What happens if you stop paying your mortgage?

Most homeowners who took advantage of the deferrals provided during the pandemic have been able to maintain their payments post deferral. However, the cost of this payment holiday means that your future mortgage payments are now higher. If someone in your household is out of work or your income is reduced, making those increased payments may be a problem. Or you may have taken on other loans and credit during the pandemic, and the combined effect has put you behind on your mortgage.

A missed payment isn’t hard to catch up on; however, multiple arrears will risk your ability to keep your home. Your mortgage agreement will define what happens when you are behind on your monthly payments. In most cases, mortgage lenders consider you to be in arrears if you have missed payments for three months or more.

Lenders have multiple options to deal with homeowners who fail to make payments, and these can include a power of sale or foreclosure.

If you also owe condominium fees or realty taxes, the lender may pay them directly to the municipality and then add the amounts to the principal balance.

Your best course of action is to control the situation before your lender enforces their right to foreclose or force a sale.

Months behind on your mortgage, what should you do?

If you are behind on your payments but believe you can catch up, you should speak with your mortgage lender about offering you some payment forbearance a little longer.

If your mortgage lender has denied any further mortgage deferrals, you have three options:

• Refinance with another mortgage lender
• Sell your home yourself and get out from under high mortgage payments
• Consider a consumer proposal to restructure your finances

Your first step may be to talk with another mortgage professional about refinancing with a new mortgage. However, if you don’t meet the income eligibility guidelines or have a bad credit score, getting a new mortgage may be difficult. Even if you have equity in your home and a good credit rating, without enough income to make monthly payments, remortgaging or refinancing may not be possible. Keep in mind that dealing with a high-risk mortgage lender will result in higher interest rates.

What you should not do is continue to borrow more consumer debt to keep afloat. Avoid using your credit cards or taking on a high-interest installment loan to make mortgage payments unless you know your situation is short term. Building up more bad credit will damage your credit score and make balancing your budget that much more difficult.

The question you need to answer is: Why can’t I afford my mortgage payment?

If you own more home than you can afford, you may have to consider the hard choice to sell your home and downsize or rent. You can sell your home if you are behind on mortgage payments as long as your mortgage lender has not already completed any power of sale or foreclosure process. Choosing to sell is something you want to control, rather than letting the lender decide for you.

If you are late with your mortgage payments because of other debt, like credit cards or a car loan, an alternative may be to talk with a Licensed Insolvency Trustee. A trustee can provide you with solutions to eliminate unsecured debt, so you have enough room in your budget to keep up with your mortgage payments.

What can a Licensed Insolvency Trustee do to help with a mortgage in arrears?

If you feel you can afford your home but can’t repay your other debts, it may be time to look at debt relief options like a consumer proposal. It is possible to get out of debt without losing your home.

First, it’s essential to understand that a consumer proposal does not deal with secured debt. You are not required to cancel your mortgage, and you can keep your home if you are making your monthly payments. Lenders cannot foreclose on your home or revoke your mortgage because you filed a consumer proposal or bankruptcy.

A consumer proposal can be a proactive measure to eliminate other problem debt you may have and improve your cash flow so you can catch up and maintain your future mortgage payments. A consumer proposal is a debt repayment plan that allows you to keep assets like your home. With this option, you  make a deal with your unsecured creditors to repay a portion of what you owe. The amount you pay depends on your income and what assets you may own, including any equity in your home.

Because bankruptcy and home equity laws vary by province, it is important to speak to a Licensed Insolvency Trustee where you live. The trustee’s role in a consumer proposal is to help you develop an offer that you can afford and that your creditors are likely to accept. A Licensed Insolvency Trustee will review your budget, ask you to obtain a valuation on your home and any other assets you have, and from there help you determine how much to offer.

The trustee will also help you assess whether you can financially afford to catch up on your mortgage arrears if your other debts are eliminated. If not, they can help you decide whether it makes more sense to sell.

What if your home is worth less than your mortgage?

The housing market in Canada, especially in cities like Toronto, has remained strong despite the pandemic. Most Canadians have seen a rather dramatic rise in their home’s equity from price appreciation. As I noted above, you can use this appreciation to make a proposal to creditors to eliminate unsecured debt and get you back on a firmer financial footing.

But what happens if your home is worth less than your mortgage? If your home has negative equity, you can walk away from your mortgage. If you or your lender sell your mortgaged property for less than the balance due on the mortgage, the lender can pursue you to collect any shortfall. However, this shortfall can be eliminated through a consumer proposal, along with other debts.

Getting debt advice

If your mortgage is in arrears, it can help talk with a Licensed Insolvency Trustee. This is especially true if:

• You have significant other unsecured debt like credit card debt, bank loans, payday loans and even tax debts that are making it hard to pay your mortgage, or
• You owe more than your home is worth.

By all means, speak with a mortgage broker, but if either of the above scenarios sounds like your current financial situation, consider booking a free consultation with a Licensed Insolvency Trustee for debt advice as well.

The post What To Do If Your Mortgage Is In Arrears appeared first on Hoyes, Michalos & Associates Inc..

Depending on which method is used, and where you are in the process, your options to remain in your home and your financial outcome may differ.

Below, I explain both processes and highlight the key differences between the two. I provide you with options that allow you to stop a power of sale or foreclosure and keep your home if that is what you can afford and what you wish to do.

Basics of a Power of Sale

A power of sale is the most common forced sale process used in Ontario when a homeowner fails to repay their mortgage. In a power of sale, a mortgagee (the lender in a mortgage) obtains the legal right to evict residents of a property and sell the property to recover funds owing.

Lenders prefer the power of sale over foreclosure because the process is faster, involves less court time, and legal costs are lower. A lender need only wait 15 days after a missed payment to begin a power of sale process. The process involves:

• the issuance of a Notice of Sale by the lender,
• 30-40 day redemption period during which you can bring mortgage arrears current,
• the issuance of a Judgement by the court and finally,
• a Writ of Possession giving the mortgage lender the right to evict occupants (with the assistance of the Sherriff) and sell the home.

In a power of sale, a mortgage lender has a fiduciary duty to sell the property at fair market value. In the power of sale, any proceeds above the mortgage debt are paid to the homeowner.  If the lender makes a quick sale at a discount, the homeowner can sue the lender for any loss in equity they should have received.

Typically, on completing a power of sale, mortgage lenders don’t earn any additional profit. If a home has equity, most homeowners will refinance to bring the mortgage current and avoid a forced sale.

In a power of sale, the lender retains the right to sue the borrower for any shortfall if the sales proceeds do not fully cover the full balance owing plus costs and fees. This shortfall becomes an unsecured claim since there is no longer any property to secure the debt.

Basics of Foreclosure

In a foreclosure, a mortgage lender takes title to the property. What this means in real estate law, is that the lender has complete legal ownership and right over the property to do with as they please. They can rent it out or sell it.

The foreclosure process is similar to that of a power of sale but takes much longer, often a year or more, compared to less than six months for a power of sale. A lender generally does not even begin the court process until several months of missed payments have occurred.

Since the lender legally owns a property after a foreclosure, they do not have the same duty to sell for the highest price. They also keep all proceeds above the mortgage debt for themselves. No equity or profits are returned to the mortgagor or homeowner.

In a foreclosure, the mortgage lender loses its right to sue for any shortfall.

Differences between a foreclosure and power of sale

Foreclosure proceedings and power of sale are different processes, but they share a lot of the same legal documents from start to finish. Both procedures start with a Notice of Sale, then a Statement of Claim followed shortly by the Writ of Possession.

It is in the Statement of Claim that you will see whether the action chosen for your property is a foreclosure or power of sale. As the homeowner, you need to be aware of the fundamental differences between both options.

What to do if threatened with a forced sale of your home

A house can cost a lot of money, and with other financial pressures such as car repayments and credit card loans, it’s easy for monthly payments to become too much.

However, we understand that a house is likely your biggest asset. While you may be struggling financially to keep up with repayment, you may very well want to get out of debt and keep your home, avoiding a power of sale or foreclosure entirely.

First things first: you need to review your budget and see if you are struggling to keep up with your mortgage repayments because you purchased too much home or if it is a mixture of other unsecured debts like credit card debt that is causing your debt problems.

Either way, there are financial options available to avoid a power of sale or foreclosure on your mortgage. However, the sooner you act, the more options available to you.

You can stop a forced sale during the redemption period by catching up on missed payments and fees. After the redemption period, your lender has the right to demand repayment of the entire mortgage, which can be much more challenging to deal with if you are having credit problems.

Here are some options to consider:

• Refinance with a second mortgage. You can get a second mortgage to bring the mortgage current. If you’ve got positive equity in your home, this can work. However, you need to be sure you can afford your future monthly mortgage repayments too.
• Restructure your mortgage with a different lender. Lengthening the amortization period of your mortgage can reduce your monthly payments, so they are mort affordable. If your bank or financial institution is not willing to negotiate a new mortgage, you can talk with a mortgage broker about finding a new lender or private mortgage.
• Downsize or sell your home yourself. If it looks like your financial problem is your mortgage payments because they are too expensive, then you could look to sell your home and buy a smaller property before you are evicted. You could also look into renting for a short time until you are back on your feet financially.
• Clean up other debts with a consumer proposal. If other unsecured debt is the cause of your budget shortfall, you can use any equity in your home to make a proposal to your creditors to reduce your monthly credit card and bill payments, making your future mortgage payments more affordable.
• File bankruptcy and keep your home. A consumer proposal avoids bankruptcy. However, if bankruptcy is a better way to eliminate troublesome unsecured debt, it is still possible to keep your home and file bankruptcy if you can keep your mortgage payments current.
• Walk away from your mortgage and file insolvency for any shortfall. If your mortgage is underwater (the mortgage is more than the home’s value), you can hand the property to your lender. If there is a shortfall post sell, this shortfall can be discharged through bankruptcy or a consumer proposal.

Advantages of talking with a Licensed Insolvency Trustee when you have mortgage arrears

If you are struggling with mortgage and non-mortgage debt and want to keep your home, it is a good option to talk with a Licensed Insolvency Trustee as well as a mortgage broker.

A mortgage broker can help you refinance and introduce you to a private mortgage lender. However, high-risk mortgages come with higher interest rates and may not be your best option if they also suggest rolling unsecured debt into the new mortgage. There are considerable risks in consolidating unsecured debt into a secured mortgage.

At Hoyes, Michalos and Associates, we can help you explore options that can help you clear up debts and find a way to make your mortgage repayment affordable. We can provide a second opinion on your budget and which alternatives will leave you stronger financially after restructuring your debt.

We offer free consultations, no matter what your situation.

The post Power of Sale vs Foreclosure Explained appeared first on Hoyes, Michalos & Associates Inc..

In Canada, bankruptcy and mortgage foreclosure are two different legal proceedings. In this guide, I’ll explain the difference between bankruptcy and foreclosure, how each affects your ability to keep your home and whether bankruptcy proceedings can stop a foreclosure or prevent your mortgage lender from seizing your property.

Secured vs unsecured debt

In the world of credit, there are two types of debt: unsecured and secured debt.

Unsecured debt is any debt where you do not have an asset as your collateral, for example, a credit card. When you are in default on an unsecured debt, your creditor may send or sell your account to a collection agency, and that company will call you to collect. They may attempt to sue you for what you owe them and try to garnishee your wages, but that’s about all they can do. An unsecured lender has no hold on your things. They have no legal rights to repossess your assets. 

Secured debts do have an item behind them. They have collateral behind the loan so that if you do not pay the creditor, they can seize your property. A mortgage is a secured debt where your house acts as collateral and provides security to the lender in case of default. If you don’t pay your mortgage, the mortgage lender will call you, but as a secured creditor, they have an extra power they can use to recover their money: they can foreclose on your home.

How mortgage foreclosure works in Canada

Foreclosure can happen when the mortgage lender isn’t getting paid. If you stop making your mortgage payments, your mortgage lender can take you to court and sue you, and if the court agrees, the lender can take over title to your property.

A foreclosure is the transfer of full ownership in a property to the mortgage lender. In a foreclosure process, the mortgagor, or homeowner, gives up all rights to the property, including any equity value built up in the home. Once your mortgage lender forecloses on your property, they own it. They can do what they want with it, which may mean fixing it up, renting it out, or most likely selling it.

Foreclosure is a lengthy and costly process. Your lender will first file a Statement of Claim with the court, to which you have 20 days to respond with a defense. After that period, your mortgage may be declared in default. Your lender will next ask for a remedy in the form of a foreclosure order. If the court feels there is any chance you can catch up, the court can issue a Redemption Order. The Redemption Order gives you a stated period of time to get current with your mortgage payment.

Usually, the redemption period is six months. You can ask the court to extend the time, and the lender may ask the court to shorten the time. 

The key here is you can stop foreclosure proceedings if you either get current with your mortgage payments or pay off the mortgage during this time frame. 

Remember, everyone wants a win here. The court does not want to see you out on the street, and the lender just wants their money. If the court can find a way for you to stay in your home and the lender to receive their money, the court will take that route.  If a lender can get you to make payments, they will generally choose this option over the foreclosure process. 

It’s in your best interest and the lender’s best interest to come up with a plan that works for both parties. 

This is where bankruptcy can help.

Bankruptcy as a preventative measure

Bankruptcy does not deal with secured debt, so filing bankruptcy itself will not legally stop a foreclosure order. However, a bankruptcy proceeding can work as a proactive decision to eliminate other problem debt and improve your cash flow enough that you can afford to catch up on your mortgage payments.

When you file bankruptcy, you don’t necessarily have to lose your home. If you can keep your mortgage payment current, Canadian bankruptcy law protects you. Rules around bankruptcy and mortgages say that a secured lender such as your mortgage holder may not cancel your loan just because you’ve declared bankruptcy or filed a consumer proposal.

In any bankruptcy proceeding, you do have to deal with any non-exempt equity in your home. For example, in Ontario, if the equity in your home is above $10,000, you will have to arrange to pay the equivalent to your Licensed Insolvency Trustee if you want to keep your house. To make these payments more affordable, you can consider a consumer proposal as an alternative to bankruptcy. Bankruptcy and home equity laws vary by province, so it is important to speak with a Licensed Insolvency Trustee about your situation.

Foreclosure vs Power of Sale

As I noted earlier, in a foreclosure, the lender obtains legal title to the property. This means any profits or equity from the sale, go to the lender. However, the foreclosure process does not give the lender the right to sue for any shortfall. If the home sells for less than the mortgage balance owing, your mortgage lender posts a loss and cannot look to you to recover the difference.

It is because of this inability to sue for a shortfall, combined with a very long and expensive process, that we see very few foreclosures in Canada. Add to that, any borrower with equity in their home will work hard to find a way to bring their mortgage current rather than lose that equity through foreclosure.

What is more common in Canada as a way to collect on mortgage arrears is a process called a power of sale. In a power of sale, the lender goes to court to get permission to evict you from the property and then sell it. They do not own title to your home; instead, the court gives the lender the “power” to sell the property.

The potential financial outcomes for the homeowner in a power of sale vs foreclosure are very different. In a foreclosure proceeding, any “profits” go to the lender, but in a power of sale, if there is money left over after paying the mortgage and costs, it gets returned to the homeowner. Conversely, if there is a shortfall, a lender has no recourse under a foreclosure but does retain the right to sue the borrower in a power of sale.

Foreclosure is rarely used with residential real estate, while a power of sale is more common.

Bankruptcy to deal with mortgage shortfall

When you declare bankruptcy in Canada and are underwater in your mortgage, the difference between the mortgage balance and sale value, or shortfall, is now an unsecured debt. There’s not enough collateral to back it up. In a bankruptcy or consumer proposal where you give up your house, you do not have to pay for the difference between what you owe and what the home is worth. 

Given the real estate market in Canada, most shortfalls involve insured mortgages, which involve high ratio mortgages. In this case, it is generally the mortgage insurer (CMHC or Genworth) that will pursue you.  CMHC is very slow to act; I’ve seen people pursued ten years after the house was sold. However, that does not mean you should rely on this and wait. CMHC is the government, so they can seize tax refunds to get their money.

What are your options if you are behind on your mortgage?

If you have fallen behind on mortgage payments, it’s in your best interest and the lender’s best interest to come up with a plan that works for both parties. Lenders just want their money, and you may just want to keep your home. If you can’t catch up, there are other options to stop or deal with the financial results of foreclosure for mortgage arrears.

Ask for a payment deferral. This was a common occurrence during COVID-19, but mortgage lenders have been granting short term deferrals or mortgage extensions in extenuating circumstances long before the recent economic crisis.

Renegotiate the mortgage. If you have a 15-year amortization, the lender may agree to a loan modification to restructure your mortgage under a 25-year amortization, for example, and include all arrears in the new mortgage. You now have no arrears and a lower monthly mortgage payment because it’s stretched out for a longer time.

Find a new lender. If your lender won’t renegotiate, get a payout figure and consider a new mortgage with another mortgage lender. Be aware that alternative, private mortgages come with a higher interest rate to compensate the lender for the added risk. Refinancing is more viable if you have higher equity in the home.

Sell the house yourself before the bank can foreclose. You may get a better price than your lender, but more importantly, if you expect there to be positive equity after the sale, you want to retain any potential capital gains for your own benefit.

File a consumer proposal and keep your home. If you are struggling with your mortgage payments because of other debt problems, filing a bankruptcy or consumer proposal before foreclosure can help you clean up your finances and make homeownership more sustainable.

Walk away, and let the bank take possession. Sometimes we buy more home than we can afford. And if the value of your home drops below your mortgage balance, you may be better walking away before the foreclosure and letting the bank file an unsecured claim in your bankruptcy or proposal.

If you’re struggling with debt, we can help you explore debt relief options. Bankruptcy is one solution, but it’s not your only solution. 

The post Complete Guide to Bankruptcy and Mortgage Foreclosure appeared first on Hoyes, Michalos & Associates Inc..

How does a mortgage shortfall happen?

If you’re a homeowner and your mortgage is higher than the equity or the market value of your home, you are by definition, underwater. Meaning, if you sold your home today, you are not likely to get the full mortgage paid out by selling. Put another way, you have negative equity in your home.

Canada has full recourse mortgage laws

A theoretical shortfall is not a real shortfall. You don’t have to sell. If you can keep your mortgage payments current, and expect that the market will return before you intend to sell you can hold tight. If you deferred mortgage payments due to the COVID-19 economic shutdown, we explain your options if you are struggling to make mortgage payments post-deferral.

If you are in default your lender will begin proceedings to collect. If you do not respond and cannot catch up on missed mortgage payments, your bank or lender will likely begin proceedings to sell your home through a power of sale.

If you sell with a shortfall, or your bank forecloses, you still owe your mortgage lender any deficiency between the money realized from the sale and the balance owing on your mortgage.

Should you sell your home for less than you borrowed and find yourself unable to repay the shortfall, in Ontario, your lender can pursue you to collect the difference, as they have full recourse:

How do I deal with an unsecured mortgage shortfall?

Like any debt, you are expected to make payments on it. If you are unable to pay back this shortfall, your creditors will pursue legal actions like a wage garnishment. In the case of CMHC, while it may take some time, they can also seize your tax refunds.

In Ontario, any mortgage shortfall after the sale of your home becomes an unsecured debt. Initially, your mortgage lender was a secured creditor. However, because the security, your home, has been sold, there is no longer any asset attached to the debt, and they are now an unsecured creditor.

If your mortgage was subject to insurance because you had a low down payment, your first step might be to draw on your CMHC Insurance. In this case, CMHC pays your original lender. However you still owe the debt, it’s just that now CMHC is your creditor.

The good news is you have options to deal with mortgage shortfall debt:

1. Make a settlement offer through a consumer proposal,
2. File for bankruptcy to eliminate what you owe faster and get a fresh start.

The best place to start is to speak with a licensed debt professional about your relief options.

