition and can tell you if something is not working properly, needs to be changed, or is unsafe. They may be able to identify where there have been problems in the past, such as a leaking basement or termite damage.

What other costs can you expect?

• Interest adjustments between date of closing and first mortgage payment

• GST/HST on a new home or a home that’s been extensively renovated

• Service charges from utility companies for hook-ups on electricity, gas, internet and telephone services

• Appraisal fees

• Moving costs

• Storage costs if you must leave your current residence before you are able to move into your new home

• Furniture and appliances

• Real estate commissions

With my being a Realtor and my wife being a financial planner, we frequently have investment discussions about the best place to invest our after-tax dollars. My wife recently put forward a pretty compelling argument about why a Universal Life policy could be a better long term investment than a downtown condo bringing in $1,500 per month in rent. So, we decided to each make our case and ‘square off’ on the topic.

Here were the rules of the game:

• A 30 year time horizon 
• Similar net amount invested 
• Ignore inflation in order to compare the relative merits of each investment more easily

The case for Investing in Real Estate

For my side of the comparison, I chose a condo in the popular and well-priced Spectrum Development, located right on top of the downtown Costco. Optimistically, a one bedroom unit there will rent for $1,500 per month, and there are units on the market under $450,000 with strata fees of nearly $300 and property taxes at 1,600 annually.

I assumed:

• Sales price of $438,000 
• A 20% down payment ($87,600) to avoid CMHC mortgage insurance costs 
• A mortgage amortized over 25 years at a constant 5% for the life of the mortgage 
• NO increase in strata fees, property taxes or homeowner’s insurance 
• NO special assessments • Occupied with a rent paying tenant 100% of the time
• A small annual investment in maintenance (new carpets, paint, etc) of $1,000 per year.

In Vancouver, we generally accept that making money in real estate means relying on market appreciation, as opposed to cash flowing on the rent. The silver lining to this is that you may write off the loss as an investment loss on your taxes, as opposed to increasing your income (who wants that anyway?).

So, the first big question is: What is a reasonable capital appreciation value to assume over the 30 year time horizon? I looked at Real Estate Board of Greater Vancouver statistics for the 20 years between 1992 and 2012, as I couldn’t go back any farther. During that time, the median price of a condo in the same price bracket more than tripled in value. If I extrapolate that over another 10 years, it would be a five-fold increase in value. However, I recognize that the transformation from post-Expo 86 to 2012 has been remarkable, and that next 20 or 30 years are not going to see as dramatic a change because the downtown core is that much more “built out”. So, I assumed a 400% increase in value. With that assumption, my condo would sell for $1,752,000 in 30 years’ time. Not bad, right?

However, the costs of owning a condo are also significant. First, there are property taxes, homeowners insurance, strata fees and regular maintenance that add up to $540/month on top of the mortgage costs of $2,038 (equating to a lifetime interest cost of $260,984). Then upon selling the unit, I would incur a capital gains tax of $328,000 and transaction costs of about $50,000, not to mention my initial cash investment of $87,600. After all is said and done, I calculated a net profit of $712,709.

The case for Insurance

Many people view life insurance as a black hole in which money goes, only to come out when they die. This is no longer the case! Savvy investors, and indeed wealthy individuals and families, have been using life insurance as an investment for generations and recognize it as a powerful means of doubling net worth with each generation.

For those not interested in improving their children’s’ standard of living, Universal Life Insurance is a means of building a nest egg that may be accessed for retirement income, vacations or their children’s’ or grandchildren’s education. Better yet, it is a tax preferred investment vehicle with no minimum withdrawal amount.

Let’s say I was 39 and I took out a $800,000 policy on my own life combined with a $750,000 on the life of my child, aged 4. Insurance on children is cheaper, because they are younger, and it will allow me to build wealth in a portfolio that I can either keep for myself or transfer to my child when she is an adult.

The beauty and unique feature of Universal Life, as opposed to Whole Life insurance is that it is totally flexible. I can increase or decrease premiums as my cash flow allows, within parameters established when the policy is set up, and depending on how and when I want to use the cash value of the account.

