Everyone has opinions on why the supply of real estate is so high in some markets. I often hear that the problem was speculators, and 0 down mortgages and the like. Well that’s great but I didn’t sell a single speculator a property. Sold many for people looking for a good agent on their way out, and I had maybe one zero down that I can think of. Sorry if that deflates the image of an REALTOR for some of you.
Anyway, I think for the most part the way we do things in Canada is sound. The banks here are regulated and are better then most in the world. We have a mortgage insurance provider that is the envy of the world. In Alberta you have one of the most highly regulated real estate industry’s in North America. What is wrong then?
I’d like to suggest that there is a problem with the way Alberta home builders do business. As prices heated up some larger builders stopped building for people and start building on spec. Many suggested to me they were not selling to investors which they clearly were, and clearly they are paying the price for it now. Not that it’s the builders fault that people tripped over themselves to buy these properties that now sit empty with many inevitably heading through the judicature process (foreclosure).
My solution for the next time around is to have the builders and their sales forces regulated by the government. Yep. They’ll hate that, but when someone comes into buy they should be disclosing to the person buying that they don’t owe them any fiduciary duties, they don’t truly represent them, and if they are buying a new home as an investment they should be doing a risk assessment or at least disclosing the risks. Especially disclosing that investments require timing, and that it is impossible to forecast the market conditions at the time of completion.
I have no problems with investors who are educated and who are made aware of the risks of investing. Think about it, you can’t walk into a bank and invest $1000 (let alone hundreds of thousands) with out signing a disclosure statement and the representative of the bank doing a risk assessment.
Consider this:
- Most builders said they weren’t selling to investors here during 2006 and 2007. Yeah right.
- In my opinion mortgage fraud is rampant by a non-regulated sales industry
- There is no code of conduct. No Mandatory disclosures. No accountability.
What I’d recommend:
- Minimum disclosure criteria
- Required notices to buyers that the sales people do not represent them and have no fiduciary duties to them
- Investors should be required to sign disclosures that they are aware of the risks involved
- More oversight on their buyer financing activities.
I had a client who took possession of their condo just recently that was started 2 years ago. They were told at the time of signing that completion would be around 8 months from signing the contract. There’s been a big change in the market the last two years, and had the buyer known they were being lied to about the length of time to completion they probably wouldn’t have invested. That’s just my 2cents on the situation.
Agree 100% with this post. When i bought my house the builder didn’t put a final date for delivery, arguing the same BS about delays for the weather, contractors etc. If I sign a commitment to pay, the should have a commitment to finish the house on time, simple as that. Now that the market has changed, they’re strugling to sell new houses..
Builders are regulated in the same way realtors are with a not for profit association, the CHBA which would be the equivlant of the CREA. They have a code of ethics, rules and regulations that need to be met, they also change these to match build codes etc. So I’m not sure what else you want in way of regulation, codes, rules, etc.
I don’t know if the sales force for these new divisions are bound by the regulations and rules of the CREA, and if not, that should be something that is changed.
As you “didn’t sell a single speculator a property”, many builders could argue the same as they don’t interigate every buyer who comes through the door. Sure they could assume, as you probably have, that some individuals are specs, but unless they say it, its just an assumption.
Seriously, I understand the need to enforce more caution with builders since alot of the glut now is starting to come from their over building, but as G pointed out, many builders had so many orders they just put their heads down and started going hard to get ahead of the curve, and really can you blame them? I remember watching some interviews with Jayman who openly stated “we’re turning customers away we have so much” with news like this I think anyone would see why they where going so hard on building and building quickly.
The unfortunate part of course, again, is what we’re left with.
G, no offence, but if you signed to buy a house without a delivery date, thats really your own fault, seriously what would you expect from someone who is months behind on work, and then you come in and say “oh have it done whenever”, well it’ll get done “whenever”.
***Response. Sabb you’re comments are not correct. While CREA (has ethical standards for all REALTORS in Canada), not everyone who sells real estate subscribes to their code of ethics and is therefore not a REALTOR. However they don’t regulate REALTOR’s. In Alberta the Real Estate Council of Alberta regulates the real estate industry sans builders. By the way this is not who should regulate the builders it is the governement who should.