I think the big mythbuster here is that if you have a shortfall on a house that someone’s pursuing you for, a consumer proposal or a personal bankruptcy actually takes care of that. And that’s where I think a lot of people are pretty surprised about Canada’s legislation around this stuff.

For a more detailed look at how to deal with mortgage shortfalls and how lenders can pursue you to recover a mortgage shortfall in Canada, tune in to today’s podcast or read the complete transcription below.

Links and Resources

• Advice for Tenants Renting a Property
• A Balanced Look at the Real Estate Market
• How Canadians Could Walk Away From Their Homes – Maclean’s Article by Scott Terrio
• Debt Free in 30 YouTube Channel
• Debt Free in 30 on iTunes
• Debt Free in 30 on Spotify

FULL TRANSCRIPT Show 212:  Walking Away From A Mortgage in Canada

Doug Hoyes:    What happens if you buy a house and take out a mortgage and then can’t pay the mortgage? Can you just walk away from your house? That’s the question on today’s episode of Debt Free in 30 and to answer that question I’m joined by Scott Terrio, manager of consumer insolvency here at Hoyes Michalos. Scott, welcome back to the show. Are you ready to talk real estate?

Scott Terrio:      Yes, it’s the subject that everybody talks about in Toronto.

Doug Hoyes:    Well, and that’s where we are today in our office here at Yonge and King in Toronto. It’s the start of the fall of 2018 and the reason we’re recording this in Toronto is, as you say, that’s the big topic of conversation at every event you go to. It doesn’t even have to be an event; if you’re standing there waiting for the subway then people are talking about real estate.

Scott Terrio:      Pretty much, yeah.

Doug Hoyes:    So, what are you seeing in the real estate market right now?

Scott Terrio:      Well, of course we’re not real estate experts so you’d have to speak to somebody like a Ben Rabidoux or a Scott Ingram if you wanted to get precise numbers on this kind of stuff but, from the people I talk to and from what I see in my neighbourhood, prices seem to be still pretty strong. Condos are strong. There’s been some weakness in some detached homes especially in the outlying areas of the city; 905 etc. But prices are still a lot higher than they were a few years ago so . . .

Doug Hoyes:    Yeah, you compare it to a few years ago and it’s a no-brainer. And I think that’s what we see in our Hoyes Michalos homeowners bankruptcy index as well where we track how many people are filing a bankruptcy or a consumer proposal with us and they own a home at the time they file. That index peaked at around 35% back in February of 2011, which meant that 7.5 years ago more than a third of our clients owned a home at the time they filed bankruptcy or consumer proposal.

Scott Terrio:      Right.

Doug Hoyes:    For most of 2018 that index has been fluctuating between about 4% and 7% and those are by far the lowest levels we’ve seen since we started tracking this in 2007. So, what does that tell you?

Scott Terrio:      Well, in a nutshell, people who own homes aren’t going bankrupt.

Doug Hoyes:    It’s pretty much that simple.

Scott Terrio:      That’s pretty much it. I mean we do get people filing bankruptcies who own homes but it’s pretty few and far between because most of those people would opt to do a proposal. But, as you said, I mean if you’ve – part of the effect of this consumer debt trend has been kicking the can down the road and if you own a home, you’re able to do that more likely than people who aren’t for example, right? That’s people who last out longer.

Doug Hoyes:    Yeah, I think that’s exactly right and we also know from our Joe Debtor study that of the small percentage of homeowners who do end up becoming insolvent, they have more unsecured debt than non-homeowners. So our average client – I’m just going to give you rough numbers because of course they change over time – but our average client has about $50,000 worth of unsecured debt. But if you’re a homeowner, who gets into such serious financial trouble that you have to do a bankruptcy or consumer proposal, they’ve got over $70 000 of unsecured debt. Things like credit cards, bank loans, that sort of thing.

Scott Terrio:      Yeah.

Doug Hoyes:    So, why is that?

Scott Terrio:      Yeah, this is probably the thing that amazes people the most out of all the things that people like you and I tell people. It’s because if you own a home you’re more credit worthy; generally speaking. There’s more to it than that but, you know, there are more expenses, you have to have more stuff or you think you have to have more stuff and so that 20 or $25 000 difference is pretty significant, I always think. I mean it doesn’t mean that renters are any more careful with their money or homeowners aren’t, it’s just that when you have a house there’s all this other, you know, the trappings and the credit worthiness and it tends to be what we see, isn’t it? You know, you have a house and, you know what, if you’re rolling in here with $50 000 in debt as a renter, you’re probably going to have 70 or 80 as a homeowner.

Doug Hoyes:    It’s pretty much that simple. So okay, let’s talk about what it means to be underwater. This is the slang term; underwater. What does underwater mean?

Scott Terrio:      Yeah. So underwater is simply math. It’s when you’re a homeowner and your mortgage is higher than the equity or the market value of your home. So, let’s give an example; you bought at the peak in April or May of 2017 and, you know, you bought a condo or a house for let’s say a million dollars. Just by virtue of the flattening of the market, you might be at 900 000 now as far as what you would list your house at, so you’re underwater by 100 000. It doesn’t mean anything, you don’t have to sell. I think people get worked up when you tell them they’re underwater because they think “Well, I can’t lose my house.” But you don’t have to, right? You’re just not going to get the full mortgage paid out by selling the house.

Doug Hoyes:    Well, so let’s go through this whole process then. So let’s assume, using your example, I bought a house at the peak; May of 2017 which was pretty close to the peak – April, May. I had a 5% down payment, because why not, right?

Scott Terrio:      Yeah. Why wouldn’t you.

Doug Hoyes:    And here we are, you know, a year and a half later and I’ve got a great job offer in another city so I’m going to pick up and I’m going to move. I’m going to sell my house. But, the price of my house – because let’s say I bought a detached house and it’s down 10% from what I bought it which is not totally crazy from what we’re seeing at the moment.

Scott Terrio:      No, it certainly isn’t.

Doug Hoyes:    So when I pay the real estate commissions to sell the house and, you know, penalties to break the mortgage, whatever, I won’t get enough to pay off the mortgage.

Scott Terrio:      Right. That’s underwater. That’s exactly what underwater means.

Doug Hoyes:    So, what are my options as I sit there today with an underwater house?

Scott Terrio:      Well okay, so if you’re going to sell the house and move, you know, there’s going to be a shortfall, right?

Doug Hoyes:    Hm-mm.

Scott Terrio:      You’re not going to have enough to pay the mortgage. Unless you’ve got that other amount somewhere to pay that lender off, that is now something that – or it’s an amount that they’re going to come after you for potentially if you didn’t pay it.

Doug Hoyes:    So option number 1; sell the house –

Scott Terrio:      Sell the house.

Doug Hoyes:    But the problem is, let’s say that I’m going to be $50 000 short after paying the mortgage, real estate commissions, whatever.

Scott Terrio:      Yeah.

Doug Hoyes:    So option number 1 is I say to the mortgage holder “No problem, I’ve got 50 000 bucks in my pocket so I’ll just kick in the 50 000 that allows the house to sell.

Scott Terrio:      Right.

Doug Hoyes:    Okay, most people probably don’t have 50 000 in their pocket. If they did, they probably would’ve had a bigger down payment to start with.

Scott Terrio:      Right. Yeah.

Doug Hoyes:    So, let’s assume that’s not possible.

Scott Terrio:      Hm-mm.

Doug Hoyes:    Okay, so I’m faced with selling the house, I’m underwater, I don’t have the money to make it whole; what are my other options?

Scott Terrio:      Okay, so – and this is where a lot of our information in Canada, or misinformation I should say, comes from our neighbours to the south. I mean, the U.S. is, you know, is all over us in terms of media presence etc. So, when the 2008 crisis hit in the States, mostly in the south, but it was all over the place, people were walking away from their houses because there was no recourse. So they said “Okay” – the term was Jingle Mail.

Doug Hoyes:    Jingle Mail?

Scott Terrio:      Yes.

Doug Hoyes:    So what is Jingle Mail?

Scott Terrio:      That’s where you put your keys in an envelope and you mail it to the lender and say “Guys I’m out of here. Have fun, sell the house for what you can and so I owe you 300 000. See you later, you can’t come after me.” I’m not sure anybody actually did that but it’s a great little term.

Doug Hoyes:    Yeah, Jingle Mail. Keys are jingling in the envelope there.

Scott Terrio:      Yeah. But that was pretty widespread. You know, there were states where that was happening like a lot in certain neighbourhoods. So that’s not the way things work here.

Doug Hoyes:    So you mentioned the term ‘recourse’.

Scott Terrio:      Right.

Doug Hoyes:    So explain recourse, full recourse, non-recourse.

Scott Terrio:      Yeah, I brushed over that technicality.

Doug Hoyes:    I knew you didn’t want to explain that hard word so tell us what recourse means.

Scott Terrio:      So, recourse means that a lender can pursue you if your house is underwater and you sold your house and there’s a shortfall of 100 000 or so. So your example, I don’t know, it was a million and you’re at 900 000 you sold it for – so there’s a 100 000 missing essentially. The lender’s out a 100 000. So they can come after you legally for that debt in Canada, okay? In the States they can’t. It’s different provincial rules.

Doug Hoyes:    Right. So in Ontario we have full recourse meaning if there’s a shortfall, you’re on the hook for it. In the U.S. in certain states – and we’re not U.S. experts, we’re not going to go through every 50 states – but there are many states where the bank has no recourse.

Scott Terrio:      No.

Doug Hoyes:    Which means you walk away from your house, they can’t sue you for the shortfall.

Scott Terrio:      Yeah.

Doug Hoyes:    Not the case here in Ontario though.

Scott Terrio:      No.

Doug Hoyes:    They have full recourse.

Scott Terrio:      Yeah.

Doug Hoyes:    So, if I can’t make the payments on my mortgage and I say to the bank “Here you go, here’s the keys, I’ll put them in an envelope so they jingle. Here’s the keys.” The bank sells the house, there’s a $100 000 shortfall, they’re coming after me for it.

Scott Terrio:      Yeah, the lender has the option in that case. That’s enough of a debt. They probably will do that and they have their lawyer take the motion to court and file a suit against you and come after you for the shortfall.

Doug Hoyes:    So let’s go through that process then; so I’ve decided that I can’t make the payments. So I miss my first mortgage payment. I’ve been up to date for the last year, I miss my first payment – is anything going to happen the next day?

Scott Terrio:      No.

Doug Hoyes:    It doesn’t happen that way.

Scott Terrio:      No, the banks aren’t coming after people for one missed payment. If you’ve been current for a long time – maybe if you’ve missed some in the past couple of years and they’re a little nervous about you, they get you a red flag then they might send you a letter and say “Hey look, you know what –”. I mean they have to let you know if they’re going to take action against you anyway. There’s a notice period and whatever.

Doug Hoyes:    So the first payment you miss, you know, maybe you get a letter, maybe you get a phone call “Hey, what happened? It never happened before. Maybe you just – ”

Scott Terrio:      Yeah, they’re not selling your house right away and they have to let you know even if they did anyway. But that’s not how it works. So I mean you’ve got – you’ve probably got a payment you can miss as long as you make it up, realistically. I think, you know, where you’re starting to miss two payments, maybe three, then you need to be pretty concerned. Banks aren’t going to let that go for any much longer than a couple of payments I would think. Just generally speaking.

Doug Hoyes:    And we’re speaking in general terms. In my experience, chartered banks are different than alternative lenders.

Scott Terrio:      Right.

Doug Hoyes:    You know, Joe, the mortgage dude, probably has a much shorter timeframe when he’s going to be taking action than a big bank.

Scott Terrio:      Yeah.

Doug Hoyes:    And obviously it also depends on what’s happening in the economy. If house prices are still going up, okay the bank can afford to wait a little extra time because the price is probably going up.

Scott Terrio:      Yeah.

Doug Hoyes:    But if things turn the other way then all of a sudden the banks are a little more nervous.

Scott Terrio:      Yeah and that trickles down as you said. So if the banks are getting nervous, certainly the secondary lenders are getting nervous and then the private lenders are probably not going to give you much time at all because they’re going to be really concerned about their investment, right?

Doug Hoyes:    So from a point of a view of the process then – so let’s say a certain period of time has elapsed; three months, six months, whatever it is. You haven’t made any payments. So the lender is then going to do what?

Scott Terrio:      Well, the lender is going to get in touch with you somehow – letter. It will have to be a paper trail, e-mail, whatever. Probably there’ll be a lawyer involved, that lender’s legal representative. So it will come on a lawyer’s letterhead maybe with bank copied or whatever, and it’s going to tell you, you know, you have certain, you know, a certain time period to remedy this, right? “Pay this, pay the following, get yourself up to date, we won’t do anything.” Or else in there will be the, you know, “We’re going to take your house and sell it by a power of sale.” That’s where you’re getting into the legal stuff and that’s where you need to be – you’re going to lose your house next. That’s the step that if you don’t remedy this now, X follows beyond it, yeah.

Doug Hoyes:    Yeah, and again, we’re not lawyers so we’re not going to go through the whole legal process but that’s about it. You’re going to get a letter, probably registered mail, something like that saying “We are going to take action.” They have to give you adequate notice –

Scott Terrio:      Yeah.

Doug Hoyes:    And so in my experience, yeah, you’re going to know months in advance of them coming to change the locks.

Scott Terrio:      Yeah. Well you’re going to know you didn’t pay them for three months. It’s not going to come as a massive shock but when you get that letter you need to do something, yeah.

Doug Hoyes:    Yeah, so at some point then the bank can start the foreclosure proceedings which means they go through a bunch of stuff, there’s paperwork they have to file, you know, this that and the other thing, but ultimately, it’s now their house.

Scott Terrio:      Yeah.

Doug Hoyes:    Well, I shouldn’t say that – they now have the power to sell the house which is why it’s called power of sale. They have the power to sell the house. They sell it and obviously they’ve had you removed from the house before that. You’re probably going to leave anyways. And if there’s a shortfall, at that point they’re coming after you for it.

Scott Terrio:      Right, and that’s where it goes from, you know, mortgages are secured, car loans are secured, and that’s where some of the terminology in here gets confusing for people so I’ll just kind of try and clarify that. When they sell the house and there is a shortfall, that shortfall of 100 000 or whatever, that is now unsecured. Because they’ve sold the security, they haven’t covered the entire amount owing and the 100 000 is the difference. So the shortfall is now unsecured debts just like credit cards, lines of credit, etc. and that’s why they’re coming after you in the court.

Doug Hoyes:    Yeah, and so secured means it’s attached to something. Obviously a mortgaged is secured; it’s attached to the house, but as soon as the house isn’t there –

Scott Terrio:      They will liquidate the house so . . .

Doug Hoyes:    It’s unsecured at that point.

Scott Terrio:      Yeah, the rest, they’re out of luck, yeah.

Doug Hoyes:    Now the complicating factor in a lot of these things is that the mortgage is insured often by CMHC; Canada Mortgage and Housing Corporation.

Scott Terrio:      First thing people ask.

Doug Hoyes:    Right. So, the bank – let’s say I’m dealing with a conventional bank – they decide to sell the house. They sell it, they go through the whole legal foreclosure proceedings. There’s a shortfall. They will then draw on their CMHC insurance to cover that shortfall, right? In most cases.

Scott Terrio:      Hm-mm.

Doug Hoyes:    So it won’t be the bank necessarily pursuing you for the shortfall, it will be CMHC.

Scott Terrio:      Ultimately.

Doug Hoyes:    Ultimately.

Scott Terrio:      Yeah, ultimately it’s CMHC that’s going to be out in that scenario. That’s right. As the insurer, yeah.

Doug Hoyes:    Yes, as the insurer. Now in my experience, it takes CMHC a long time to pursue people and in fact, I have seen cases, many cases – this isn’t an isolated thing – many cases where it’s been ten years later.

Scott Terrio:      Yeah, I’ve seen some long ones, yeah.

Doug Hoyes:    So, does that mean you can just wait for ten years?

Scott Terrio:      Well, you can. I guess it depends what happens in the meantime. I mean is there interest attached to that? Like is it growing? Does it stay static?

Doug Hoyes:    Well and with CMHC, they are a division of the federal government and so, in my experience, they will start taking your tax refund.

Scott Terrio:      Yeah, and there’s lots that they can probably do, right? Whereas, you know, a bank or something, they only go take you to court for the exact amount and etc etc, according to whatever the agreement was. You know, CMHC is a government body as you said so therefore, I mean, they could probably, you know, lean on CRA a little bit and say “Okay, well what’s this person got? Are they a wage earner? Like could we garnish wages? What can we do to make ourselves as the tax payer whole?” right.

Doug Hoyes:    Yeah and CMHC can’t just start garnishing your wages, obviously they have to go through the court process like any other creditor. But yes, if you’re getting tax refunds every year, it’s very common and very easy actually for them to starting seizing that.

Scott Terrio:      Yeah, that’s the easiest way because they just don’t give it back to you, right? Or they don’t have to go get it, they just say “Okay, well here’s your $3 000 tax refund for this year. Sorry, you’re not getting that because you still owe us 50 000 over here for the shortfall of the house.

Doug Hoyes:    Now if the mortgage holder or if the insurer has gone to court and got a judgement against you and done the whole foreclosure proceedings, there is no time limit on that judgement.

Scott Terrio:      That is . . .

Doug Hoyes:    So if they’ve got a judgement, it’s not like well they’ve got to start collecting in a year. It can sit there for practically forever.

Scott Terrio:      Yes, it can. Now you are also in – basically, if you’ve gone through the statement of claim, the judgement and the execution of the three stages, the execution being “Okay, well what are they going to do?” right. So, you know, can they garnish your wages, can they freeze your bank account, can they . . . whatever, attach to some kind of an asset that has value. So now you’re in the legal process up to your neck at that point because that’s – they’ve gone the full distance in the court, right? So that can sit there, yes. Probably not going to because they’re going to want to make themselves whole so you’re going to be looking at a wage garnishment almost certainly, as long as –

Doug Hoyes:    They want their money.

Scott Terrio:      Yeah.

Doug Hoyes:    Okay. So, what do I do if I’m in that situation then? I was not able to keep my house – and again, this is not a situation that we have seen recently. Anybody who bought a house in the last five years, it’s probably worth more than what you paid for it. So even if you couldn’t pay the mortgage, well you just sell it yourself. I think as we go through the thought process, if you can sell it yourself and recover enough to pay off the mortgage, that’s what you’re going to do.

Scott Terrio:      Don’t need us.

Doug Hoyes:    Yeah. And why would you let the bank sell it because of course, in a power of sale, they’re getting less money than what you would get if you sold it yourself. That just is common sense, right?

Scott Terrio:      Yeah.

Doug Hoyes:    If the sign says power of sale and I’m buying the house, well I know that perhaps it hasn’t been fully maintained, there’s probably problems, so I’m paying less than market value.

Scott Terrio:      Red flag.

Doug Hoyes:    Red flag.

Scott Terrio:      Yeah.

Doug Hoyes:    So you would try to sell it yourself first. If I can’t sell it myself, because it’s underwater, the bank sells it and now someone; the bank, the mortgage lender, CMHC, whatever, is pursuing me for the shortfall. What are my options at that point?

Scott Terrio:      Right. So, the first thing I’m going to tell anybody of course, is you call Doug or you call Scott. You talk to a licensed trustee and you say “What can I do about this.” Because, as I mentioned, that is now an unsecured debt. So licensed trustees who file personal bankruptcies and consumer proposals for people, deal with unsecured debts. So I think the big myth buster here is that if you have a shortfall on a house that someone’s pursuing you for, a consumer proposal or a personal bankruptcy actually takes care of that. And that’s where I think a lot of people are pretty surprised about Canada’s legislation around this stuff is that you can actually put that – like in other words you can get rid of that by virtue of filing it. It’s included in your bankruptcy or your consumer proposal. And usually these shortfalls, like they’re significant, right? It’s not – nobody has $2 000 shortfall on their house.

Doug Hoyes:    It’s not a thousand bucks.