I looked at what I could do with a policy using a similar cash outlay to the condo above. David paid $87,600 at the start, followed by 25 years of $12,995 per year. His total net cash investment was about $354,000. I spread the condo down payment over the first 5 years of my policy, and added in the $12,995 for a total of $30,515 for five years, followed by 21 years of premium payments of $12,995 and a final payment of $6,500, equating to the same $354,000.

At a 5% long term investment growth (I am allowed to pick from a variety of funds within the insurance company’s portfolio) I will have $1,411,898 cash surrender value in my account. I can withdraw this as a lump sum, incurring taxes at a preferred rate to net me $831,350. I’m ahead by about $120,000. Alternatively, I can borrow against this and retain the account value, and pay the tab from the death benefit which is over $3.6 million by the time I am 80 years old. Not to mention, if the market does better than the very conservative 5% growth I assumed, then so do I!

Summary

People love, and will continue to love, property as an investment. It is perceived as a safe long term bet. It is tangible, which is a huge psychological plus. We live in a city where property values seem to continualy rise over a five to ten year time horrizon. A property in the downtown core may be a great growth opportunity, with no ‘sweat equity.’ There are other ways of leveraging an investment in property that could work to your advantage. For example, renting out a basement suite until you are ready to grow into it.

However, with a Universal Life policy, everything is simple. You do not need to take ads on Craigslist to rent out your unit, you do not need to respond to emergencies, ensure access for maintenance, renovate, or worry about the housing market when it is time to cash in on your investment. Moreover, you leave a legacy for your family.

If you would like to play with the assumptions on the property investment, or see more details about the insurance illustration, you may download our spreadsheet by clicking here or give one of us a call.

The 2011 Greater Vancouver housing market began with heightened demand in regional hot spots and concluded with greater balance between seller supply and buyer demand.

The Real Estate Board of Greater Vancouver (REBGV) reports that total sales of detached, attached and apartment properties in 2011 reached 32,390, a 5.9 per cent increase from the 30,595 sales recorded in 2010, and a 9.2 per cent decrease from the 35,669 residential sales in 2009. Last year’s home sale total was 6.3 per cent below the ten-year average for annual Multiple Listing Service® (MLS®) sales in the region.

The number of residential properties listed for sale on the MLS® in Greater Vancouver increased 2.7 per cent in 2011 to 59,549 compared to the 58,009 properties listed in 2010. Looking back further, last year’s total represents a 12.8 per cent increase compared to the 52,869 residential properties listed in 2009. Last year’s listing total was 11.1 per cent above the ten-year average for annual Multiple Listing Service® (MLS®) property listings in the region.

“It was a relatively balanced year for the real estate market in Greater Vancouver with listing totals slightly above historical norms and sale numbers slightly below,” Rosario Setticasi,REBGV president said.

Residential property sales in Greater Vancouver totalled 1,658 in December 2011, a decrease of 12.7 per cent from the 1,899 sales recorded in December 2010 and a 29.7 per cent decline compared to November 2011 when 2,360 home sales occurred.

More broadly, last month’s residential sales represent a 34.1 per cent decrease over the 2,515 residential sales in December 2009, a 79.4 per cent increase compared to December 2008’s 924 sales, and a 12.6 per cent decrease compared to the 1,897 sales in December 2007.

The overall residential benchmark price, as calculated by the MLSLink Housing Price Index®, for Greater Vancouver increased 7.6 per cent to $621,674 between Decembers 2010 and 2011. However, prices have decreased 1.5 per cent since hitting a peak of $630,921 in June 2011.

“Our market remained in a balanced state for most of the year, although higher levels of demand for detached properties in the region’s largest communities caused prices in certain areas to rise higher than others,” Setticasi said. “For example, the benchmark price of a single-family detached home experienced double-digit increases in nine areas within the region over the last 12 months.”

New listings for detached, attached and apartment properties in Greater Vancouver totalled 1,629 in December 2011. This represents a 4.1 per cent decline compared to the 1,699 units listed in December 2010 and a 49.4 per cent decline compared to November 2011 when 3,222 properties were listed.