The provinces through their regulators enforce the legislation (this is not the case for builders) and a code of conduct. Disciplinary action against licensed real estate industry members in Alberta is published and the hearings are public. This is not the case for builders.
Real Estate Industry members must disclose their relationship to their clients and if their clients chose a lower standard of representation they are required to sign off on that fact. This is not the case with builders.
Conflicts of interest must disclosed by licensed members. In addition there must be full disclosure to our clients of all relevant facts. This is not the case with builders. The builders rep in many cases knows of problems in terms of the ability to deliver what is promised or what defects certain models have and they are not required to disclose this.
If the consumer has a legitimate complaint against a licensed industry member and they submit it to the regulator it must be investigated. Where do the complaints for builders go? Generally no where. Is there a place where people can find out information on builders who have been disciplined? no. Are all builders bad? No. Should they be self regulated? Maybe.
To have the banking industry, mortgage brokers and real estate industry regulated and not have the builders regulated just doesn’t make sense.
I could go on and on here on the differences of where some MINIMUM government regulations or disclosures would protect the public and would just make common sense in my opinion but I won’t bore people further.
Sheldon
Sheldon,
I agree that speculation in the new home segment was a big problem. So was the fact that a lot of people moved out at the same time speculation was hitting its peak. My wife has worked for various builders for 5 years, including the really crazy years from 2004-2007, so I believe I have some insight on this.
There are 2 issues to deal with. How do you find out how much speculation there is, and how do you reduce it (you can’t stop it because it’s not illegal as far as I know)? There are only a couple of ways to figure out the amount of speculation there is in a market. Way #1….buddy comes in to the builder and buys 5 houses….pretty obvious, unless of course he’s buying for a large corporation who wants to house their employees. Way #2…ask the person to sign a paper saying they are not building for investment. This was tried by a few companies that I know of. One of the companies actually said on the paper that if the buyer sold within 1 year of posession, the builder could buy the house back from the purchaser for the original purchase price. This didn’t stand up to legal scrutiny however, as how do you prove that the house was built on speculation vs. somebodies circumstances changed and now they’re not moving, or their Mom and Dad have decided they can’t move into the purchasers old home because their 90 year old parents need home care. It could be any 1 of a hundred reasons. Also there was something morally repugnent about saying yah if prices are up we’re your partner and we’ll take the profit, but if they go down you’re on your own.
How do you stop it? In my opinion there is only 1 way to limit speculation. Change the way the house is financed in a way that increases the risk of the purchaser. The greatest invitation to speculate is to have a completion mortgage. If you can walk into a builder and lay 6,000 bucks on the table and have the rest due on completion…you’re taking a lot of the risk out of the equation. In the 05/06/07 time frame, purchasers were making 80,000-100,000 dollars by flipping for an initial outlay of a measly 6,000 dollars. You need to make all new home purchases draw mortgages, with an initial outlay of at least 15%, thus increasing the purchasers liability.
***I’m not saying that based on current legislation the what the builders did was wrong. Just requiring certain disclosure be made to buyers should be a minimum. Just as your banker is required to do when you invest any amount of money.
Informing buyers that if they are not moving into these investment properties there maybe tax implications. For a fact I know some salespeople with the builders knew that the people were buying several properties eventhough the builder had policies against this. So either the builder wasn’t supervising their sales force or they didn’t care.
Sheldon
Sheldon:
I don’t agree with your suggestion. The size of the government, I believe, should be kept to a minimum.
To solve the current problem, we should use the free market force. If you really think it through, banks are the source of all such mess. An investor can choose to buy or sell a property, but it’s down to banks to decide how much to lend to that investor.
Thus, the solution should be to let the banks regulate themselves. AND DO NOT BAIL OUT THE BANKS. By Darwinism, banks that do business in a responsibly way will survive. After a century, all remaining banks are ones that know what they are doing. Unfortunately, the governments are currently bailing out bad bank genes, and the same problem will come haunt the next time around.
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I don’t see my previous post.
Sheldon,
Thanks for taking the time on the response, it is appreciated.