Scott Terrio:      It’s like 50, 100, 150. I’ve had a guy that I signed not too long ago who had two properties out west. He was well over 400 000 on these two rental properties when the Alberta market went south. So, you know, it can add up in a hurry and most people can’t even dream of paying the amount that they owe, right?

Doug Hoyes:    And it’s a valid point because we’re seeing, when it comes to real estate shortfalls, it’s very common that it was somebody who went out to a place like Alberta, worked in the oil patch, whatever, bought a house in Fort McMurray, whatever, and now they’re back here because, you know, the work is here. And so many people, also in Toronto, have gotten into the investment property thing as well, right?

Scott Terrio:      Hm-mm. So now you’ve got a house “But I’ve also got this rental property” and if you’ve got two of those and everything goes south on you, you know, you’re looking at six figures in a hurry, right, of a shortfall.

Doug Hoyes:    Well, that’s one of the reasons we’re recording this podcast now is that it isn’t a problem for most people today here in the fall of 2018 but, if you do have a couple of rental properties, because why not, you know –

Scott Terrio:      With 5%. Why wouldn’t you?

Doug Hoyes:    Well it’s been a brilliant strategy for the last 10 or 15 years.

Scott Terrio:      Yeah.

Doug Hoyes:    You buy a condo in pre-construction. By the time it’s built, it’s worth a few hundred thousand more than what you paid for it. You rent it out, rents are high in this city as in most places in Ontario. It’s covering or almost covering the mortgage but even if it isn’t, who cares.

Scott Terrio:      You just made 200.

Doug Hoyes:    Yeah, the prices are going up.

Scott Terrio:      For a bunch of paperwork.

Doug Hoyes:    I mean, as we know, you and I both know Rachelle Berube, the landlord rescue lady, who has been on this podcast, and she said on this podcast that the vast majority of rental landlords that she deals with have a cash flow negative position every month. Meaning okay, the rent is 2 500 bucks a month “Great, that’s fantastic” but it’s costing 3 000 to pay the mortgage and everything. So I think in 2019, maybe it’s 2020, we can, you know, look back in time and see, we will get a bunch of people in here who had a rental property underwater, couldn’t sell it –

Scott Terrio:      Yeah, this is going to be a thing.

Doug Hoyes:    It’s going to be a thing –

Scott Terrio:      It’s not yet but it’s going to be.

Doug Hoyes:    And I’ve been saying that for years. I get it. Okay, you know, I’ve been wrong for a while. I didn’t think the real estate market could keep going up and up and up and up. But mathematically, it cannot go up forever.

Scott Terrio:      No.

Doug Hoyes:    So, you’re in a situation where you’ve got 50, 100 000 whatever. Whatever the number is, and you made the clear distinction. It is an unsecured debt at that point.

Scott Terrio:      Yes.

Doug Hoyes:    So mortgages don’t go away if you go bankrupt, if you’re keeping the house, because it’s a secured debt.

Scott Terrio:      Yeah.

Doug Hoyes:    But if it’s an unsecured debt, then you can file a bankruptcy or you can file a consumer proposal. Now with a consumer proposal there’s a dollar value limit on your unsecured debts.

Scott Terrio:      Right.

Doug Hoyes:    How much?

Scott Terrio:      250 000.

Doug Hoyes:    So if I have, like in the example you gave of this guy from out west who had $400 000 in shortfalls, he couldn’t file a consumer proposal.

Scott Terrio:      No, he’d be into a different proposal, division 1 proposal, a consumer proposal’s division 2 without a big lecture on bankruptcy and proposal 101’s your . . . So he’d be into a bigger, more expensive, more complicated proposal in that case.

Doug Hoyes:    But it is doable so –

Scott Terrio:      Yeah.

Doug Hoyes:    So I guess if you have $250 000 or less worth of unsecured debt, a consumer proposal makes sense potentially. If you’ve got more than that then you write more complicated procedure, you’ve got to do it under division 1.

Scott Terrio:      Yes, and it also includes all of your debts. So if you’ve got 250 or 49.9 of your shortfall, it’s also your credit card debt, your taxes owing, lines of credit; so then you’re over 250 already too, right?

Doug Hoyes:    All unsecured, yeah.

Scott Terrio:      So it’s just, you know, when you’re filing with a trustee it’s aggregate unsecured debt. So the good thing is it’s all gone by virtue of the proposal of the bankruptcy but now you’re pushing your limit, right? Because most people, as you said earlier, was it 74 000 in unsecured, other consumer debt, right?

Doug Hoyes:    Yeah.

Scott Terrio:      So if you’ve got 200 in your shortfall and as a homeowner what we see is, you’ll probably get another 74 000 in other debts, so now you’re 274 and you’re probably into a different proposal, yeah.

Doug Hoyes:    And I guess – you made the point earlier – if you’re in that situation you’ve got to come in and talk to a licensed insolvency trustee because there’s all these little tricks. Okay, well if it’s over this now – and again, you’re right – we’re not going to get into all the minutia of it here –

Scott Terrio:      Right, but you’ve got to talk to your trustee. You’ve got to talk to somebody and you’re better to do it sooner because in our experience as well, you’ve done more of these than I have, almost everybody that I’ve ever filed has said “I should have come in 12 to 24 months ago.” Because human nature, you know, you keep doing your best, you keep pushing things out and debt never gets better with time.

Doug Hoyes:    Compounding goes backwards and forwards unfortunately. It’s good or bad things.

Scott Terrio:      So get in, talk to your trustee and learn your options, right?

Doug Hoyes:    And so the options may be a consumer proposal, may be a division 1 proposal, may be a bankruptcy, depending on what your situation is.

Scott Terrio:      Yeah because either one gets rid of all the unsecured debt. So everything is – it isn’t that bankruptcy does it more than a proposal, they just do it differently, right? Because I get a lot of people saying “Well, I just want to get rid of my debt.” Okay well, that shouldn’t be the deciding factor of whether you do a bankruptcy or a proposal, right? It’s the mechanism and what makes more sense for you because they’re very different filings accomplishing the exact same thing.

Doug Hoyes:    So if you had to look forward to 2019, 2020, and of course, we don’t know what the real estate market’s going to do. If we did we’d be speculators and we’d be, you know, buying and selling apartment buildings and all the rest of it. But is it likely to assume that there will be people overextended and we will see a bump in either consumer proposals, division 1 proposals or bankruptcies.

Scott Terrio:      Yeah, I think at some point. I mean the insolvency cycle alone has been low for so long that, you know, eventually things have to shake out. It’s like any other kind of nature system, right? I mean there’s a ton of consumer debt right now, there’s been a lot of real estate speculation, a lot of which has been done by people who don’t really know what they’re doing. They got into it, you know, the fear of missing out, you know. I get that because when I have people in here who are making what I consider to be pretty marginal monthly income and they’ve got a rental property and they can’t immediately, when you ask them some basic questions, they can’t tell you “Are you joined with anybody on there?” Well they don’t know what that means. “Okay, so you don’t really know – if you don’t know that, there’s probably other things you don’t know about what you were doing there.” Then they start mentioning cryptocurrency accounts and stuff. So you get a little worried about “Okay, I think maybe you’re in over your head here a bit.”

So I think there’s an echelon of consumers out there who are in that category of, you know, they’re making okay income but if they lost that tenant in that condo that they have rented out, you know, could they go a month? Could they cover it? Probably not. Not with that income and they have no savings. So I think there’s a whole group of people here who are going to maybe not necessarily – we’re not talking a catastrophe here but we’re talking about people who are very vulnerable in a monthly sense, right?

Doug Hoyes:    That’s a critical point about the monthly payments. “So, as long as the tenant is there paying, I can barely squeak by. Maybe I can kick in a couple of hundred bucks.”

Scott Terrio:      Or as Rachelle will tell you, probably underwater by 500 bucks a month on your cash flow –

Doug Hoyes:    “But I’ve got 500 bucks I can kick in from my job” or whatever.

Scott Terrio:      “Not from my job or whatever.” As long as everything stays the same.

Doug Hoyes:    But when a tenant leaves, can you put another tenant in the first day of the next month or is there a month or two period where you’ve got to repaint the place, clean it up, whatever, find a new tenant.

Scott Terrio:      Yeah, and if you’re not a professional landlord, and those people aren’t, you know, that stuff is hard to do, right? You don’t just go get somebody. You’ve got to screen people, you’ve got to, you know, you’ve got to get the thing out in the public, right? So a month maybe they can cover. Two months, probably not.

Doug Hoyes:    Yeah, and now you’re playing catch up from there.

Scott Terrio:      Yeah and then it just probably snowballs after that. So there’s going to be that group before there’s any real estate devastation, right?

Doug Hoyes:    Yeah, that’s a good point. It might be the one off landlords who end up getting it, yeah.

Scott Terrio:      Yeah, I think there’s quite a few of those out there from what I’ve heard.

Doug Hoyes:    Getting into trouble. Excellent. Well, on that depressing note, I think that’s a good place to end it.

Scott Terrio:      But there’s help available.

Doug Hoyes:    There is. There is and I think that’s really the point and I think, you know, as Scott had said, and thanks for being here today Scott. Here’s the summary; If you can’t keep up with your mortgage payments on your house, well consider selling it. It’s pretty much as simple as that. If you can sell it, pay the real estate commissions and other selling costs and get enough to pay to off the mortgage . . . boom.

Scott Terrio:      That’s often the best option.

Doug Hoyes:    If you can’t sell it for enough to cover the costs, you can talk to the lender to see if there’s some kind of deal that can be made. ‘Okay well, if I sell it and there’s going to be 10 or 20 000 owing can I convert that to a loan, pay it off over time.

Scott Terrio:      Probably, yeah. That’s . . . yeah.

Doug Hoyes:    It might work. But, if you’re into, as you said –

Scott Terrio:      50 or 100 or more.

Doug Hoyes:    Yeah a bigger number and you’ve got all these other unsecured debts as well, then walking away from the house or surrendering it back to the bank, may be your best option. And, as you said, you can’t just walk away from a house like you can in some parts of the United States, you are liable for whatever the mortgage shortfall is unless you pay it or file a consumer proposal or a bankruptcy. As I said at the start, insolvencies due to real estate are not a big issue at the moment but your point about landlords with cash flow problems might become a big thing and obviously if the real estate market does soften, if interest rates continue to go up, it could be –

Scott Terrio:      Yeah, a broader macro issues as Ben would say.

Doug Hoyes:    That’s right.

Scott Terrio:      But yeah, it’s going to be, you know, there’s going to be people that get hurt sooner by no real estate catastrophe other than just, you know, their stuff’s going wrong, right? Tenant didn’t pay them this month. Okay, now you’ve got to come up with that payment. Or just something as minor as that can often push people over their financial edge, right?

Doug Hoyes:    Yeah, and I think the people who bought a house recently, like in 2016, 2017, those are the ones who are more vulnerable than someone who bought it 10 years ago.

Scott Terrio:      Yeah 14, 15, 12, 13 they’re probably okay.

Doug Hoyes:    Unless of course they’ve been refinancing all the way along in which case we’ve got another thing to worry about.

Scott Terrio:      Another podcast.

Doug Hoyes:    Exactly. That will be another podcast but that will wrap it up for today. That is our show for today. Full show notes are available at hoyes.com and there’s also a full transcript there of everything we talked about and new, for season number 5, we’re posting most of our videos on YouTube. So if you want to watch as well as listen and, you know, see what Scott and I look –

Scott Terrio:      Why wouldn’t you?

Doug Hoyes:    Yeah, why wouldn’t you. Then head over to YouTube. We’ll see if the video actually recorded for this one.

Scott Terrio:      Don’t watch in the car, just listen.

Doug Hoyes:    That’s right, just listen.

Scott Terrio:      Just audio only in the car.

Doug Hoyes:    You can subscribe to the Debt Free in 30 channel or just go to the show notes for a link to this video. And of course, you can subscribe to this podcast on iTunes, Apple Podcast, Google Play, Stitcher and most podcast apps. So, until next week, for Scott Terrio, thanks for listening. I’m Doug Hoyes. That was Debt Free in 30.

The post Walking Away From A Mortgage in Canada appeared first on Hoyes, Michalos & Associates Inc..

Home equity debt consolidation

There are four ways to use your home equity to pay off debt:

1. Refinancing is where you approach your current mortgage lender and ask to roll your consumer debt into your first mortgage.
2. A home equity line of credit, HELOC, is a secured line of credit where the bank gives you a certain fixed credit limit you can draw money against to pay down unsecured debt.
3. A second mortgage, or home equity loan, is a personal loan secured against your house with an amortization like any mortgage. With a second mortgage, you receive a lump sum of money to be used to pay off outstanding credit card debts, payday loans, overdue bills and other debts.
4. A consumer proposal is a program that allows Canadians who are not able to repay their debts as they come due to make a repayment proposal to their creditors.

Below I’ll explain how each debt consolidation option works and some pros and cons of each solution.

Refinancing your mortgage

The maximum amount you can refinance with a first mortgage is 80% of the appraised value of your home. When you refinance to pay down consumer debt, you replace your current mortgage with a new mortgage with new terms. Your lender typically gives you a cash lump sum which you use to pay off your credit card debt.

The advantage will be one monthly payment; however, you need to be sure that refinancing will improve your cash flow. A higher principal balance will likely translate into a higher monthly mortgage payment. However, this can be offset by not having to make payments on your credit cards. Those payments may not be lower than what you are paying today, especially if you were only making minimum payments.

If interest rates have fallen since you signed your last mortgage, you may save money there, however, you may also be charged a penalty for breaking your existing mortgage contract early and possibly appraisal fees and legal costs.

Your monthly payments will be based on the amortization period you choose. A longer term means lower payments, but it also means paying more interest over time.

Home equity line of credit

To avoid pre-payment penalties with changing the terms of your existing mortgage, you can consider consolidating debt with a home equity line of credit. A HELOC is a stand-alone line of credit secured against your home’s equity.

The maximum loan-to-value ratio for a line of credit is 65% of your home’s value. This means you need much more equity in your home to qualify for a home equity line of credit.

A home equity line has the advantage of providing a revolving line. This means you can borrow and repay as often as you need, and the credit limit remains in place as long as you are making your minimum payments.

Home equity lines of credit charge variable interest rates. The best borrowers will qualify for rates just above prime; however, if you have bad credit, you be charged a higher mortgage rate, assuming you are eligible. Home equity loan rates are usually higher than first mortgage rates but lower than those charged on credit cards.

The advantage of a home equity line is low mandatory monthly payments. Many HELOCs require only interest payments or interest plus 1% or 2% of the principal balance. This is likely much better than payments you are making on your current debt; however, if all you are paying is interest, you are not paying down your debt.

Second mortgage home equity loan

If you can’t refinance with your current lender, another option is to get a second mortgage using your home’s equity. You can borrow up to 90% of the market value of your home with a second mortgage. However, if you are using a higher-ratio mortgage and because second mortgages sit behind the first mortgage lender when it comes to payout in the event of default, interest rates are much higher on second mortgages. Even a traditional lender will charge between 3% and 10%, depending on your credit.

The advantage of a second mortgage is no breakage penalties as with refinancing, but higher interest rates can offset these savings.

Can you qualify for a home equity loan?

You must meet all required lender qualifications to be approved for any home equity loan:

• Your loan-to-value ratio must not be above 80% for a first mortgage, 65% for a HELOC, and up to 90% for a second mortgage or private mortgage.
• Your debt service ratios must be within allowable limits. Most lenders require your housing costs plus other debt payments as a percentage of your gross income to be no more than 43%.
• You must meet the mortgage stress test to prove you can afford the payments even if interest rates rise.
• You will need to have a reasonably good credit score. The lower your credit score, the less options you have and the higher your interest rate will be.

Second-tier lenders can be expensive

If you can’t access your equity through a traditional mortgage or lender, you could consider a second-tier mortgage lender. There is a vast secondary mortgage market in Canada, funded by private investors. However, second-tier private mortgages can be very expensive. You may discover that the monthly payment remains so high that it does not solve your cash flow problems. If you can’t afford to keep up with the payments over the long run, you could end up defaulting on your new second mortgage. This will only make your situation worse, further dragging down your credit score and potentially risking your home to foreclosure.

What is a 100% consumer proposal?

We are increasingly receiving calls from people in this exact scenario.  Caught between a rock and a hard place, they don’t want to lose their home, yet they can’t access their equity through a mortgage lender to deal with their debt. In these cases, we can present a consumer proposal as a viable alternative.

A consumer proposal is not a loan. It is a negotiated repayment plan with your creditors.

In this type of situation, your consumer proposal won’t be a ‘deal’. You won’t be able to settle your debts for less than you owe because you have enough equity in your home to cover all your debts. You just can’t get at this equity cost-effectively.

What you can do is make an offer through a proposal to repay 100% of your debts over up to 5 years.  Certain aggressive creditors, if they make up the majority of your debts, may also ask you to pay a little more to cover government filing levies, credit counselling and trustee fees deducted from their payments. However, the proposal once agreed to, is interest free.

Let’s look at a typical example.

Jonas owes $50,000 in credit card debts, a payday loan and some taxes owing to the Canada Revenue Agency. He has $65,000 equity in his home but has poor credit, so he cannot qualify for a home equity loan.

Since he has more equity in his home than the total of his unsecured debt, his creditors will expect to get paid in full, so he must propose to pay at least $50,000 to his creditors. With a five-year proposal that works out to $835 a month over 60 months. This is much less than the minimum payments on his unsecured debt which might range from $1,200 to $2,000 depending on the type of debt he carries. Additionally, with a proposal Jonas will be debt free in five years.

If his creditors ask for his proposal to cover trustee fees, he may have to offer more. How much more depends on how much equity you have and your income. the effective cost and total amount of money you pay is still much less than what you would pay with a high-ratio second mortgage.

Refinancing debt through a consumer proposal is not for everyone. It is a good option if:

• You have problems with your credit report due to late debt payments.
• Your unsecured debt plus your current mortgage would exceed 90% of your home equity.
• You have a low credit score which may result in an interest rate so high you are not saving money.
• You do not have enough income or job security to support your monthly mortgage payments.

There are four key advantages of using the equity in your home to make a consumer proposal plan:

• You keep your home
• Payments are interest free
• You pay off consumer debt in five years
• It can be much less costly in the long

If you can’t afford the payments under a consumer proposal, which has a 60-month limit, it is possible to file a Division I proposal to extend the term.

Summary

Whether or not this is the right option for you will depend on your specific situation. The important thing is to consider all your options before settling for an expensive home equity consolidation loan.

If you have a good payment history with your mortgage company and your house is worth more than you owe, talk with your mortgage broker to see if you can consolidate your debt using your home equity at a reasonable cost. That could be refinancing your first mortgage or getting a second mortgage or home equity line of credit.

But if the interest rate is too high or you don’t qualify, consider a consumer proposal instead.

For a more detailed look at the cost difference between an interest-free proposal and a second mortgage, book a free consultation with a Licensed Insolvency Trustee today.

The post Second Mortgage Home Equity Loan or Interest-Free Consumer Proposal? appeared first on Hoyes, Michalos & Associates Inc..

Can I Keep My Home if I File a Consumer Proposal?

Yes. One of the key benefits of a consumer proposal is your assets are protected, which means you keep your assets while achieving debt relief. This includes any equity you have in your home.

When you file a consumer proposal, you are working with a Licensed Insolvency Trustee to create a plan to pay off your unsecured debts, such as credit cards, payday loans, and income tax debt. Any equity value in your home will be taken into consideration when calculating how much you should offer. This is because if you were to file bankruptcy any equity would be forfeited to your creditors. However, with a proposal you keep your home and repay the creditors an equivalent home equity amount over a period of time.

Keep Your Mortgage Payments Current

It’s also important to understand that a consumer proposal does not affect secured debt like your mortgage. You will be required to keep making your mortgage payments regularly and on-time. Failure to do so would result in your mortgage lender acting to seize your home due to mortgage arrears.