Sales of detached properties in December 2011 reached 630, a decrease of 18.1 per cent from the 769 detached sales recorded in December 2010, and a 30.2 per cent decrease from the 902 units sold in December 2009. The benchmark price for detached properties increased 11.2 per cent from December 2010 to $887,471.

Sales of apartment properties reached 774 in December 2011, a decline of 4.6 per cent compared to the 811 sales in December 2010, and a decrease of 32.9 per cent compared to the 1,154 sales in December 2009.The benchmark price of an apartment property increased 3.7 per cent from December 2010 to $401,396.

Attached property sales in December 2011 totalled 254, a decline of 20.4 per cent compared to the 319 sales in December 2010, and a 44.7 per cent decrease from the 459 attached properties sold in December 2009. The benchmark price of an attached unit increased 4.2 per cent between December 2010 and 2011 to $511,499. 

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November 2, 2011

With a sales-to-active property listings ratio of 15 per cent, the Greater Vancouver housing market continues to hover at the lower end of a balanced market and has been trending in that direction over the past five months.

The Real Estate Board of Greater Vancouver (REBGV) reports that residential property sales of detached, attached and apartment properties on the region’s Multiple Listing Service® (MLS®) system reached 2,317 in October, a 1 per cent decrease compared to the 2,337 sales in October 2010 and a 3.2 per cent increase compared to the previous month. Those sales rank as the second lowest total for October over the last 10 years.

“Right now, prospective home buyers have a good selection of properties to choose from and more time to make decisions,” Rosario Setticasi, REBGV president said. “Home sellers should be mindful of local market conditions to ensure they are pricing their properties competitively.”

New listings for detached, attached and apartment properties in Greater Vancouver totalled 4,374 in October, which is on par with the 10-year average. This represents an 18.3 per cent increase compared to October 2010, when 3,698 properties were listed for sale on the MLS®, and a 23 per cent decrease compared to the 5,680 new listings reported in September 2011.

The total number of properties listed for sale on the Greater Vancouver MLS® system currently sits at 15,377, which is 9.3 per cent higher than the 14,075 properties listed for sale during the same period last year. October was the first month that the total number of property listings showed a decrease this year.

The MLSLink® Housing Price Index (HPI) benchmark price for all residential properties in Greater Vancouver over the last 12 months has increased 7.5 per cent to $622,955 in October 2011 from $579,349 in October 2010. However, since reaching a peak in June of $630,921, the benchmark price for all residential properties in the region has declined 1.3 per cent.

Sales of detached properties in October reached 974, which represents virtually no change from the 976 detached sales recorded in October 2010, and a 34.5 per cent decrease from the 1,487 units sold in October 2009. The benchmark price for detached properties increased 11 per cent from October 2010 to $884,778, but decreased 1.3 per cent compared to the previous month.

Sales of apartment properties reached 958 in October, a 2.6 per cent decrease compared to the 984 sales in October 2010, and a decrease of 40.4 per cent compared to the 1,607 sales in October 2009. The benchmark price of an apartment property increased 3.2 per cent from October 2010 to $402,702, but decreased 0.7 per cent compared to the previous month.

Attached property sales in October totalled 382, a 1.3 per cent increase compared to the 377 sales in October 2010, and a 37.4 per cent decrease from the 610 attached properties sold in October 2009. The benchmark price of an attached unit increased 6.5 per cent between October 2010 and 2011 to $519,455, and increased half a per cent compared to the previous month.

Download the complete stats package by clicking here.

One very pleasant change from the last time I attended was the new venue - it was held at the Vancouver Trade and Convention Centre in Coal Harbour while BC Place gets its new roof. Although many of the exhibits seem to never change (hot tubs come to mind), there were definite themes around more sustainable living and home automation.

Any one who thinks the Vancouver Real Estate market is in a bubble should think again.  Today a single family lot sold in Kitsilano for $230,000 over asking price with more than 20 offers to purchase.  The 33 foot wide lot, located at 3279 West 3rd Avenue, allows for a duplex to be built under the RT-8 zoning.  5 of the 20 offers were greater than $1.3m.  The asking price for the property was $1,098,000.