Hi Sheldon,
I have come across many shady characters in the Real Estate Industry as well, most of the time the realtor is not representing the buyers or the sellers, they are representing themselves.
Realtors had lined up on the doorways of builders that were paying commission at the peak prices times, I know of many realtors who were speculators themselves.
Their only interest in the whole game is the commision cheque, all the realtors in the industry do not have the same ethics like you.
If they were bound by ethics: they would all have advised their clients in 2007 that please do not buy now, for you are likely to loose large sums of money.
Have you ever seen the fancy descriptions about the properties and go to look at it and find that the home is a dump, and the realtor is lying thru their teeth.
***Shawn
I’m not sure how you come to this wealth of experience but we agree to disagree. Like every profession there are some that give many a bad name. Lawyers and Doctors included. However you have described none of the very responsible professionals that many thousands of people in this city deal on a continual basis.
As far as your concerned its the REALTORS fault. Not the banks, the lawyers and people involved. Sorry but I don’t buy your arguement. Sounds like you have a hate on for REALTORS and that’s your perspective. I guess you’ve never dealt with a good one.
From your perspective the comments that REALTORS write for a property are lying. Are you kidding me? We are paid to market the property. What seller wants to have their home described as a heap of crap. Every single property advertised is puffed. Whether its the seller trying to do it or the sellers agent.
Anyways a good REALTOR knows how to read through that crap and won’t show their clients the property if it doesn’t meet their needs. I’m pretty sure your smart enough to see through it to.
You are entitled to your opinion though. I appreciate the comment.
Sheldon
I can’t believe I am saying this, but I agree with Bunny!
In the spring of 07 I was actively looking to move. Not to speculate but to find a home for my family. I was talking to three builders and left my number with all of them to call me when a certain areas lots came for sale. One day when driving around I noticed the lots had come up for sale, I stopped in at the show homes and they all told me the same story about a waiting list and that most lots had already sold. I called B.S because I know that my name was one of the first on the lists. I found it interesting that one of the salepeople I talked to had bought one of the lots himself and I wonder how many of his buddys and relatives did as well. Bottom line is they all were completed this summer, all have lost money and most are empty and for sale. What upsets me the most is that the speculators, corruption and gread pushed the regular family looking for a home out of the market.
*** Post deleted….You have an excellent story. If you left out the insults it could stay up. Interestingly enough if you sent in a written complaint and that REALTOR was investigated and the story was corroburated then that person would be discipline. I don’t disagree with you that type of conduct is reprehesible. I have had the same thing happen to clients of mine. However that is a rarity compared to the hundreds of transactions I’ve been involved with where their clients have been represented by true professionals. I have some good lawyer, stock broker, and especially builder stories if you want.
I’d be happy to have you repost your comment without the insults. So what about your Realtor? They don’t sound like the type of people you describe or I don’t think you’d keep calling them.
Sheldon
I’m sure everyone remembers the weekend open house schemes of 2006-2007.
This was where the realtor would stage an open house from Friday to Sunday. They’d tell everyone that the owners were “away” and couldn’t be contacted until Sunday evening at 7pm. Everyone is told if they’d like to present an offer that it would be presented to the sellers at 7pm Sunday evening.
This, of course, would result in multiple offers, many offering thousands of dollars over the asking price because they knew others were putting in offers at the same time.
Just another little trick these people were pulling back in the boom.
As for homebuilders… don’t get me started on them! We bought a new house, which we will never do again. Among the many problems we’ve had with the house, here is one that will blow your mind. They put the emergency drain (in the basement floor) right at the bottom of the stairs, so you step on it as you reach the bottom of the stairs. After telling the builder that it was the most ridiculous place in the whole basement that they could have put it, I was told, “Oh, that’s normal. Most houses have it there.” Even National Home Warranty said it’s fine and that it should not be moved.
So don’t EVER think that National Home Warranty is going to do anything for you. They are working for the builders, not for you. When you are buying a new home you might as well tell yourself that any problems you find you are going to have to fix yourself, because that is the truth.
Sorry to be so negative, but I imagine I speak for most homebuyers out there who bought in the last 3 or 4 years.