Moreover, under current laws, a lender is not allowed to cancel a mortgage just because you have filed for bankruptcy or a consumer proposal, if your payments are on time.

Will a Consumer Proposal Impact my Mortgage Renewal?

If your mortgage payments are current and on-time, you should be able to renew your mortgage with your existing lender while you are in a consumer proposal filing. The reason for this is your existing lender usually will not require a new credit application. However, filing a consumer proposal will impact your credit rating. In very rare circumstances, this may affect your ability to renew your mortgage at preferred rates. A lot will depend on your loan-to-value ratio, debt-to-income ratio and personal credit payment history.

Should you decide to switch lenders, or refinance your mortgage, you would need to file a new credit application. Your lowered credit rating would then be under consideration. In this case, it may be a challenge to renew with a new lender at your preferred mortgage terms. They may consider you a lending risk and have you refinance at a higher interest rate or possibly deny refinancing altogether.

Based on our experience, unless you decide to renew your mortgage with a new lender and therefore file a new credit application, a consumer proposal filing should still allow you to renew your mortgage with your existing bank in most cases.

Will a Consumer Proposal Filing Prevent me from Buying a Home?

A consumer proposal does not prevent you from buying a home in the future. While your proposal will appear on your credit report for a short period, there are steps you can take to rebuild your credit and prepare for a successful mortgage application.

As with any mortgage application, your chances of approval are increased if you have a significant down payment already (20% or higher) and a stable income.

In addition, here are some steps you can take to improve your ability to qualify for a mortgage after you have completed your proposal.

Qualifying for a mortgage after a consumer proposal

Because a consumer proposal allows you to lower your monthly debt payments, often quite significantly, now is the time to start building some savings. Consider creating a budgeting plan and direct your savings in debt payments towards a goal like saving for a down payment towards a new home and/or having a stable emergency fund. You should also make it a habit to pay all your bills in full and on-time to build a solid credit history during and after your consumer proposal filing.

Traditional lenders will look for the following in order to be approved for a prime quality mortgage after filing a consumer proposal:

• A two-year timeline after discharge, over which you have re-established a new, better, credit rating;
• Two or more new credit facilities (like a line of credit or a small bank visa); and
• Approximately $2500 in new credit.

While this process requires some patience and discipline, it’s in your best interest to build a large down payment and consistently pay all your bills. This way, you can rebuild your credit rating to qualify for a mortgage at an affordable rate. You can learn more about what you need to do to qualify for a mortgage after filing for insolvency.

What if my spouse has great credit, and only I’m filing a consumer proposal?

If you are planning to buy a home and your spouse has good credit, he or she could apply for the mortgage loan and have you join as a co-signer, if required.

If you’re already a homeowner, and just you or your spouse files a consumer proposal, or you file one jointly, your mortgage will not be affected as long as you are making its payments.

We understand you may have a lot of questions about how a consumer proposal filing affects home ownership. As each situation is unique, our debt relief professionals are more than happy to review your finances, answer your questions, and help you determine whether a consumer proposal is the right solution for you.

The post Does a Consumer Proposal Affect my House and Mortgage? appeared first on Hoyes, Michalos & Associates Inc..

Ontario introduced exemption laws around home equity in 2015 that mean that you will not lose your home in a bankruptcy if the equity is $10,000 or less.

If the equity in your home is above $10,000 however, how you proceed will depend on how deep in debt you are, what kind of debts you have and whether or not your mortgage is under water.

Is Your House Mortgage Current?

The first step in keeping your home when you file bankruptcy is making sure you are current on your mortgage payments. While you do not necessarily lose your home if you file for bankruptcy, if you are in arrears on your mortgage your lender will eventually take action to repossess your house. Secured loans like your mortgage are not included in either a bankruptcy or consumer proposal. That means you can’t obtain protection from your mortgage lender under Canadian bankruptcy law for mortgage arrears.

So before you do anything else, catch up on your mortgage payments.

Now you have options you can look at that will deal with the remainder of your debt, without the threat of foreclosure on your home.

How Much Can You Afford To Pay to Get Out of Debt?

When choosing the best way to plan your way out of debt, you have to ask yourself what you can afford to pay.  There are options that work if you are able to pay your debts in full.  Then, there are the options for when you cannot repay your debts completely.

Paying Back Your Debts in Full

For some people, the right choice is to utilize the accumulated equity in their house to consolidate other debts into a more manageable monthly payment.  This could take the form of a secured line of credit, a second mortgage, or even a new mortgage with a brand new amortization period.

This is a conversation you have with your bank or mortgage lender.  With the changes to mortgage rules in the recent past, financial institutions are limited to lending you 80% of the assessed value of your house.  For example, you could refinance with a total mortgage balance of up to $240,000 if your home is assessed at a value of $300,000. This option works if you have sufficient equity in your home to take care of all your outstanding unsecured debts. In addition to being able to offer your home as collateral, you will also need a reasonably good credit history. If your mortgage and other debts are in arrears, you may not qualify for this type of debt consolidation loan.

So what if the bank isn’t able to help you because you don’t have enough equity or good credit to refinance your debts?

A credit counselling agency may be able to help you with a Debt Management Plan. Your credit counsellor will work with you and your creditor to develop a debt repayment plan for your debts. The amount of equity in your home does not have a direct impact on the amount to be repaid.  In a DMP, the full principal amount of the debt must be repaid, but you may be able to negotiate a reduced interest rate.

Paying Back A Portion of Your Debts

If you can’t afford to pay back all of your debt, you can look to the solutions provided under the Bankruptcy & Insolvency Act.

When filing personal bankruptcy with a Licensed Insolvency Trustee and want to keep your house, you need to work out a payment plan to pay for that equity within a reasonable time period.  If you fail to make the payments, your trustee is forced to sell your house to realize on the equity for your creditors.

A Consumer Proposal would likely be a better choice to get out of debt if you want to keep your home.  Like a bankruptcy, a proposal is filed with a Licensed Insolvency Trustee.  In a proposal, you offer to repay a portion of your debts. The big advantage of a proposal is that your trustee never has the duty or responsibility to sell your home or other possessions. Instead, you negotiate a repayment amount with your creditors. They will expect to receive as much, or slightly more than, they would in a bankruptcy which means you will have to ‘buy out’ your equity over the term of your proposal.

Why is this different then than a debt management plan? Because you can include more than just credit card debt and, if your debts total more than the equity in your home, you can make an arrangement to pay back less than you owe.

In Short

Keep in mind that any option where you are not repaying your debts in full is going to hurt your credit rating. That’s why most people, before contacting a trustee, first take time to determine if they can pay back their debts on their own first.

If you cannot pay back your debts in full, it is possible to keep your home even if you file bankruptcy or a consumer proposal. Contact us to book a free consultation with a Licensed Insolvency Trustee so we can help you find out how and still get out of debt sooner.

The post How Do I Get Out Of Debt Without Losing My Home? appeared first on Hoyes, Michalos & Associates Inc..

So, what can prospective tenants do to find a home that won’t be sold off in a year? How can someone with a low credit rating be approved to rent? Our guest today suggests being honest about your finances and explains why listings on the MLS aren’t ideal for long-term renters.

Rachelle Berube is the property manager at her business called Landlord Rescue. She helps landlords in the Greater Toronto Area find good tenants so they don’t have to. In her experience, if you’re looking for a stable home, you should rent from somebody who’s owned their property for a long time. Why? Because they potentially have no mortgage and likely won’t flip.

Rachelle also suggests avoiding the MLS:

Realtors are buying and selling and representing owners in the leasing process, but they’re also part of selling. So you know by default, that if a property is listed on the MLS, it’s listed sometimes even for sale and for rent at the same time.

What are good resources for tenants looking for a stable and affordable place?

According to Rachelle, renters looking for long-term units should consider searching:

• Kijiji
• ViewIt.ca
• Rent Compass
• Craigslist

She also says to temper your expectations and look for an older place, that has less risk of being sold away within a year. Another helpful tip is to be direct – simply ask the landlord how long they’ve owned the property.

In addition to stability, cost is a common concern among renters. While there’s often talk about “bidding wars,” Rachelle says that usually that’s all they are: talk.

Yes, there might be a bidding war or two, but a lot of those are created. And a lot of that is to kind of get tenants to believe that rent prices are going through the roof…part of that is we have very, very bad data in the rental industry.

To help you find an affordable unit, Rachelle recommends, once again, to avoid looking at websites like Realtor.ca and PadMapper since they’re full of short-term and part-time rentals, like for Airbnb. These cause prices to be skewed upward and give renters a false sense of reality.

I saw one the other day, it was like a two-bedroom for $4,700. Well, I guarantee you, I can go in that same building and probably find one for $2,200.

Rachelle’s ultimate piece of advice: Set your budget, look for a realistic price that you can afford, and stick to it.

How can prospective tenants with a low credit rating be approved?

While credit checks are virtually impossible to avoid, Rachelle does have helpful tips for anyone who may have had money troubles in the past and is working towards a fresh start.

So I would say, don’t try and deceive people, it’s going to be obvious. I’m not going to forget to do a credit check, this is my job.

Since section 10 of the Ontario Residential Tenancies Act allows a landlord  to do a credit check, verify your income, and review your rental history, here is how you can increase your chances of being approved:

1. Be prepared by creating a package: Get your most recent credit report from TransUnion or Equifax (pay the $20 to get a copy, so your landlord doesn’t have to). Include a copy of your photo ID (passport or driver’s license), as well as, your proof of income (a recent paystub), and references. Treat the process like a job application. By being prepared, you’re already off to a good start.
2. Provide positive references.  If you have a previous landlord that will give you a positive reference, include that in your information package.  If you don’t have a reference from a previous landlord, a reference letter from your employer may help distinguish you from the competition.
3. Arrive on time for viewings and be polite: A good impression goes a long way.
4. Be honest about your situation: If your potential landlord sees you have nothing to hide, it makes you much more reliable and trustworthy. A good credit score is one factor, but a landlord is most interested in your character, because that’s what determines whether or not you will be a good tenant (taking care of the place, being clean and quiet,  and paying your rent on time).
5. Find a guarantor or co-signer. This often is your parents or another family member.  This works for the landlord, because the co-signer is fully liable for any missed payments or other costs.  But beware: if there are any problems, the landlord can sue both you and your co-signer, so only get a co-signer if you are sure you can make all of the payments.
6. Find a roommate with good credit. Like finding a co-signer, your roommate becomes fully liable for any missed payments, so both you and your roommate should understand the implications of having two names on the lease.
7. Wait until your credit score improves.  If you take steps to rebuild your credit, your credit score will improve, so in some cases the best option is stay in your current living situation until your credit score improves so you can get a place based on your credit rating, without the need to involve a guarantor.

A word of caution: your prospective landlord may ask for you to prepay for many months rent; don’t do it; it’s illegal.  Section 106 of the Ontario Residential Tenancies Act says that the maximum you can pay as a security deposit is one month’s rent.  So when you rent a place you may be required to pay first and last month’s rent (with the security deposit being last month’s rent), but you are not permitted to “pay six months in advance”.

Here’s the bottom line: with damaged credit it may be more difficult to rent a place, but if you follow the steps above you increase your chances of finding a place to rent.  Remember: a landlord wants a good tenant, so if you can show that you are a good tenant, you increase your chances of finding a great place to live.

For more tips on how to find rentals that fit your income and lifestyle, tune into our podcast, or read the complete transcript below.

Other Resources Mentioned in the Show

• Landlord Rescue website
• Rachelle’s Twitter: @landlordrescue

FULL TRANSCRIPT – Show 187 Advice for Tenants Renting a Property

Doug Hoyes:       The biggest expense most of us have is our housing costs, either mortgage, taxes, utilities and maintenance fees if we own or rent, and maybe certain utilities if we rent. Some of the most popular episodes of Debt-free in 30 have involved real estate. I’ve had as guests investment experts, economists and realtors, but never before have I had a guest who understands the rental real estate market from the perspective of both tenants and landlords. How is that possible? Well, let’s find out and meet my guest. Who are you and what do you do?

Rachelle:              Hi, my name is Rachelle and I’m a property manager. I own a company and we rent and manage condos and houses in the greater Toronto area.

Doug Hoyes:       So your typical client is somebody who owns one or two condos, one or two houses, and you manage them for them is that what you do?

Rachelle:              Correct. I’ll manage them and we also have a sizeable rental business. So the hardest part of the process is going to the place, showing the place, and people hire me for my judgment, selecting good tenants to help them have a successful landlord and tenant relationship.

Doug Hoyes:       So if I bought a condo and I want to rent it out. I own a house and I want to rent it out. I call you up and I hire you. You’re going to help me find a tenant. You’re going to approve them or whatever that process is, and then for the next ten years you’re going to keep an eye on things. You make sure the rent cheque gets deposited. If something needs to be fixed, you fix it, that kind of a thing?

Rachelle:              Correct. A lot of our clients are actually out of the country, so if you’re relocated for your work and you know maybe . . .

Doug Hoyes:       I’ve got to move to Texas, but I’m going to leave my house here, so you’re going to take care of my house and rent it out while I’m gone?

Rachelle:              Correct and we meet the most interesting people that way because people are all over the world. We had one guy, he worked for CRA, he went to Singapore. We have another client, they’re in Japan right now and they send me pictures. I had another lady, she drove a tour boat or was on a tour boat in Antarctica. So all kinds of interesting people.

Doug Hoyes:       Cool, excellent. So, okay, what I’d like to do is sort of hit on a lot of practical advice for people in the rental world. I’ve got a few questions that I want to ask you from the landlord’s perspective first of all, then we can flip it around and talk about from the tenant’s perspective.

Of the landlords that you work for, what percentage are cash flow positive each month, and what percentage have to kick-in money each month to fund operating expenses? So, I own this condo, you’re renting it out for me, I as the owner have to pay the mortgage, the condo fees, the maintenance fees, all that kind of stuff. Repairs and maintenance, the rent comes in, how many of your clients are making money on a cash flow basis each month?

Rachelle:              Almost none of them.

Doug Hoyes:       Almost none of them. So that means they’re kicking in cash every month?

Rachelle:              Yeah, if you’ve bought within five years, chances are you’re cash flow negative at this point.

Doug Hoyes:       Cash flow negative, so because what I’m paying for mortgage and everything else, is more than what I can get in rent?

Rachelle:              Correct.

Doug Hoyes:       Why in the world would anyone be doing that?

Rachelle:              Well there’s a whole industry of people trying to convince investors that real estate is the best thing since sliced bread. The problem is, is it’s not really a business when it operates like that because in a properly structured environment, not a crazy speculative market like we have, your money would be the rent. You would be doing it for income from the rent. Almost like an annuity, okay. The problem is that the way it’s structured now is you buy it, you hold it for a few years, you wait for it to appreciate it, and you sell it. But that’s not like obviously a sustainable business because when you sell your condo, you’re out of business.

Doug Hoyes:       You don’t have it anymore, yeah. For your typical landlord client that perhaps owns a condo or a house and rents it out, how long do they hold it for before they sell it, and I realize that all depends on the market and everything, but do they tend to hold it for the long-term or they tend to be flippers who are going to sell it one, two, three, four years kind of a thing?

Rachelle:              Well for me, I made a decision because the condo flipper speculators were driving me a little bit crazy because they don’t know the rules, they don’t care about the rules, they just want to buy and sell. So, I didn’t really like that, so I kind of made a decision to step back from that type of client and then I started dealing with a lot more of the people who have a house and leave the country and need somebody to take care of their house while they’re gone.

Of course, we have some clients that are very long-term as far as condos are concerned. I had one gentleman, he was self-employed. His retirement plan was to buy five condos and he wants an index to inflation pension. So he timed it so that when he retires all the rents on his condos will fund his retirement. So that was kind of an unusual approach.

Doug Hoyes:       Well and that’s unusual because, by the time he retires, presumably the mortgage will be paid down enough that it’s actually kicking off positive cash?

Rachelle:              Well, yeah, if there’s no mortgage . . .

Doug Hoyes:       Then it’s all cash.

Rachelle:              Then it’s all cash. So that’s kind of an interesting thing, but most of the clients would hold for one or two years maybe. We had, actually quite a sell-off in our portfolio last year around March. So some people actually like hit the top.

Doug Hoyes:       Yeah, it was perfect.

Rachelle:              We had like ten people sell and I was like, “Oh my god, what am I going to do? All my clients are leaving”. And funnily enough, a month later, two months later, people were calling us because they couldn’t sell their houses anymore, so then we ended up managing a bunch of beautiful, gorgeous properties for people who had to sell, but didn’t want to sell at the lower price and were hoping to kind of . . .

Doug Hoyes:       To keep it. Just, so we’re clear here, we’re recording this in my Toronto office at Yonge & King here, what geographic area do you deal with? Is it the GTA and sort of surrounding areas? How far do you go?

Rachelle:              We’ll go to the east as far as Oshawa, is usually the furthest east we’ll go. Usually we would do Richmond Hill, Markham, but I’ll go as far as Newmarket, Aurora sometimes. I’ve been to Barrie. It depends on the property. We’ll go to Oakville, Milton, Brampton, all those areas.

Once a property is under management, there’s not that much to do. Like we specialize in getting good tenants, so it’s basically the most boring job in the world. You collect rent cheques once a year. You do a fire inspection once a year. You get good people and you don’t have any problems.

Doug Hoyes:       Yeah, and if there’s something that needs to be done because the roof needs replacing, well you’re hiring the roofing guy to replace the roof. You’re not out there banging in the nails. Now you said that you specialize in getting good tenants, that’s good. That makes sense to me if I’m a landlord. Tell me a horror story of a bad tenant.

Rachelle:              Oh, well, okay. All right, so I had a call from an owner of an illegal quad in Oshawa. Her top floor tenant broke the jaw of her basement tenant and so I had to meet up with them. She worked in Sweden or Norway.

Doug Hoyes:       This is the landlord you’re talking about?

Rachelle:              The landlord. So she was leaving town, so she calls me. So I met up with the tenant. Took pictures of her injury and so on, and then proceeded to evict the tenant from the upstairs floor, who actually was like a bit of a psychopath. I actually had to get my husband to help because he’s a tech guy, and the lady had recorded the assault on her 1999 Blackberry. So we took the recording off of that, which is no small feat, and we eventually used that in court. So we went to the court with the tenant and the landlord –well, no, the landlord wasn’t there, it was just me, the tenant, and he was saying that the other tenant had just fallen and tripped over a branch.

Doug Hoyes:       And broke her jaw.

Rachelle:              And broke her jaw. So, finally, I brought out the recording and I played the recording like really loud into court. Then he was like, “Oh, okay, I’ll leave”. So the creepy part about it was that he left, it was like Halloween. So he had been in his apartment for like 20 years, so unlike other people he didn’t call me. His phone number was dis-activated, so I had to go there like Halloween. It was like the creepiest place ever, because you have to stick your head up, it’s like a loft. I had to stick my head up and I was looking around and I’m like, “Oh my god is the reaper here because this could definitely be the end of me?” So he left and then the lady downstairs she had problems with her cat, had kidney stones. This is a true story.

Doug Hoyes:       I’ve never heard of this, but okay, I guess that’s possible.

Rachelle:              So she paid $800 to the vet and she didn’t pay her rent. So then I felt really good about evicting the guy upstairs, because I’m like, she’s a victim, and I’m evicting this guy who is like a sociopath and this feels really good, but then I had to evict her because she was a hoarder and then she started not paying her rent.

So, at one point, I got a call from the hospital. I had to go to the hospital and they’re like, “Well, is it safe for her to move back?” I was like, “Well, I just took over the management. I don’t know. I don’t have a key”. So I had to get a key and I go into her place. The smoke alarm was off the wall and the stuff was just piled like chest-high. So then I had to evict her. And then that was another process because she was in the hospital.

So that was like very unsatisfying. I used to do a lot of legal evictions where, as a property manager, as a person who deals with people. Going to the house and kicking people out. That particular eviction was very sad.

Doug Hoyes:       What you’re telling me, and that’s why I wanted to get this kind of from the landlord’s point of view before we talked about it from the tenant’s point of view. Most of my clients are tenants, they’re’ not landlords, they’re people who rent houses, don’t own them, or don’t own them to rent them out. So I wanted to kind of get that perspective because being a landlord sounds great. Someone just pays you money every month and houses keep going up in value, but what you’re telling me is that from a cash flow point of view, if you bought your place in the last few years and have a mortgage, then you’re probably actually putting money in every month, which means the only way you’ll ever make money is if house prices continue to go up and you can sell it, and then you’ve got the issue with the bad tenants who can obviously cost a landlord a lot of money.

So okay, let’s flip this around now and talk about it from the renter’s perspective then, okay? So I’m someone who wants to find a place to live. So in the geographic area you mentioned, the greater Toronto area, you know from Oshawa over to Oakville, up to Richmond Hill, whatever, how hard is it today, and we’re in spring of 2018, how hard is it to find a decent place to live at a decent price?

Rachelle:              Well, I would say it’s very difficult and it’s becoming progressively more difficult as time goes on because the landlords who have paid these outrageous prices for houses are obviously are thinking, “Well, I need to make some money on this” and they’re carrying it.

So I had a house I rented up in Markham, like it was a sub-division, so some of the houses were for sale and some of them were for rent. So the price point on it was like $1.6 million and it rented for $2,700. The owner, she paid 20% down, she’s like losing 5K a month renting to this tenant.

I mean, it’s not a stable market, right? Like obviously the guy is just the custodian and what I would say is a social contract between landlords and tenants has been broken in a very serious way. I mean that in a way that –like landlords used to depend on the rent and they really valued a tenant that paid the rent in full and on time, and was decent, and didn’t complain too much or cause drama about regular repairs and so on.

I worked in buildings where the owner would meet with every single resident to do rent increases every year. That was like a 400-unit building. So the guy would meet with every single person there and he would do their own rent increase and he would talk to them and say how his costs went up. He would say, “Well, can you pay this?” So, we didn’t lose a single tenant at rent increase time. There was that commitment on the part of the landlord and the appreciation for the good tenant.

Now, of course, the tenants at that point, were actually funding every single income of the building and repairs and all that kind of stuff. But if you get into a situation where the tenant isn’t covering half the cost of just a mortgage on the property, never mind maintenance because the problem with the house or condo is that it’s a constant source of entropy.

So everything is breaking and just because it isn’t broke today, it’s getting older. So from a financial perspective, we can say, “Okay the life of a furnace is 10 years, we’ve used $7.00 worth of furnace today”. So you could project how much it’s costing and those costs specifically are a lot higher than people imagine. And so if you do it properly, you should be able to even replace your building, but this is just unknown in the Toronto area.

So, you know, part of a property manager’s job is taking care of the financial health of the building so you can continue to provide service and that’s kind of an alien thought because a lot of people are just thinking from the owner’s side, they’re thinking, “Okay, I’ll hold this for a couple years. We’ll put a good tenant in there and we don’t want them to damage the place, and they can help cover some of the costs, and then we’ll sell it in a couple years”.

From the tenant’s place, they’re not getting instability. So even though we have security of tenure, that doesn’t mean anything because once the property is sold, the other investor isn’t going to take them on if they’re paying lower than market rent. So a lot of the things that we saw earlier this year that were providing instability to tenants and that we’re trying to address in the new change of the law, well let’s just say that if the property sold, nobody wants a money-losing tenant. So people will do whatever they have to do to get rid of that person who’s paying below market rents.

Doug Hoyes:       So you’re addressing the issue of stability. So, okay, I’m worried about that because I’m living in a place now and I don’t want to get kicked out or I want to move to a place and live there for a while. I’ve got a kid in school, I don’t want to be bouncing around school districts, I’ve got a job, I want to be close to work, so what would your advice be for someone who is looking for a place to rent and wants stability, give me the tricks. What should I be looking for? How can I find a place like that?

Rachelle:              So if stability is your primary goal, you should look for somebody who’s owned a building for a long time. Who potentially has no mortgage or should have a very low mortgage on the place. Has owned the place for more than five years. I would also suggest staying away from any houses on the MLS because realtors are buying and selling and representing owners in the leasing process, but they’re also part of selling. So you know by default, that if a property is listed on the MLS, it’s listed sometimes even for sale and for rent at the same time. So I caution people just to kind of stay away from that area.

Doug Hoyes:       So how do I find a place if I’m not going to look on MLS to find a place?

Rachelle:              Well there’s tons of places. There’s Kijiji, Craig’s List, ViewIt.ca, Rent Compass, the number of websites is really endless and it varies by area, but that’s what I would say. I would say people should kind of temper their expectations, look for an older place. Don’t look for a place that’s brand new because you know, okay well maybe you don’t know, but when a place is brand new, the owner can’t save the 13% HST by putting a tenant in there. So a lot of owners are just renting for one year so they don’t have to pay the HST and then flip it.

Doug Hoyes:       And that’s a huge number if you just bought a half million dollar condo.

Rachelle:              Yeah, that’s going to be like 13%.

Doug Hoyes:       Yeah on a million dollars, that’s $130,000, so half of that, I mean you could be saving $60-70,000 by buying the place new, renting it for a year, and then selling it. So even if I charge zero in rent, I’m still $60,000 ahead. So it’s a massive number. So look for an old place.

I mean, it’s kind of hard to know for sure, I guess other than asking when you meet with the landlord or the landlord’s property manager, “Oh, how long has this guy owned the place?” But if he’s some old guy who’s owned it for a while, then you can speculate that his mortgage is probably a lot less than somebody who just bought it.

Rachelle:              Yeah, and you can tell. And part of that, you should look for realistic situations. I was helping a friend of mine find a place and just shy away from anything that reeks of bidding wars or anything like that. There’s a lot of talk about bidding wars and this and that and a lot of that is, we live in a big city. Yes, there might be a bidding war or two, but a lot of those are created. And a lot of that is to kind of get tenants to believe that rent prices are going through the roof. So that’s really an issue. Part of that is, we have very, very bad data in the rental industry.

I was talking to my friend the other day and she’s a renter, and she was looking around. She said, “Oh my god, my husband says that prices went up 12% this year”. I’m like, “Who told you that?” I don’t really feel that’s true and I’ll tell you why after. And she’s like, “He went on Pad Mapper”. Well Pad Mapper and TREB, like the MLS and Realtor.ca, are full of short-term, part-time rentals that have through the roof prices. It also gets data from Air B&B. So Air B&B is listed on Pad Mapper. As a matter of fact, there’s so much Air B&B, that there’s a little box that you can check that says, “Don’t show me Air B&B”, because a lot of the units listed on it are Air B&B.

Well the cost of housing for a long-term tenant is not the same as renting a quasi-hotel room in the City of Toronto. So it really has kind of skewed the price upward. And you see the same even like, Toronto-Life, they always present these rentals –like I saw one the other day, it was like a two-bedroom for $4,700. Well, I guarantee you, I can go in that same building and probably find one for $2,200. It’s furnished and, therefore . . .

Doug Hoyes:       Premium price, yeah.

Rachelle:              So it’s skewing the numbers upwards and then you get all of this market consensus and renter consensus and they see this in the newspaper and they’re like, “Oh my god, there is a bidding war in Toronto”. Yes, but sometimes those bidding wars are created. So I would say, set your budget, look for a realistic price that you can afford and stick to it. Just shop until you find what you’re looking for. That’s really what I would say.

Doug Hoyes:       Yeah, it takes some work, but you can do it. Now my clients have come through a proposal or bankruptcy, their credit is damaged. How hard is it then to find a place to rent? So, are your typical clients doing credit checks on everybody or are they more interested in whether you’ve got a stable job and first and last month’s rent?

Rachelle:              Everybody wants the credit check now and I’ll tell you why. A few years ago, they changed privacy legislation. It used to be that we would get information from the Landlord and Tenant Board about who was a bad tenant and who wasn’t. There was a number of databases that served the purpose of telling us who had been evicted for non-payment of rent.

So we relied very heavily on that, because fundamentally, I don’t care if you pay your credit card bills as long as you pay your rent and a lot of people do. Unfortunately, that tool was kind of taken away from us by privacy legislation and so now, the only thing we have to rely on is a credit check. So that’s really the only outside kind of agency that we have to refer to, to say that this is a good person who pays their bills in full and on time. I don’t really particularly think it’s that accurate, however, until we get something else, which we have not been able to do, then we’ll have to use it.

Doug Hoyes:       It’s all you’ve got.

Rachelle:              I mean, what else are we going to use?

Doug Hoyes:       So if I own this condo and you’re renting it out for me, how do you get the credit report? Do you have access directly to the Credit Bureau or do you have to get the tenant to get a copy and give it to you, how do you do that?

Rachelle:              Well it’s very easy. There are a number of websites that landlords can register at. There’s Rent Check, there’s Tenant Verification.ca, there’s all kinds of them that you can register with. You just send them your information that you own the house, or like in my case, I’m a property manager, and they’ll allow you to check peoples’ credit and it’s a very simple.

Doug Hoyes:       So it’s not that hard. You pay the fees, so you’d tell the tenant, “Okay, sign this form saying we can get your credit” and then you can do it.

Rachelle:              Yeah.

Doug Hoyes:       So, okay, so someone who has gone through a bankruptcy or a consumer proposal then, is that going to make it –I mean you’re doing a credit check, so you know there’s no secrets here, is that going to make it a lot more difficult to rent a house, a little bit more difficult, doesn’t make a difference? So if you get someone and their credit check comes back and says, they went bankrupt a year ago. They don’t have any debt. What’s your thought process then? Are you looking to see, “Oh, I want to see the bankruptcy paperwork to see if you stiffed a landlord or is it, “Well, sorry, we can’t help you”. What’s the process there.

Rachelle:              I would say it depends. I say that because you mention that people who have been through bankruptcy don’t have any debt and, ironically, one of the ladies I used to work with in one of the Purpose Built buildings, used to love people who were freshly bankrupt, because she’s like, “They have terrible credit, but at least they can make our income” — because we also use basically an income screen where we want people to be paying 30% of their income towards housing.

Doug Hoyes:       So back then too my typical client who’s gone through a bankruptcy or proposal.

Is there anything that I as a person who’s coming through a bankruptcy or proposal can do to increase my chances of being able to rent a place? Is it a case of waiting till the bankruptcy’s done or does that not matter? Is it a case of waiting for a period of time? Is it a case of having a bigger security deposit? What can I do to tilt the balance in my favour?

Rachelle:              The thing is, is that you’re not really allowed to offer more than first and last. Anybody who’s taking more than first and last, and a lot of people do, is really doing something that’s already illegal. We have a standardized lease coming out, I think starting April 30^th or something like that, and it says right on there that you’re not allowed to collect extra deposit, so we’ll see where that goes.

I can tell you what I screen heavily against –I hate liars, right? I think everybody who works in my industry hates liars. Some owners will take people with damaged credits and some people won’t. So I would say, don’t try and deceive people, it’s going to be obvious. I’m not going to forget to do a credit check, this is my job. So what you have to do, and this is the advice that I would give if somebody says I have damaged credit.

The first thing you’re going to do is you’re going to get all your stuff together. You’re going to get your credit report. You’re going to pay the 20 bucks. You’re going to get some kind of, not necessarily an application, but you’re going to get a copy of your photo ID. You’re going to get a copy of your proof of income and you’re going to make yourself a little package, so that whoever is looking at your application –like you should know what people are looking for.

I mean, we’re all looking for the same thing. We’re looking for proof of income. We’re looking for stability. We’re looking for how long were you at your other place? And we’re also looking at credit score. So surprisingly, a lot of the people who have gone through bankruptcy actually do not have that bad a credit score. Okay?

Doug Hoyes:       Yep.

Rachelle:              And I say that because you guys know what you’re doing and you give people good information about what to do after –you don’t follow advice like I did. Like, I had an issue where my husband left and left me with all the credit cards. I paid those things off. It took me years. They were in default and the whole time my credit was like very poor. Like extremely poor and I didn’t know what to do about it and I didn’t care, I just paid everything cash. There’s a lot of people who are like that. They just pay for things cash. They don’t have any credit cards and the problem with that is –generally, as a society, we’re using the credit score more and more as like this bar to evaluate rental applications, mortgage applications . . .

Doug Hoyes:       Insurance, cell phones.

Rachelle:              Even employment. They even check your credit at certain jobs. The point of what I’m getting to is it’s a skill. You have to learn how to manage it. So if you do have a hit to your credit, work with a person like Doug and listen to what he has to say. Don’t be like me with a credit score in the 500s for over ten years because I just want to pay cash for everything. You can’t do that. You have to realize that this is the equivalent of a status symbol in today’s –and you really can’t operate without it and get yourself that secured card like I did, and then you’ll be considered a human being after a year.

Doug Hoyes:       So is there a minimum credit score that you’re looking for?

Rachelle:              Well typically, and this is to be completely honest, in the houses, we’re looking for actually a little better credit score than the banks are for mortgages. I say that in a funny way, but the reason why is because we’re actually giving you unsecured credit and the banks are giving you secured credit.

Doug Hoyes:       So what kind of score is that then?

Rachelle:              Well we don’t have a particular score. The way I score applications is a number of different things. First of all I would say, if you have a problem with your credit, treat it like a job interview. Don’t go there smelling of weed in your flip-flops. Treat the process with some respect. You make an appointment. Show up the [frick] on time. Like, I had a lady show up an hour later. I was somewhere else. She’s like, “Oh, I’m here now”. I’m like, “I don’t care”. Like, come on.

Doug Hoyes:       So the credit score is one of the things on your list, but there’s a whole bunch of other things too.

Rachelle:              That’s the last thing on my list.

Doug Hoyes:       That’s the last thing then. Okay, that’s a key point then. I mean, I’m looking for tangible things someone can do and you just gave me a whole bunch of thing. So, okay, treat it like it’s a job application and get your stuff together.

It ‘s like if I’m going to the bank to get a loan, am I going to show up with any paperwork or am I not? As a landlord, you need proof of my ID. You need proof of my income. You need credit report/credit score, whatever. Well, if you have this nice little package all put together, you know all neat and tidy and bound, that’s going to go a long way.

Rachelle:              So, if you have your package, and your package is like highly offensive to somebody, you already know and you can move on. That’s the other thing that I would say. This is kind of, even as a self-employed person who’s been through a lot, you know what? If you have to ask a hundred people, you want to make that process fast man. You don’t want to mess around.

A lot of the time, the rental agent knows what goes through in those buildings and don’t argue with them. Just be like, “Oh, okay”. I move onto the next one because you only have 60 days and the first 30 days are spent just looking at places. You want to take that information in and be like, “Okay, I’ll move on, I’ll move on”.

Doug Hoyes:       Which is exactly like a job interview. “Okay, I’ve applied for 50 jobs. I’m probably not going to go to 50 interviews. Let’s get my resume looking good. Let’s drop it off. Oh it won’t apply, great, let’s go to the next one, let’s go to the next one, keep it moving”.

Rachelle:              Right.

Doug Hoyes:       So there’s a whole lot of things you can do to tilt the balance in your favour. So, I don’t want to put words in your mouth, but just because I’m bankrupt or I’ve gone through a bankruptcy, doesn’t mean I can’t rent a place if I’ve got a bunch of other things that look good, like a job, a nice package of information, all that kind of stuff.

Rachelle:              Absolutely and if you’re polite and nice and on time, like all those things count. For me, a lot of times the person that you’re meeting is going to be at least part of the decision-making process. So if you’re nice to them and you’re just a decent person –like I screen very heavily for decency and for God’s sake if you had problems with your previous landlords, just shut up. Don’t talk about it. We don’t need to hear that.

Doug Hoyes:       Yeah, the job interview, don’t tell me how bad your old boss was, that’s not what we want to hear.

Rachelle:              So for me, I don’t want to hear about how you’ve been to court or how you got your old –even if you were completely in the right, I don’t care. That’s the other thing. So you want to leave that stuff out of –even though the lady might ask you or talk about it or seem really cool with the conversation, no. Just don’t go there.

Doug Hoyes:       Yeah, it’s not a thing. And again, it’s like going for a job interview, you don’t have to tell all the bad things that happened at your job two times ago, let’s focus on the future, and move on.

Rachelle:              Yes, or how you took your boss to the labour board.

Doug Hoyes:       Yeah, that’s kind of not the things you’d be mentioning. Well I think that’s some fantastic advice and we’ve gone long here, but I think that’s excellent. I wanted to boil it down to practical stuff and I think you’ve given us a lot of that.

So how do people track you down? I mean, I know you’ve got a blog, you’re active on Twitter, so if anyone’s listening and wants to track you down, how can they find you?

Rachelle:              Well, they can just . . .

Doug Hoyes:       What’s your Twitter name?

Rachelle:              @LandlordRescue.

Doug Hoyes:       LandlordRescue, all one word, and I’ll put all this in the show notes. And your website, your blog, is also . . .

Rachelle:              LandlordRescue.ca.

Doug Hoyes:       So easy to find. Now are you looking for clients? Landlords who are looking to rent? Renters looking for a place, that sort of thing?

Rachelle:              Absolutely. We’re always looking for landlords. Tenants are more tricky because we’re like a smaller company. Like, for instance, I have a number of places available right now, none of them are the same. I have a lovely two-bedroom back-split, basement apartment out in Markham. I have a five year old three-bedroom townhouse up in Markham. I have a lovely two-bedroom condo at Yonge and Bloor. Just because you want something, doesn’t mean I have it and that’s unfortunate. It’s not like renting in a building.

Doug Hoyes:       Yeah, if I want a house in Markham, well okay, I’ve got one at the moment, I don’t have ten.

Rachelle:              That’s right.

Doug Hoyes:       So what I would suggest then, is people can check out your website and they can always direct message you on Twitter or whatever. If they’re a landlord looking for someone then obviously you’re there and if they’re a potential tenant, well, probably you can’t help them because it all depends what you have at the moment, but what the heck, they can DM you anyways and see if you’ve got anything.

Rachelle:              Oh, and I did want to say this, the idea that rent is always going to go forever up is just patently false. I’m going to say this because people who get debt or get credit or buy houses have access to a lot more credit than tenants do. So in a large part, the ceiling on rentals is based on salaries of the people who are renting the houses because you actually pay for rent based on what you can afford from the money that you make now. It’s not really feasible to use your credit card or your HELOC. You don’t have a HELOC on your rental property. So the idea that rent can always go up and up and up is just not true. So look around because there are a lot of landlords looking for great tenants, and matching them up together and find somebody that you can get along with.

Doug Hoyes:       Excellent. Well I think that’s excellent advice and I think that’s a great way to end it. Rachel, thanks for being here today.

Rachelle:              Well thanks for having me.

Doug Hayes:        Thank you, it was great. So that’s our show for today. As always, full show notes, including links to everything we talked about today and how you can find Rachel can be found at Hoyes.com, that’s H-O-Y-E-S.com.

And I’ve got a favour to ask, if you like this show and liked all of the free practical advice we provide each week, please subscribe using whatever podcast app you like and it would be great if you would leave a rating or a review on iTunes or your favourite podcast app. Thanks for listening, until next week, I’m Doug Hoyes. That was Debt-free in 30.

The post Advice for Tenants Renting a Property With Bad Credit appeared first on Hoyes, Michalos & Associates Inc..

But, we’ve never had the most obvious guest to talk real estate: an actual realtor. On today’s show, recorded on February 15, 2018 and released on March 3, 2018 (so if you are listening in the future, the statistics will have changed) we’re chatting with Scott Ingram. Scott’s not just a realtor, though. He’s also a Chartered Professional Accountant. But what really sets him apart is that he likes to empower his buyers by educating them.