GM
*** GM you most certainly don’t speak for most buyers. Certainly not for buyers I’ve dealt with.
I will agree that the tactic of delaying offers was prevalent. I don’t think you’ll find a single seller who owns a property who would agree with you. It is after all the sellers property and if they have highly marketable commodity as they did then they have the right to be represented in a manner that they chose. Plenty of sellers selling on their own attempted this tactic although maybe not to the same result.
In other words you shouldn’t be able to sell stocks, companies, art or anything to the highest bidder. Interesting. Sounds kind of like something Karl Marx.
I guess I just don’t agree.
I’ve been reading this blog since the industry began to slowdown last summer. I was running a framing company for two years working for the same builder throughout that time.
From late 2006 until the summer of 2007, I only framed one house that was acutally occupied by a family. The rest were being listed on MLS within a few months of completion (some within a few days). The builder I worked for (part of an umbrella corp. that had 3-4 builders in one central office) had a general trades meeting in March07 where the company finance director discussed the projections for the coming year. His primary concern was that the price of homes would rise beyond the reach of 70k average income earners. The threat of a new housing glut did not even seem to occur to him.
Meanwhile, all the different presidents of this corp were announcing production targets of 500 homes each for the year.
I’m not sure if it was an intentional blindness or just complete disregard for the market, but these builders were selling homes only to be competing with their own products six months later. I noticed a few re-sellers who would even list the original builder as a sales incentive.
I knew the bubble burst was coming for a while. We couldn’t see it immediately in June07 as the builder was still starting new homes until Sept-Oct. We found out at that point that the builder hadn’t sold a house in three months and they had built at least 15-30 homes on spec. with funds drawn from their general operating expenses. I suspect they were getting structures framed in order to collect progress payments in order to keep the cash flowing from the banks. After Sept., the game was up and the industry ground to a halt.
I don’t blame the construction managers, they were just following orders and trying to reach production targets. As we are seeing from across the border, the people we expected to be fiscally responsible have been anything but that and we are now dealing with the repercussions of their greed.
Why are some posts so negative when it comes to realtors?
Like any other profession, there are some one can’t recommend, but there are certainly many who provide – in my opinion – a valuable service to buyers and sellers.
I use mine for very specific things:
- To market my property within the parameters I specify. He has more time for that than I do.
- To provide an independent opinion on the quality of a property I am interested in buying. He has seen more houses in his career than I will ever set foot in, and can spot many issues I may not notice.
- To tell me what comparables are selling for, and propose some “hidden gems” I may have overlooked in my own preliminary search.
- To negotiate on my behalf, within the terms I set out, since he is not emotionally involved in the transaction.
- To provide advice in the many areas of real estate transactions that I may not know enough about, since I will only buy a relatively small number of houses, in my lifetime.
Here is what I don’t use him for:
- Decide whether I can afford to buy or not. That’s my responsibility to figure out – and my banker’s.
- Decide when I should buy or sell. Finding out sales figures, inventory, and price trends is ultimately my homework, not his. You just don’t get the same insights from stats someone else prepares for you, as you get from your own observation, over long periods of time.
Having said that, do we really want to hold realtors responsible for our own lack of preparation or good judgement?
Should they all have refused to facilitate any transactions in 2007? It would be pretty ridiculous to expect them to go a year or more without income, until prices settle….
Hi Sheldon,
Good post…food for thought.
As much as I have a hard time with a lot of the builders’ tactics during the run up (for example, one that is quite well-known that canceled a contract because they could turn around and sell the home for more – our client successfully sued with our help) I think the best punishment is the fact that many of them who went the ‘spec’ route are now stuck with vast oversupply of inventory that they can’t sell.
The ones that got greedy and over-built spec homes are in deep right now and might not make it out. Free market wins.
For the speculators that got burnt (and it’s really only them – most people who were buying a principal residence won’t suffer as much) there are those who got in early or who can get back in now and pick up better deals. Once again, if greed got the best of them and they thought things were going to go higher forever, they’re paying for it now.