When it comes to understanding the current housing market in Ontario, and more specifically, Toronto, where he specializes, Scott thinks we benefit from focusing on context. That’s why on his blog, he provides readers with charts of data spanning 7 years. For example, when he wrote about January 2018 stats, he displayed listing activity going back to 2012.

To me, you should be paying attention to all the numbers. I think it’s important to pull back and look with a longer term context with some of the things.

Scott also says looking at the months of inventory (MOI) statistic is key. MOI is the measure of how many months it would take for a current inventory of homes on the market to sell. For example, if there were 300 active homes on the market at the end of April and there were 100 sales during April, it would take 3 months for all those homes on the market to sell, assuming there are no new listings. We divide 300 active listings by 100 sales in the month, which gives us 3 months.

And what people say is: a balanced market, so it doesn’t favour the seller or the buyer, is somewhere in the four to six [month] range.

According to Scott, it’s also important to realize that real estate is a very local industry.

When Canadian real estate stats come out, CREA, Canadian Real Estate Association, they say ‘oh, the average price of a home in Canada is up 5% or down 5%,’ – In my head I always think that’s about as relevant as what is the average temperature in Canada right now.

For example, selling activity in Toronto could be very different than in Windsor or Sault Ste. Marie.

There’s other parts in the GTA, specifically, the worst areas right now where things are moving more slowly are Richmond Hill, Markham where your months of inventory could be seven or eight.

In Scott’s view, before purchasing a home, have a balanced look at the market. Don’t assume that a few months of strong selling activity will last the entire year. After all, real estate activity is seasonal.

For a more detailed analysis of how to better understand real estate, including the difference in sale activity between condos and detached homes in the Greater Toronto Area, tune in to today’s podcast or read the complete transcript below.

Other Resources Mentioned in the Show

• Scott Ingram’s website
• Scott Ingram Twitter

FULL TRANSCRIPT –  Show 183 A Balanced Look at the Real Estate Market with Scott Ingram

Doug Hoyes:    This is episode 183 of Debt Free in 30. I’ve been doing this show every week for the last three and a half years and over that time I’ve had lots of real estate experts on the show like Hilliard Macbeth, Ben Rabidoux and Alex Avery, but in all of those shows I’ve never had the most obvious type of expert on to talk about real estate. I’ve never had a real estate agent as a guest here on Debt Free in 30. Why not? Well, the job of a realtor is to help you either buy or sell real estate. They don’t make any money not to telling you to buy or sell so in my experience they tend to have a one sided view of the world.

There’s nothing wrong with that, I’m a licensed insolvency trustee, I have a different view of the world than most other people. That’s life and there’s nothing wrong with buying or selling a house. I live in a house, my wife owns it. We live there, we raised our kids there. I’m not against real estate, but in this podcast I want to present useful information to you the listener. I don’t want this show to be nothing more than a sales pitch.

Well, today for the first time ever my guest is a realtor. Why now? Because I think I found a guest who’s a realtor and he has lots of opinions but his opinions are backed up by a lot of facts. Like me, he’s a chartered accountant, what we now call a CPA. And he’s an MBA so you know he’s good with the numbers. He does a lot of epic threads on Twitter which is where I first discovered him. And the tag line he uses for some of his seminars is an educated buyer is an empowered buyer. I like that. He’s quoted all the time in the media so let’s get started. Who are you and what do you do?

Scott Ingram:    Hello, I am Scott Ingram I think you just said what I did, which is I’m a realtor with a background in accounting.

Doug Hoyes:    So, okay let’s talk about this accounting thing. You’re a CA, a CPA, how did you go from that to being a realtor?

Scott Ingram:    Well, yeah I’m a chartered accountant from Ernst and Young back in the day, went into industry after that. The last job I had was just terrible, my last office job. And at that point I considered well, do you really want to be 9-5, which isn’t really 9-5, it’s 9-8 or 9 till whatever for the rest of your work career or do you want to do something that is you’re in the driver’s seat more, you’ve got more flexibility?

And real estate was something I’ve always had an interest in when I’d come across articles I’d read it. I kept in touch with the daily listings in my neighbourhood just to kind of keep my finger on the pulse of things and it’s after I left that last terrible job I went and said you know what, I’m just going to take the first course on the way to becoming a realtor and see if I like it. And I did and I kept with it and here I am.

Doug Hoyes:    And so how long have you been a realtor for?

Scott Ingram:    I’m into my third year as being a realtor.

Doug Hoyes:    So it’s relatively recent then, okay. So, how many realtors are there in the GTA?

Scott Ingram:    Well, that’s an interesting question actually. As of December, TREB, the Toronto Real Estate Board has 50,510 members, yeah. And just to give you some context, which is something I always like to do, so in Toronto 50,000, or GTA I should say, 50,000 realtors in OREA, Ontario Real Estate Association, there’s 70,000, so basically 50 in Toronto, 20 outside of Toronto. In all of Canada, CREA, the Canadian Real Estate Association, there’s 120. So, if you look at it that means there’s – if there’s 70,000 in Ontario that means there’s 50,000 in the rest of Canada. So there’s as many realtors in the GTA as there are in the rest of Canada outside of Ontario.

Doug Hoyes:    Wow. That’s a huge number.

Scott Ingram:    Yeah and so the GTA is about 17% of the population but we have 41% of the country’s realtors.

Doug Hoyes:    Wow. And so, how hard is it to become a realtor then?

Scott Ingram:    Well I think that’s part of the reason there’s so many. There are fairly low barriers to entry. So you need a high school diploma and then you have to take some courses. So when I started, just like I said just a couple of years ago, you had to take three courses and then you need a 75% to pass each one, three courses and then you can sign up with a brokerage and then you can trade just as much as somebody that’s been in the industry 20 years.

But in the next two years you have to have sort of an articling thing you have to take three more courses. So a total of six courses and then you’re in. But now they’ve tried to make it slightly harder and instead of doing three and three they’ve made you take five upfront before you can start trading and then one after.

Doug Hoyes:    So if I want to become like – I want to follow your path. I’m a CA, You’re a CA. Now I want to become a real estate guy. So, from today how long – what’s the quickest I can actually, you know, have my name on a listing for a house?

Scott Ingram:    It’s you can – there’s places right across from where you take all the exams up in Don Mills it’s like fast track I think. So you could probably take a course a month, you could take – you could do it in a book like you can do it at home. You can take textbook and just take the test. You can do an online course so you can do it at your own pace.

So if you really fast tracked, yeah you could, you know, bang off a course every couple of weeks if that’s all you did. So you could probably three months, I mean six months I would say is probably maybe a course a month. Sign up, get some business cards, there you go. Yeah I’d say probably you could start trading within zero to trading in six months on an accelerated pace.

Doug Hoyes:    Wow. Yeah and I guess if I really wanted to get into the business I’d go get a job working for a real estate agent or a brokerage or something here. I’ll be the guy who goes and bangs the signs in and measures the rooms and does other kinds of grunt work. Okay, so it can be relatively quickly so obviously there are not huge barriers to entry which is why you say there’s 50,000 real estate agents in the GTA.

Scott Ingram:    Yeah and I should say in that 50,000 I’ve never seen any published stats on what’s part-time and what’s fulltime. So I mean you could have people that are, you know, it’s your aunt that’s 70 years old just kind of kept her licence and once or twice a year she does something for –

Doug Hoyes:    A friend of hers.

Scott Ingram:    Friends of family.

Doug Hoyes:    Right or maybe I’ve got a fulltime job and that’s what I do on the weekends or something. But still, that could be the case in the rest of the country as well and yet it’s still a huge number. Okay, so that’s some good background now let’s get to the point of this interview and the question I want to ask you is who am I supposed to believe? So, some people say that the market is booming, some say it’s crashing and everyone makes their point by picking out numbers that support their point of view.

So, I’ll let you give me your predictions at the end of the show but first what numbers should I be paying attention to? And for today’s show we’re going to concentrate a lot more on the GTA market because that’s where you’re embedded. But okay so in terms of numbers of things like, you know, sales volume, sales price, are those the kinds of things I should be watching for? How can I analyze what’s happening in the market?

Scott Ingram:    To me you should be paying attention to all the numbers. I don’t think there’s one. If you look at baseball for example and for a long time batting average was the big thing. This guy’s got a good batting average. But as people become more enlightened over recent years with a lot more analytics in the game people talk about people that have an empty batting average like they never walk or they don’t hit with power. So you used to have someone like a light hitting short stop could hit for a high batting average but now people see beyond that.

So I don’t think there’s one magic stat to watch that’s why it’s good to take in a balance of things. That’s what when I publish monthly stats I look at several different stats because to me they’re all an indicator that it’s not one magic

Doug Hoyes:    And we’ll mention this at the end of the show but you do. I mean I’ll hold it up to the microphone here, which is really great radio. But so every month you publish a whole bunch, I mean there’s I don’t know 20 pages here of charts and graphs and everything.

Scott Ingram:    It looks like 10 pages.

Doug Hoyes:    10 pages. And where can people find this?

Scott Ingram:    They can find it through my website.

Doug Hoyes:    Which is?

Scott Ingram:    Which is well they can go to areacode416homes.ca or sorry, .com or if they just Google me Scott Ingram and Century 20 they’ll find my website and they can click through to blog, I do a blog entry every month. Or find me on Twitter, my handle’s @areacode416 I’ll always post up when I release these every month and I’ll usually pin that post for the rest of the month.

Doug Hoyes:    Yeah and that’s a good way to do it. That’s how I see them because you will often, not just publish okay, you can go here, but here you go boom, boom, boom and you’ll highlight all the main things.

So, okay so I get what you’re saying with the baseball analogy. There’s batting average but there’s a whole bunch of other things that I can look at too. So, when I’m looking at how the market is doing, what are the kind of things I should be looking for? So, it’s not just one metric it’s many so give me a few that you pay close attention to?

Scott Ingram:    Well, sales, volume, so –

Doug Hoyes:    Which is the number of units sold in the particular period.

Scott Ingram:    Right, which is generally a month. So we’ll compare January’s sales versus January’s last year. And that’s one of the things that I always stress in my charts I show the last seven years and then an average of the seven years. Because I think people lack context often because when the stats are released monthly by TREB, Toronto Real Estate Board, the media or people just tend to concentrate on versus last year. So, but was last year a record year, was last year a terrible year? So when you’re just comparing to one particular year you sort of lose sight of –

Doug Hoyes:    The context.

Scott Ingram:    Yeah. So that’s why I think it’s important to kind of pull back and look with a longer term context with some of the things. So sales volume which is basically demand and then I look at active listings, which is a snapshot of how many houses were for sale or condos at the end of the month. So, the January active listings number would be a snapshot on January 31st of how many properties were available for sale.

Doug Hoyes:    They don’t do an average for the month?

Scott Ingram:    No.

Doug Hoyes:    Okay, so obviously that’s I guess prone to a little bit of fluctuation but if you’re looking at the same period of, you know, it’s the end of the month it’s always the same thing. And obviously that would be supply then.

Scott Ingram:    Yeah, exactly. And then the next stat, which I really like, which marries both of those, is called months of inventory. And that’s one of my favourite indicators I would say and it’s good to watch the trend on that up or down. So, when prices were falling after the peak craziness at the March madness last year or the spring period, when the prices were falling months of inventory was going up at the same time and it’s usually an indicator for that. But it’s also good to watch relative again to prior periods is this – because real estate is very seasonal. So December, January very slow months, April May are –

Doug Hoyes:    Yeah you can’t compare May to December, that’s just silly.

Scott Ingram:    Right. So if you just looked at yeah, sales, volume in those two months it’s weird. Or if you just look at the number of listings in that month you would go oh wow, May has way more listings than December so the supply is too high but it’s because a lot of people are buying at that time so it’s very seasonal.

So the thing that kind of equalizes that a bit takes into account supply and demand is months of inventory. And what that is, is I like to think of it in terms of a car lot. So, if I told you this car lot has 200 yeah at the end of January there was 200 cars on the lot, is that a lot, is that a little? I don’t know but if I told you that in the month they sold 100 cars you would go, okay and if I told you they sold 20 cars –

Doug Hoyes:    You would maybe have a lot of inventory.

Scott Ingram:    Right so if it’s a downtown lot they sold 100 cars that month they’re carrying 200 that would be two months of inventory because at last month’s velocity 100 cars were sold in a month, it would take two months to empty that lot. Whereas the other case where they only sold 20 in the month, say at some rural dealership for some reason have 200 cars on the lot, and they sell 20 a month, that would take 10 months to sell all that inventory. And what people say is a balanced market, so it doesn’t favour the seller or the buyer, is somewhere in the four to six range.

Doug Hoyes:    Four to six months?

Scott Ingram:    Four to six months, correct. So, I guess five being the midpoint. So, Toronto is has had has been in a, by that measure, has been a seller’s market for basically 20 years expect for a little blip in the 2008, 2009.

Doug Hoyes:    Meaning below four to six months worth of inventory?

Scott Ingram:    Yeah, it’s been consistently below four to six months of inventory basically for the last 20 years. Now and this is where you can see the differences regionally now so TREB, Toronto Real Estate Board, carries listings for a wide area of not just Toronto but it’s greater Toronto area and even a little extended. So, Toronto 416, which is where I concentrate on, meaning the city of Toronto your postal begins with M as in Mary, that is only 38% of the sales transactions of TREB. So, 62% come from the surrounding areas, the 905.

So, these – real estate is a very local industry so different part – that’s like when Canadian real estate stats come out, CREA, Canadian Real Estate Association, they – when they say oh, the average price of a home in Canada is up 5% or down 5%, I think that’s always – in my head I always think that’s about as relevant as what is the average temperature in Canada right now.

Doug Hoyes:    Yeah, it means nothing

Scott Ingram:    In Vancouver or Yellow Knife or whatever. So, real estate’s very local and even if you take Ontario stats, Toronto could be very different than Windsor or Sault Saint Marie. And even within Toronto different neighbourhoods are acting different than other neighbourhoods.

So, what we’re seeing right now in the GTA is that Toronto months of inventory for houses, and the housing market can act very differently from the condo market, in January was 3.1 which is actually the highest it’s been in awhile for January but it’s still considered, you know, using that four to six months as balance, it’s still in seller’s market territory. But there’s other parts in the GTA specifically the worst areas right now where things are moving more slowly are Richmond Hill, Markham where your months of inventory could be seven or eight. So into buyer’s market territory.

Doug Hoyes:    So it does fluctuate around. So, and this is one of the things that always, you know, ticks me off about when you read the stats in the newspaper because they’ll say oh, sales are up this much from last month well. Well, it doesn’t mean anything because if last month was December or last month was January as you move through the year the numbers change considerably. So, I guess one of the key points you’re making is if you’re going to look at stats, make sure you’re comparing apples to apples.

Scott Ingram:    Exactly, yeah, There’s a lot of mixed problem when you start looking at overall average stats.

Doug Hoyes:    Yeah and I think your example of what’s the average temperature in Canada is an excellent example because that is a totally meaningless number.

Scott Ingram:    Yeah.

Doug Hoyes:    Like it’s totally meaningless. So I mean maybe if you look at that number over a course of a thousand years maybe there’d be a trend that would cause us some alarm but, you know, it’s ridiculous.

Scott Ingram:    And I guess if you compared the average temperature in Canada to the average temperate in Honduras it would tell you something.

Doug Hoyes:    Yeah it would tell you something but it’s kind of a ridiculous number. So, okay, so in terms of stats, and I know in your publication every month you’ve got a whole lot more but I think you’ve kind of given us the big overview, so there’s the demand stat, which is sales volume, the demand stat which is active listings and kind of merge them all together the months of inventory which kind of marries it up.

So if I’m thinking of buying a house does any of that matter? Like should I – you know, who cares what the rest of the market is doing? Is that something I should worry about or is it really my own personal circumstances that are much more important?

Scott Ingram:    Well definitely your personal circumstances are the most important thing. You know, one thing we didn’t talk about which is important to monitor as well are prices, average prices, median prices and how those are trending. The reason I look at when I’m meeting prospective buyer clients, for the first time I usually walk them through my monthly stats just so A, they can talk to things when I mention them after and B, well, what I was saying about I think an educated buyer is an empowered buyer.

But C, so they know what kind of market they’re getting into. So, if I had met someone for the first time last March and I showed them how the stats were going at that time they should be bracing themselves to be in a very competitive market. Where if we look at days on market, which is how long from when a listing hits the MLS to the day it’s sold, you know, things were flying off the shelves back then. Months of inventory was crazy low, like had historical lows so that’s – those are just to tell you what kind of market you’re stepping into.

Doug Hoyes:    So, it’s important to know what the big picture is before you start diving into something I guess.

Scott Ingram:    Yeah.

Doug Hoyes:    It would be almost like if I wanted to invest in the stock market okay so is the stock market at record highs or is it at record lows right now? I mean maybe that would help give me a little bit of context as to what potentially could happen in the future.

Scott Ingram:    Yeah. I guess one of the differences in houses though if you want to put in an order to buy 100 shares of X, you could –

Doug Hoyes:    It could be filled in 10 seconds.

Scott Ingram:    Right. Whereas if you want to buy 123 Main Street there could be seven other offers and you’re in a competitive bidding situation.

Doug Hoyes:    So there’s an infinite supply of stocks but there’s only one of those houses that I want to buy. So, you got to be a little bit more narrowed in on it.

Okay so that’s kind of the big picture. And you’ve kind of touched on a bit where the market is now. So, we’re recording this in February, 2018 and it’ll be released around March 3 just to give me time to have a full transcript and everything for everyone to read so if you’re listening to this podcast in the distant future the market may have changed. Where are we now? And I want to kind of ask two questions related to this. The first one is about the new mortgage rules and I think we’ve talked about this on the show before, the mortgage rules have changed a couple of times over the last two or three years.

The last change was on January the 1st where the stress test is now applied pretty much to everything and I’m grossly over simplifying it but it’s a little harder now to get a mortgage now than it used to be in the past. So, in real simple terms and again I’m over simplifying this but you pretty much have to qualify it at an interest rate a couple of points higher than what you’re actually paying. Is that a, I realize that’s not a perfect summary but am I pretty close there?

Scott Ingram:    Yeah, that’s pretty much it. I will say though there was a stress test already in place for people that were putting down less than 20% and now what they’ve done is just also implement a stress test of a couple of points on the people that were putting down 20%.

Doug Hoyes:    Right. So, the insured mortgages were already subject to the stress test, now pretty much everyone is. So has that had, and I realize we’re into February now, the end of February, so it’s, you know, you don’t have six months of history to answer this question but have you seen it make any difference at all or not?

Scott Ingram:    I think in the last few months yes, I have seen a difference so first thing is I would say there seems to have been a pull forward of demand into last year say November, December. So, people that wanted to beat the stress test. And so what we’re seeing is volume sales, volumes dropped after the craziness of the spring and they were going anywhere call it 20% below prior year levels. Whereas November, December they were more like 5 to 10% below prior year levels where again before it was sort of call it 20 to 30% range.

So, it got closer to prior year levels and I think – but they were still down but I think that was probably – they would have been down worse if people hadn’t pulled for it. And then this year drop versus last year. It’s hard to separate the affect of this versus, you know, buyer psychology blah, blah, blah. But I think one of the things was probably some people that would have bought maybe earlier this year sort of accelerated the process. Bought last year so sales volumes were a little bit slower at the beginning of this month. And yeah I think definitely it’s harder to get credit now. People are qualifying for less so yeah I think that’s –

Doug Hoyes:    It has had some impact. And I guess in the fullness of time we’ll really know the answer.

Scott Ingram:    But I do think the largest impact is probably just psychologically because people read about – like if you go back to last spring when the Ontario government announced that Ontario fair housing plan, which is when they brought in the foreign buyers tax or the non-residency speculation tax was the official names. But that just cooled things right down. If you look at the teeth of what was in there, the two biggest things were that foreign buyers tax and the putting back rent controls for buildings built in 1991 or later.

But if you look at like the substance of that they weren’t that big a deal. They should have affected the market as much as they have. But I think psychologically it just sort of splashed water on the face of buyers. And they’re like whoa, what are we doing here? Give your head a shake. And I think also just from reading about a stress test, stress test, stress test, so much hearing about in the media, I think buyers have been affected by that and I sense a lot more caution coming into this year.

Doug Hoyes:    Yeah and that makes sense because every market is psychology. I mean it’s – it can’t all be based on pure fact. It’s got to be based on what I think. Now you made another comment that I want to ask you about and that was that there are really two different markets, the condo market and the what do you call it, the detached house or the standalone house.

Scott Ingram:    Freeholds.

Doug Hoyes:    Freehold or whatever, something that isn’t a condo. Freehold I guess would be the opposite of a condo.

Scott Ingram:    The other type of ownership.

Doug Hoyes:    Right. So is it true that those are two different markets in the GTA and if so, what are we seeing in those two different markets? Because my perception is that, and this again just anecdotally talking to clients, that condos are still pretty hot but freeholds, detached houses or whatever have eased off. Is that true or am I wrong?

Scott Ingram:    You are right on the money on that. And I think so condo prices have remained elevated versus prior year levels. But that to me is being driven by low supply. So, if I looked at January’s numbers there was 1,846 condos available for sale at the end of the month and that was 40% below the average of the previous seven years. So, it started dropping actually. I’m pointing to Doug here to show him the seasonal averages month by month of how many condos are generally for sale. And it’s sort of around the 5,000 level fluctuates seasonally. But then in 2016 the numbers broke away from the norms and got a lot lower and through 2017 last year when things got really crazy the inventory levels were just crazy low historically and they’ve stayed down that low right now. So there’s less stuff on the market.

Doug Hoyes:    Which is going to support prices then.

Scott Ingram:    And there’s I believe there’s more eyes on this space now because people have been priced out of freeholds or houses and I think there’s more eyes looking at the condo space. So you’ve got more people looking and less properties available for sale.

Doug Hoyes:    It’s going to make the prices go up.

Scott Ingram:    Exactly.

Doug Hoyes:    That’s supply and demand. Okay so let’s talk about the future then. And, you know, here’s my perception of conventional wisdom in Toronto today. The market has pulled back a bit but the real estate market according to many real estate agents it’s going to keep doing great going forward because you’ve got continued population growth in the GTA. There’s something like over 100,000 people a year who are coming into the market. You’ve got continued economic growth Toronto of course is a major business centre. And there’s a supply shortage of homes and condos. Well, you just said that. I mean you just said that condos are at a historically low level if you look back over the last few years.

Now I can make the opposite case and I can say yeah well the prices are already really high, you already also said that people are being priced out of the market. When I drive around Toronto or walk around you see cranes everywhere so it looks to me like there’s a ton of new condos being built. Interest rates are higher, they’ve gone up three times in July, September of 2017 then again in January 2018 so that’s going to make things more expensive going forward, which I think would reduce demand. And then I’m not hearing all the stories about the crazy bidding wars like I used to.

What do you think 2018 and beyond is going to look like? And you can separate the condo and the freehold market if you want, but what do you see going forward? What’s the future, tell me the future, tell me from your crystal ball what’s going to happen?

Scott Ingram:    Well, I wish I had a crystal ball but I think psychologically like I said it seems buyers are a lot more cautious now which is probably good. And I think like what we’re in for in that correction we saw last year I think was a regression to the mean. And this still might need more regressing, if you look at the last couple of years going into the last year the price of houses increased 12%. If I look at December average house price versus December of the year before in 2015 it was 12% higher. Actually go back to 2013, 2013 was 17% higher, 2014, 7% higher, 2015 12% higher, 2016 22% higher. So it can’t keep going in double digits.

Doug Hoyes:    It’s impossible.

Scott Ingram:    Yeah the long term – if I take for houses the last 20 years, the average growth rate has been 6.7% that’s a kegger compound average growth rate, so, 6.7% for houses, 4.7% for condos. And that’s been a good 20 year run. But when you’ve got – and so it’s not to say that the next 20 years are going to be 7% and 5% because that was a good 20 years there. In the last 20 years there’s only been three negative years for houses and two negative years for condos, so 17 out of 20 years has been a positive price growth.

But when you’ve had recent run ups like that, 10, 20% I don’t think it can keep going at that so you’ve got to have a couple of years at 0, -5, whatever it is I think to kind of pull back to that long term average. So whether last year’s correction sort of reset it to that or if there’s still a couple of more slow years to grow, of growth, maybe.

But I still believe in the long term and it’s not just because of my profession. I try to be unbiased, as you said like we talked I’m newer to the profession but also because I’m accountant. The numbers are what the numbers are. I guess you can kind of spin things to support a point of view. But I try to take a more balanced approach because I’m here to give to me, to give my clients the best advice to me the best advice is unbiased.

Doug Hoyes:    And so you’re not expecting a crash, you’re not expecting house prices to go down 50%.

Scott Ingram:    No, I think all those reasons you mentioned the continued population growth, that it’s a major business centre and art centre really for the whole country that – and they’re not making any more houses.

Doug Hoyes:    Yeah well not making any more land.

Scott Ingram:    Definitely not making any more land. So, I think long term Toronto is a great place to buy. So, yeah anybody that has a longer term view they’re – you know, I wouldn’t – it’s a lot different right now for flippers. There’s a lot more risk now of people where I think buying, fixing up properties and selling them and think they’re so smart because they made $200,000 profit but also like if they just bought it and did nothing they might have made $100,000 profit or $150,000. They weren’t so smart it’s just like the market made them look smart.

Doug Hoyes:    It’s just that the timing was perfect, yeah. I mean everyone’s a genius in a bull market and everyone’s wrong in a correction I guess.

So last question then, what is the general advice you give people then if they’re thinking of buying or selling a home?

Scott Ingram:    Well, as you were saying sort of personal circumstances will dictate. But I always ask people what’s your timeframe on this? Is this a place you want to live for 20 years, is this a five to seven year thing? So, you know, know what your timeframe is and like I said I believe still in the long term prospects in this market are strong.

Doug Hoyes:    Being a flipper is probably not a great idea at this point.

Scott Ingram:    Yeah it’s risky. And this is the other thing that I was struggling to think of there just know that there is risk like prices can go down, we’ve seen it last year. There’s a few unhappy buyers that bought in March. But if you look at that as in terms of what percent all of Toronto would be unhappy buyers it’s probably 1%. So, but know that there is some risk like anything you buy but I think the longer your timeframe is the – you’ll be reducing that risk drastically.

Doug Hoyes:    Excellent. Well I think that’s a great place to end it on. Knowing your time frame is obviously an important thing to know how much risk you want to take on. So, Scott, reiterate again for people how they can find you. So on Twitter your Twitter handle is?

Scott Ingram:    @areacode416.

Doug Hoyes:    Okay. And that’s an easy way to find him because if you go there there’s obviously profile links to his website and everything. Your main website is same thing, area code –

Scott Ingram:    It’s areacodehomes.com.

Doug Hoyes:    Areacode416homes, with an s, .com. I will put links to everything in the show notes. So, Scott, thanks very much for being here.

Scott Ingram:    My pleasure, thanks for having me.

Doug Hoyes:    Thank you, that was Scott Ingram in his first every podcast appearance. I think it went great. So, that’s our show for today. Full show notes including transcript and links to Scott’s website and everything we talked about today including all the research that he’s talked about can be found at hoyes.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

The post A Balanced Look at the Real Estate Market with Scott Ingram appeared first on Hoyes, Michalos & Associates Inc..

What it actually comes down to is opportunity cost.

You can only spend a loonie once.

On today’s podcast, I have Alex Avery join me to talk about his book, The Wealthy Renter – How to Choose Housing that will Make You Rich. Basically, Alex’s goal is to help the reader better understand what a house is in terms of an investment and that if you’re not ready for such a commitment, you shouldn’t give in to pressure.

Let’s say for example, you’re thinking you might buy a house and put $50,000 in as a down payment. Instead of putting this money towards a home, that you may not need, you could invest that $50,000 into something else. Alex explains that either way you are earning a return on your capital.

According to Alex one of the problems we have is in assuming that a house is an investment.

And it’s not really an investment, it’s more of a consumption item. And people have a difficult time because it’s not 100% investment, it’s not 100% consumption but people do assume that it’s 100% investment.

Now, Alex isn’t arguing that there’s something wrong with wanting to own a home or that it’s a bad investment at all. Really, one of his main points is to address the misconception that you can’t be wealthy if you decide to rent instead of own.

You’re not saying ‘you have to rent; buying is stupid.’ You’re saying you have to think.

Some points to consider, according to Alex Avery:

1. It’s not one-size-fits-all. Buying isn’t for everyone. Neither is renting. Consider how long you expect to be in a particular location. If you have precarious employment, or know that a job will be moving you to another location, renting is a more suitable choice. On the other hand, if you know exactly where your life will be in the next 10 years and you’ll have children, who will go to school, then it’s probably better to invest in a home.
2. When making the decision to rent or buy, don’t forget all the negative carrying costs of owning and selling a home. Count that against your ‘investment’ decision. Be aware of you biases that might make you want to scale up, buy more, renovate more. Alex uses the term investment creep to explain this bias.
3. Understand how the pro ownership lobby can influence your decision – from the government, to real estate agents, even your friends talking around the dinner table. Don’t be persuaded by someone else giving you advice that reflects their objectives, not yours.

A house is the biggest financial decision you’ll make in your life. We’re not saying don’t buy it. We’re saying to really think about what you can afford and what makes financial sense. Listen to the podcast to learn more about Alex’s recommendations on how to make the best housing decision for you.

Resources Mentioned in the Show

The Wealthy Renter by Alex Avery

FULL TRANSCRIPT – SHOW #176 Can You Rent and Still Be Wealthy? with Alex Avery

Doug H:            For the first time ever here on Debt Free in 30, before we start the theme music, let’s start with a reading from The Wealthy Renter. Here’s the author, Alex Avery, explaining why the decisions we make about where we live have such a significant impact on our lives.

Alex A:             Where we live defines how we live our lives, our housing choices determine how long it takes to get to work, how much time we spend with our friends and family. If you have kids it determines where your kids will go to school, where they will play and who they will play with. It can affect how well we do our jobs, it can determine how much money we have for other things like travel and the nicer things in life like cars, jewelry, clothing, electronics and collectibles.

It’s probably the biggest factor that determines when we can retire and how we retire. Housing is the largest single expense in life for the vast majority of Canadians. For those who choose to own, buying a home is the biggest purchase of their lives, for renters, the rent cheque is usually the largest monthly expense. And over a lifetime is almost certainly the largest expense. As the biggest expenses of our lives, how well we manage the cost of our housing has a greater impact on our cost of living than any other factor. With all this at stake how can you afford not to know as much as you can about housing?

Doug H:            Welcome to Debt Free in 30, I’m Doug Hoyes. With all this at stake about real estate, how can you afford to know as much as you can about housing? I agree. The problem is that based on my experience we Canadians don’t know as much about real estate as we think we know. We think that the best investment we can make is to buy a house, but is that true? How is it possible that you could actually be better off financially by renting instead of buying? You already heard my guest today read a passage from his book explaining why real estate decisions are so important and today he will explain why he believes that for many people you are more likely to get rich by renting instead of buying a house.

Alex Avery knows real estate. He spent the last 15 years studying real estate and for the last 12 years he worked at a bank analyzing publicly traded real estate securities. I started the interview by asking Alex Avery why he decided to write The Wealthy Renter, How to Choose Housing That Will Make You Rich. Because analyzing companies is not directly related to the advice he gives in The Wealthy Renter.

Alex A:             It’s really not. And about I guess 10 or 12 years ago as I was starting at the bank, you know, in the course of everyday activities I would run into all sorts of people and, you know, in the casual conversations that you have with strangers people would ask, you know, what do you do? And I would say I work in a bank. What do you do there? I’m a real estate analyst and the next question was always should I buy a house? And I would always preface by saying well that’s not actually what I do, but let’s talk about it.

So over the course of hundreds and even thousands of these conversations I started to identify patterns of thinking that I thought were inconsistent with the reality of what a house is in terms of an investment. And so I started writing down these oddities that I was coming across and, you know, initially writing down what the misconception was and then also writing down what the reality was behind it. And, you know, initially I didn’t really think about writing a book, you know, over the course of writing down all these ideas at one point thought wouldn’t this be interesting if it turned into a book? And, you know, a dozen years later it did turn into a book.

Doug H:            And here it is, The Wealthy Renter and I’ve read your book and I agree with your point of view. I will be right up front about it and anybody who’s ever listened to this show knows that. But I mean I’ve met with hundreds of people over the years that say exactly what I said in the intro which is, you’re throwing your money away if you’re paying rent. If you rent at the end of the month you have nothing to show for it but if you own a house at least at the end of the month you’ve paid off the mortgage and you’ve built up some equity. And that sounds perfect reasonable but obviously you don’t agree with that way of thinking, so, why not?

Alex A:             Well, the idea that you’re throwing your money away to rent a house is just a fundamental misunderstanding of the mathematics of the economics of –

Doug H:            Well, so let’s talk math then. Compare for me renting versus owning. And we don’t have to do exact numbers but paint the picture for us then.

Alex A:             I guess the basic premise for anyone who’s sort of taken Economics 101 you get down to opportunity costs. So, when you’re a renter you’re renting a house from a landlord, when you buy a house you’re renting the capital from the bank initially in the form of a mortgage. So, whether it’s rent in the form of rent, rent in the form of interest that you pay to a bank or ultimately if you were to buy a house and pay off the mortgage, you effectively are paying yourself a return on capital on the equity that you have on your house in the form of an opportunity cost, so non cash expense. But were you to take that money out of a house and put it into another investment like a dividend paying stock, there would be an amount of income that you would get each month.

Doug H:            Yeah, so you’re saying that you can only spend a loonie once, that’s what opportunity cost means. So, to buy a house I’m going to have to have, I don’t know, a $50,000 down payment or whatever the number is. If I rent a house I can take that $50,000 and do something else with it.

Alex A:             Yes.

Doug H:            So again, we’re making up numbers here but let’s assume that there’s two people, one person puts $50,000 bucks into a house and the other person rents and puts $50,000 dollars into something else. So what would the something else be?

Alex A:             Well, it’s interesting because the sort of the next step in understanding that there is an opportunity cost to housing is then separating housing from your personal life and saying let’s look at it as an investment. And as an investment housing is actually a pretty terrible investment.

Doug H:            Okay, now that can’t possibly be true because we’re recording this in downtown Toronto and we all know that for the last, I don’t know, five, six, seven, eight, nine years up until about I don’t know spring of 2017 when things started to get a little bit soft, everybody, every house, has always gone up, gone up, always gone up. So how can that possibly be a bad investment?

Alex A:             Well, if you look at housing on paper and look at the characteristics of the investment, they’re all pretty bad. So transaction costs are extraordinarily high, 5% if you want to buy a million dollar house in Toronto you’re going to pay $50,000 in terms of the brokerage fees and then legal fees, land transfer tax each time. So when you buy a house $50,000, when you sell the house another $50,000. If you wanted to buy a million dollars worth of stock you could do it for 6.99 on a discount brokerage.

Doug H:            So seven bucks versus 50,000. Okay, so I get that.

Alex A:             Transaction costs are high, the liquidity is relatively low. If you want to sell stock you can sell it in an hour, seconds. If you want to sell a house it could take months, years. The relationship of housing to your personal life and your emotional wellbeing also complicates the investment.

One of the things in the professional investment world is trying to minimize the behavioural biases and there’s nothing quite the same. I mean you’re never going to buy stock and then think about selling it and say it’s probably time, it’s probably maxed out but got to remember Tommy’s going to grade seven and I don’t want to move school districts.

Doug H:            Yeah, my kid grew up on this stock. I don’t want to sell it. Well, not there’s much less emotional attachment do it.

Alex A:             One of the biggest themes that I talk about in the book is the idea of investment creep as well, which is a concept that I, a term I coined myself. But what it really tries to describe is that most homeowners in Canada will be familiar with, and that is the moment when you’re standing in the kitchen of a house that you’re looking at, you’ve looked at two or three or five or 10 houses. You’re there with your friend your partner, your parent and the real estate agent and you’re debating whether this is the right house.

You’ve looked at a house that was below your budget but it needed a lot of work, you looked at one that was at your budget but it didn’t have as much shine on it and then you’re standing in the kitchen of a house that’s 20% above your budget. And you look at your partner and you say it’s got a brand new kitchen, it’s got an extra bedroom, we can have our friends and family come and stay over and let’s go for it, it’s an investment.

Doug H:            It’s a good investment.

Alex A:             And it’s not really an investment, it’s more of a consumption item. And people have a difficult time because it’s not 100% investment, it’s not 100% consumption but people do assume that it’s 100% investment. And then when they run the math the perception that Canadian housing has actually been a fantastic investment over the last 25 years, which I will note has been a rather extraordinary period for housing is not actually very good.

Doug H:            So we’re going to talk about that. The concept of investment creep I guess is exactly the same as consumption creep. You know, when I’m buying a car I get a fancier car that I need, when I buy a toothbrush maybe I get the fancy one, but in those cases buying that fancy toothbrush ends up costing me an extra three bucks, it doesn’t end up costing me hundreds of thousands of dollars. And that’s what gets you into trouble with investment creep when it comes to a house. So, back to your – you just made the point then that real estate is not as good an investment as we think and the last 25 years have been a historically booming period. Is there a reason for that?

Alex A:             Yeah I mean there have been a whole bunch of things that have lead to the, I guess the relatively rapid escalation in prices of housing lead by Toronto and Vancouver. Everything from a generational decline in interest rates from the early 1980s, you know, short term interest rates were over 20% and now they’re 1% or less on the short term side to structural changes in markets.

If you look at the Vancouver market land constraints are really one of the biggest factors in house prices and real estate prices in general. And if you go back to the late 80s there was still a fair bit of undeveloped land in the Vancouver market so, housing supply could keep up with housing demand. And sometime in the late 80s, early 90s they basically ran out of land, green field land for development. And so house prices have been rising in Vancouver since that time.

If you look at the Toronto market there was a big policy change in 2004, 2005. The McGuinty government introduced the green belt and then subsequently a companion policy called Places to Grow. And those basically took what was a largely unconstrained market with lots of developable land and converted it into an island. So that the green belt basically precluded single family supply from satisfying the demand for housing.

Doug H:            And obviously Toronto, the south there’s a big lake so can’t move very far south. And in Vancouver you’re right, it’s much more boxed in Toronto. So, okay so house prices do not – we’ve had an exceptional period of time for all the reasons you’ve mentioned. I mean demographics I guess too would certainly factor into that. That’s not necessarily going to repeat itself again in the next 25 years. I mean the things you said were one time things, you can’t just create land in the next 25 years or shrink it.

So, on a math point of view then what you’re saying, and this is one of the central themes of the book, is when you actually compare renting to buying, buying does not look as good as you would think. So, one reason is our brains don’t think of all the costs. So I bought the house for $500,000, I sold it for $600,000, therefore I made $100,000. That’s not reality.

Alex A:             That’s not reality for a number of reasons. If you were to look at, if you were to simply buy the TSX composite index, the broadest measure of the stock market in Canada you would have a positive carry, you would have an income yield associated with the dividends that come from that portfolio. And when you live in a house there’s a negative carry in the sense that you have to pay some sort of capital maintenance whether it’s paying rent to a landlord, interest to a bank or opportunity costs to yourself.

You’re also going to have to pay maintenance costs, heating costs, there’s all sorts of costs and then that’s where you get into that slippery slope where what is necessary versus what is desirable and this idea of investment creep, the kitchen probably is functional. A 50 year old kitchen is still usually pretty functional but people tend to like to upgrade kitchens that are 50 years old and they justify it by saying it’s an investment. But that’s in fact a pretty terrible investment. And I usually use the analogy that putting $50,000 kitchen or $100,000 kitchen into your house is the exact same as buying a $50,000 or $100,000 sports car. The moment you drive it off the lot, it drops 20% and most of the value has depreciated in the first five or 10 years. And it’s for the exact same reasons, I mean a brand new kitchen is a beautiful brand new kitchen, a one year old kitchen is a one year old kitchen.