I do agree with your suggestion about regulating the sales people of home builders, and you’re right about the fraud. We have serious concerns about tied-selling with builders (you can only use my lawyer, my banker, etc) and non-standard contracts with no requirement for independent legal advice. Those would be helpful as a consumer protection measure.
that is what financial post posted today, excerpt
“He points out that as of August, there were 34,635 multiple units under construction in Toronto and 19,973 in Vancouver. Multiples generally consist of condominiums. Both cities have built more condos than all Canadian cities combined a decade ago.”
http://www.financialpost.com/most_popular/story.html?id=914783
Yea the condo boom in Toronto is nuts. Every time I go back more towers going up. But they build structures that will last 100 years +, and use good design and foresight when planning a new tower. I can’t say the same for the stuff they call condos out here, wood framed junk. Tho the old rental towers down town could be good if you put some money into them.
You make some great points in regards to home builder regulation. I think the current state of the home market is a great argument for more regulations being placed on home builders.
Sheldon,
I don,t have a hate on for the realtors, It is way too easy for people to become realtors, I think that they should have some fundamental knowledge of the building process before they are allowed to act as consultants, The famous No 1 realtor in St albert did not know the difference or the pros and cons of granite versus corian, example no 2, an experienced realtor I was shopping for a home did not understand that the same house built on a 40 ft lot should cost less than a house built on a 50 ft lot in a similar neighbourhood. A realtor did not point out to my friend that the house had 4 inches walls.
I think some realtors provide a decent service but are way overpaid for the little knowledge and expertise they bring to the table and sometimes the minimal effort they put in listing the house.
Every realtor in the city benefited from the real estate bubble, now that that the things are not so good they are playing the blame game.
I purchased several properties and dealt with several realtors in the past and none of them warned me of any impending risk.
I think that you are a respectable realtor and you dont need to be negative about the home builders or comfree.
All the construction projects were delayed in the boom times, public or private, residential or commercial
***Shawn,
I appreciate your point of view and thanks for the compliment. Its very true. Some REALTORS are experts in marketing, some are great at sales, others are details people and some are experts in construction. There are a wide range of skills that are needed and some are specialits in some areas. I know some people who are REALTORS who’s only skill is networking and they do very well at it.
As for evaluating a lot its easy to say a smaller lot isn’t as valuable all things being equal. Lots with different views or backing onto different influences will also affect the value.
My suggestion is that people should find the REALTOR with the skillsets that match their needs and expectations.
Sheldon
Sheldon,
Just one more comment, If the realtors are puffing up descriptions than they can’t be called professionals, a radiologist or a doctor will not puff up the patients illness to make a living.
I am an engineer, I will not puff up the soil test reports.
Most of the realtors act like commission agents, not that their is anything wrong with that, but please I am smart enough to see thru that sincerity bull.
So what is the difference b/w a used car salesperson embellishing his car and a realtor puffing up the description of the home.
***Shawn,
Thanks for the great comments. Doctors do coach their diagnoses for some patients, but PR people certainly spin things, The marketing business is about making your product as attractive as possible but that’s only one aspect of marketing. The entertainment industry always puts its best foot forward. Where not talking about pure schematics. Homes are bought partially on emotion. So doing what you can to improve the buyers feeling and experience can’t be a bad thing for my client.
The major difference between the used car sales person as you put it is we deal with the financial aspects of peoples lives, the unique relationships of our clients and their families and their needs, the legal and contractual aspects surrounding one of their most important financial transactions they will under take. Most of I find myself explaining various options to clients that they may or may not have considered and the potential outcomes of those decisions so that they can make the right decision every time. Most often I do it with my own investment upfront with no gaurantee of getting paid. Quite often my investment comes at the expense of time away from family and other opportunities. I win by helping others. I certainly don’t wait in a showhome waiting for the customer to crawl in.
Sheldon
Anybody that purchased a house that was built during the boom is absolutely nuts. This is the worst time as corners are cut, workmanship is shotty etc, etc, they are pretty much just slapped together as fast as possible. Just listen to Mike Holmes, he has said it on his shows many times.
Hi Sheldon,
Thanks for your feed back, you are a thorough professional and I just wish that we had a few more realtors like you.
***Shawn,
Thank you. I appreciate the compliment. Happy Halloween.
Sheldon