Doug H:            Is a one year old kitchen, yeah.

Alex A:             And, you know, the people who buy your house might have different tastes. So, the value you get out of that is one of the funny anecdotes that I often come across in the housing industry is that when you ask anyone where’s the best bang for your buck in terms of renovation dollars, everyone knows that it’s the kitchens and the bathrooms.

And I find that really entertaining because if you think about who you’re getting that advice from it’s usually real estate agents and contractors. And the contractors have a pretty heavy bias on that front because you can spend 50 or $100,000 on the kitchen, try to spend $5,000 on your living room. It’s pretty difficult.

And so you see that, you know, the advice that you’re getting is tailored to the needs of the people who are giving you that advice. And, you know, it’s one of those things where a lot of the people asking for that advice also want to spend money on their kitchen, they want to have a beautiful kitchen, they want to have their friends over and show if off. And the, you know, the contractors and the real estate agents are just there to give them their permission to allow them to spend their money on something they justify as an investment, but really it’s a consumption item.

Doug H:            Right and that theme runs through your book that you’ve got to look at where the biases are. Obviously the real estate agent I mean we don’t have anything against real estate agents, they serve a perfectly useful function, but obviously they make money when you buy or sell a house. As you say the remodelling guys, the mortgage guys, whatever, it’s the same thing.

So, if I had – if we could turn back the clocks, 20 years or 30 years or 10 years and whatever time period and I have two choices to make I can buy a house or rent and invest, is there any way to tell how much different life would be? Or is that too nebulous a concept to address?

Alex A:             It’s a little bit complicated in the sense that if you were to make an investment in the stock market, generally you would fund it all with your own capital. Whereas when you buy a house you usually lever it up and you borrow a lot of money from a bank so you get a leveraged return.

Doug H:            Yeah, so I can put down 5% and buy the house so that’s 20 times leverage.

Alex A:             Yeah.

Doug H:            Your stockbroker isn’t going to give you 20 times margin when you buy a stock.

Alex A:             They might give you two times if you’re lucky and you’re a good client. But if you look at the performance of housing as an investment relative to the TSX composite over the last 25 years through to 2015, the TSX composite has delivered a compound annual return of 8.0%, which has basically converted $100 in 1990 to $689 at the end of 2015, after commissions, after all the costs associated with it, so almost seven times your money. And when you compare that to house prices, the compound annual return has been 3.7% and that’s, you know, before we consider some transaction costs and ongoing costs. So, that $100 is then $261.

Doug H:            Yeah and if you extended that through 2017 to 2018 it probably wouldn’t be much different ’cause both the housing prices and the stock market have done well during those periods. Okay, so let’s assume that I buy your argument that from a math point of view if I had invested in the stock market 20 years ago as opposed to buying a house I would be better off, however that’s a theoretical academic argument.

Let’s talk about real life. Because in real life what you’re saying is I can rent a place for a thousand bucks or I can own a place for $1,500. If I take the extra 500 bucks and put it away, then I’ll be better off. But of course in real life if I’ve got $1,500 I’m spending it. So, one of the big arguments in favour of owning a house it’s a forced savings plan. And I think you mention it in your book that parents want their kids to buy a house because well, my kids aren’t as smart as me, that’s the way all parents think. Not me, I know my kids are smarter than me.

Alex A:             Not even smart, it’s just irresponsible.

Doug H:            Yeah, they’re younger. By definition your kids are younger, they haven’t lived as long as you. So by – if they buy a house, they take on a mortgage, they have to make the mortgage payment every month. So if they save no money at all well at least in 25 years, the mortgage will be paid off, they’ll have a house that they own. That becomes a forced savings plan, they’ve got a place for when they retire. Why is that not an argument for renting over owning? Or sorry, why is that not an argument for owning over renting?

Alex A:             I think that is singularly the best argument for owning over renting.

Doug H:            Really. So if there was one argument that would be it.

Alex A:             Yeah if you – so, two things there. One, the objective of the book is to help people better understand housing and make better housing decisions. And it’s not necessarily arguing that any individual should rent versus buy or buy versus rent but rather to have people equip to make the right decision for themselves.

Doug H:            So you’re not saying you have to rent, buying is stupid. You’re saying you have to think.

Alex A:             Yeah and one of the big themes in the book, as you noted, is looking at the pro homeownership lobby that exists. And, you know, it’s not an organized thing but when you look at government policies, when you look at conversations at Thanksgiving and Christmas, conversations around the water cooler at work, what you find is that there’s an enormous bias towards homeownership and this, you know, shameless promotion of homeownership to the point where renters are disparaged and made to feel stupid as if they’re wasting their money.

And so, what I do in the book I spend a lot of time debunking a lot of those myths like you’re throwing away your money when you’re paying a mortgage or, you know, as I mentioned the idea of investment creep that the best bang for your buck is putting money into your kitchen or bathroom. Well, it might be the best bang in terms of your renovation dollars but the return is negative and it’s immediately negative. That’s a pretty bad investment. If I told you I’d sell you a stock today at $100 that’s going to be worth $80 in eight months, you’d probably say no thank you.

Doug H:            Yeah, it doesn’t sound like a deal to me. Now you mentioned, what did you call it the pro homeownership lobby or something like that.

Alex A:             Yeah.

Doug H:            And in your book you detail the policies that governments create to promote homeownership. And you do a good job in the book of explaining why that’s what politicians do to get re-elected, you know, building houses we think creates jobs and owning a house gives you a sense of security and family and all the rest of it. The – one of the biggest pro homeownership policies in Canada I think, you can correct me if I’m wrong, is CHMC, which is a government fund set up to protect the banks. So, it’s nothing to do with the homeowners.

Alex A:             It’s a misconception about what mortgage insurance is actually about.

Doug H:            So if I can’t pay my mortgage, the bank will seize my house, sell it and if they lose money the government will cover the bank but of course the bank in the meantime can still be coming after me for the shortfall. So, CHMC is there for the banks, the lenders, not for the actual borrowers. Now my question is okay, I agree with all of that, should we just abolish CHMC then?

Alex A:             You know, I think there are a lot of really good aspects to homeownership and the government lobby towards home ownership, whether it’s CHMC basically subsidizing the interest rates that an individual homebuyer can get or being able to borrow from your RRSP or getting a rebate on your land transfer tax or avoiding capital gains tax on your principle residents. Those are all tool that the government uses to promote homeownership and the positives of homeownership in society are pretty material.

Homeowners are generally harder working, more productive people and that goes back to the structure of the finance of the purpose of a house. If you have a $500,000 mortgage and you know that you have to make that payment every month, if you’re on the fence about whether to go to work for the fifth day in the row that you were sick, you might go to work because you need your job and you’ve got to pay your mortgage. If you don’t have that you may not decide to go to work if you’re more financially secure, so sort of the stick of a mortgage makes people more productive.

It also tends to make people a little bit more law abiding. So if you have some really shiny expensive thing that you’ve spent 20 years trying to pay off, the odds are you’re not going to run down the street and mess around with someone else’s shiny thing because you don’t want them messing with your thing.

So, there are some really positive things about homeownership for society, you know, more productive, less criminal activity, all sorts of really positive things. But the problem with it is that the advice that comes out and the structure of the promotion of homeownership isn’t something that should be left unchecked. If you look at what happened in the U.S. in the run up to the 2007, 8, 9 housing crisis, that was irresponsible government policy and it just went way too far. I mean in the early 2000s Bush was talking about trying to drive homeownership rates above 70%. And, you know, there was a big push for minority homeownership and there were all sorts of crazy deregulation things that come up.

I remember there was one policy announcement where Bush announced the American Dream Down Payment Fund, which the explicit purpose for this down payment fund was for Americans to overcome the number one impediment to homeownership, which was not having a down payment. So at that point they were essentially giving away money for people to buy houses. And that just completely dislocates the incentive structure and the behavioural benefits that you’re trying to get from homeownership, which lead to the really irresponsible activity that you saw in the U.S. and the massive economic destruction. Interestingly enough CHMC in the last five years, 10 years even, has actually been doing a pretty good job.

Doug H:            Well, they’ve dialed it back from where they were.

Alex A:             They have. And it’s interesting, CHMC got lucky in that it was following in the footsteps of the United States in terms of, you know, moving amortizations from 25 years to 30 to 35 to 40 years. Moving down payments all the way to zero and then I – there were methods in which you could actually get cash out of buying a house for a brief period in Canada. In the U.S. that was quite common. And Canada’s housing market didn’t crash the same way the United States housing market did.

But since that time you’ve seen very significant tightening of lending and credit standards, you know, even January 1st of 2018 there are more changes kicking in and so those are all moving in the right direction. And those are all federal policies or I guess CHMC but with the sponsorship of the Department of Finance and the government. And yet at the same time you’ve got different incentive structures and different policies that are coming in at the provincial level.

Ontario is in particular a fascinating market to be watching, Toronto being the GTA, being the largest market. And you’ve got policies that were announced earlier this year from the provincial side or extending rent controls, changing the OMB. You know, you don’t want to get too far under the weeds but those are effectively policies that are counterproductive in terms of helping afford housing and are more likely to result in less supply and higher prices.

So, at current, the Toronto housing market for instance is sort of battling with a federal government who is tightening the reigns and making it more difficult for people to buy and at the same time the provincial government is restricting the supply of housing, which is aggravating the situation.

And so when you think about, you know, I sort of go back to this idea if you’re a 27 year old living in Toronto making an average household income of 70 odd thousand dollars, you’re feeling this tremendous pressure to buy a house from your parents and your co-workers and the realtor and the bank and everyone else, the government who’s involved in promoting homeownership. Not only is that a challenging position to be in, most people don’t have the awareness and understanding of the housing market to make an educated decisions, but the stakes keeping getting higher.

And this isn’t, when you think about a free market, free markets are driven by the forces of supply and demand but in the housing market it’s a lot more complicated than that because there’s a huge amount of government regulation. Everything from the green belt, which there’s all sorts of land around Toronto that just simply can’t be developed to housing, to the access to credit, which is subsidized by CHMC but has been getting tougher and tougher. If it were to get easier and easier you might even see a more rapid acceleration in house prices.

So it’s really not a market at all, it’s a highly regulated market I guess. And the things that are driving changes in the economics of housing are not driven by economics, they’re driven by politics.

Doug H:            Yeah and like you say you’ve got the federal government working against the provincial government in effect with their different policies. So, CHMC, and you go through this in your book has, they were lucky in that the U.S. market crashed before ours did and so the Canadians were able to go uh oh, look what happened. ‘Cause back in the day you could get a 100% mortgage, you could get a 40 year term, a whole bunch of things that don’t exist anymore.

So CHMC has dialed it back a bit, as has the government and you talked about, you know, January 1st, 2018 more aggressive qualification rules for mortgages and so on. So what would happen though if CHMC were to either not exist or was to continue to be dialed back? ‘Cause I assume they’ve got something like, I don’t know, a few hundred billion dollars of mortgages that they guarantee right now. What would happen if that were to be consciously reduced, what would seriously affect the market, would that crash the market?

Alex A:             So, I mean it all depends on the magnitude of the changes. If you were to go back in time and eliminate CHMC entirely, you would find that, you know, you or I walking into a bank or the average Canadian walking into a bank saying I’d like to borrow eight times my household income, what do you think? They might say well, you know.

Doug H:            No.

Alex A:             No. Or if they did they might say well how does 9% sound when the 10 year government of Canada is 2% or 1.8%. You would have a very wide credit spread. You’d have a much more expensive cost of borrow.

Doug H:            But is it also not true that that house in Toronto that cost a million dollars would only cost $450,000 because without the debt backing it up it would never have been able to get that high to begin with.

Alex A:             I would say that absolutely, the access and cost of financing has helped accelerate house prices. And to the extent that you were to remove that or dial it back it has a cooling impact. But again this is different policies so, you know, the existence of CHMC and the ability to borrow at very low costs versus the provincial government and municipal government policies around housing supply and zoning. It does get very complicated, Evan Siddall, who’s running CHCM right now I think is doing a great job of being responsible and moving things in the right direction. But it’s not just him, he has to work within the context of other –

Doug H:            Like you say politicians are doing other things. So, okay so let’s – I got two final questions for you then. My first one is there anything in the book that you really want to point that that we’ve glossed over? I think we hit the main themes but is there anything else that oh you forgot that chapter, which is the best one of all.

Alex A:             You know, I think there’s an interesting chapter in there about the big six markets in Canada and understanding as a read analyst working for a bank I would get lots of hedge funds calling me over the last five years in sort of periodic waves saying the Canadian housing market looks a whole lot like the U.S, market in 2006 and 2007. And, you know, personal leverage and personal debt is approaching levels or in access of levels of what you had in the U.S. And so absolutely there’s a massive crash coming to the Canadian housing market.

So one of the things that I’ve done in the book is a chapter on the big six markets in Canada, which are the majority of the value of the Canadian housing market. And looking at the structure of each individual market and there are rules of thumb that have helped people understand that pricing of housing in various different environments and various different types of markets.

So I spend a bit of time talking about for instance the importance of land constraints. So if you look at the Canadian housing market, Toronto, Vancouver and Montreal are significantly land constrained markets. Vancouver’s got mountains, it’s got the agricultural land reserve and it’s got some rivers, very, very land constrained market. Toronto by virtue of the green belt has basically island like characteristic and Montreal is also actually [unintelligible [00:32:02]

Doug H:            Two islands, yep.

Alex A:             And then you contrast that with Ottawa, Calgary and Edmonton which are essentially unconstrained markets where you can build to the horizon. So, when you look at those two different kind of markets, you look at price to income is probably the best measure. And it does get skewed a little bit by interest rates, but over long periods of time what you see that is in unconstrained markets, price to income generally oscillates between three and five times. In a low interest rate environment maybe you get up to six times. So the housing market is expensive at six and cheap at three or four. In a constrained market you’re going to see anywhere from five or six times up to 11 or even 12 times in a low interest rate environment.

And so one of the I think big misconceptions about the Toronto housing market in particular is that it moved from, you know, in the early 90s in the four or five times range all the way up to more recently 10 times. And the missing piece in people’s understanding in the Toronto market is it went from a unconstrained market, or largely unconstrained market, to a constrained market overnight. And I mean I can get a lot more into that. But the specifics of each of those different markets and understanding those markets will help people understand, you know, the pros and cons and investment characteristics that you’re like to see from an investment and housing in those markets and what your expectations should be.

Doug H:            Yeah and in that chapter, and throughout the book, you make the point that what you really – the value is the land not the building.

Alex A:             Yeah.

Doug H:            And so, if you think about that in those terms – of course the building can be replaced, it’s going to wear out, the land continues to go up in value. So, okay final question then is advice. So let’s break it into two parts. So, if I am considering buying a house, let’s say I’m 30 years old, I’m 35 or 40 years old, whatever it is, I’ve put away some money and I’m kind of struggling with the decision and you’ve got, the last two chapters in the book kind of are almost checklists okay here are the things you’ve got to think about. So, buy the book, go to the last couple of chapters and you can see this.

Because the thought process I think if I’m buying a house is well, there’s the money aspect of it, which you talked about but there’s also the psychology aspect of it. I mean my kids, I want them in a good school district, if I own the house the landlord can’t sell the house. I don’t have to move. I can have a dog, which I can’t have in some houses. I want to paint the walls green, well I can’t do that if it’s a landlord house. Although you do have an interesting section on the book where you talk about real estate agent who rent houses and actually do renos on them and make deals with the landlord so that’s obviously not an impossibility. So, if I’m thinking about buying a house, what are the things I should be thinking about?

Alex A:             The way that I think about the decision or own to rent is a lot like prescription drugs. So every person has a unique prescription and that prescription can change over time.

Doug H:            So it’s not one size fits all.

Alex A:             Absolutely can’t be and that is the advice that you get which is everyone should own if they can and if, you know [unintelligible [00:35:23]

Doug H:            Which is a one size fits all prescription.

Alex A:             So, you know, other things to consider are how long do you expect to be in that location, is it suitable for whatever is going to happen in your life? I mean one of the common things I think in Toronto certainly is that people in their 20s feel the pressure to buy and they’ll run into the market and buy a bachelor condominium or a one bedroom condominium. If you’re in your mid to late 20s there’s probably some chance that you may get married at some point, at which point your bachelor apartment is probably not the ideal solution. And if you’re a couple of years away from that, buying a condo and paying 5% transaction costs on the way in and 5% transaction costs on the way out, probably makes it very, very difficult for you to generate a positive return on that investment.

So, you know, what your life is going to look like over the next five or 10 years, you know, any type of impact on your work, if you have a job that is likely to see you move to another location, if you have precarious employment renting is definitely more suitable choice. The transaction costs associated with buying and selling houses are enormous and the transaction costs associated with changing your rental situation are basically zero.

Doug H:            Yeah, pick up and move.

Alex A:             Yeah.

Doug H:            So, that’s the advice you would give someone buying a house or considering it, what advice would you give to the parents that, you know, a guy like me, 50, 60 years old who’s got a 20 or 30 year old kid who I want to push into the housing market because it worked so well for me I think, although in the book again you explain how that may not be so.

So what should I as a parent be thinking about before I start, you know, giving advice? Because again you make the point in the book that just because you’ve owned a house does not make you a real estate expert, just because you happened to buy at the perfect time in the market and it went up does not make you an expert investor. So what’s the advice you would give to someone who’s giving advice?

Alex A:             And it also doesn’t mean that the return that you believe you have achieved on your house is actually what you’ve achieved. But no, I think the biggest objective of the book and I think that I would like to see is a better educated, you know, general population on personal finance in a particular on housing decisions. And so, the advice that I like to give people is learn as much as you can about this decision, which is the biggest financial decision you’ll make in your life. I wrote the book in a what I had aspired to be a very easy reading quick and informative and not too heavy type of a format and I’ve gotten some feedback that it is actually pretty easy to read.

Doug H:            I understood it.

Alex A:             And so I tried to make it as accessible as possible and as broad as possible. So, I think reading the book is really helpful. My favourite experience from writing the book is getting email from people who say, you know, thank you for writing the book I really enjoyed it. I was feeling a tremendous amount of pressure to buy a house or, you know, at the other end of the spectrum a lot of retirees, empty nesters living in houses that are far too big, understanding their housing situation a little bit better.

But the, sort of the millennial crowd who are facing these first time housing decisions writing me emails saying, you know, I was under a tremendous amount of pressure, I didn’t feel right about it. I was about to make a leap, I read your book and probably about 70% of them say I’m still going to buy a house but I’m going to buy a different house than I was going to buy and I feel much more confident in the decisions that I’m making because now I understand more about housing.

And, you know, like I think I started the book and finished the book by saying, I don’t care whether you own or rent, whether you live in a high-rise, a single family, a big town or a small town. The important part is getting educated about your housing decisions so that you can make the best housing decision for you and not simply be persuade by someone else who is giving you advice that reflects their objectives not yours.

Doug H:            Excellent. Well, that’s a great way to end it and I like your comment about it’s like a prescription, it’s not one size fits all something works for somebody, it might not work for somebody else. Excellent, thanks very much for being here Alex.

Alex A:             Thanks for having me Doug.

Doug H:            Thank you. That’s Alex Avery the book is The Wealthy Renter, How to Choose Housing That Will Make You Rich. And it’s available all over bookstores everywhere, Amazon, all over the place. So feel free to check that out. I will put links in the show notes to Alex’ book where you can find it. So, you can go over to hoyes.com and there will also be a full transcript of the show. So, until next week, thank you Alex, I’m Doug Hoyes, thanks for listening. That was Debt Free in 30.

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