Thursday, November 1, 2012

Thurs Post #1: You gotta know when to hold... know when to fold. Speculators bailing and taking a loss - UPDATED

We've covered properties in Vancouver that are listing 23% below assessed value and houses in Richmond selling for 25% below assessed value, but there are other less dramatic sales taking place that are worth noting.

More and more we are hearing stories about speculators abandoning their 'investments', cutting their losses and getting out of the market.

A couple of examples for you.

First up is...

3341 West 33rd Avenue in Vancouver

It's billed as perfect for Investors or Builders:
Investor or Builder Alert! This house is situated on a large 56' x 130.59' lot in a wonderful neighbourhood. Main floor features include a gracious entrance with cross-hall living room and dining room, oak floors, leaded glass windows, a comfy kitchen and den with 3 bedrooms up, recreation room, office and another bedroom down, this house offers great accommodation. Close to excellent schools (St Georges, Crofton House, Prince of Wales), shopping, parks and Dunbar Community Centre. Move in, rent out or build your dream home on this 7313 sf property.
Presumably this is why someone bought the property in February 2012 when they snapped this house off the market for $1,958,000. I guess they thought they got a good deal because the property is assessed at $1,986,100, so they bought it for below assessed value (click on images to enlarge):

But the buyer's bullish sentiment has turned because as you can see in the above screen shot, the house has been back on the market for $1,988,000.

Lucky for him, a greater fool has been found.  He bought for $1,958,000 and he sold it this week for $1,933,000.

That represents a loss of $100,000 in less than 9 months.

And while it isn't a property selling for 23% below assessed value, it is an example of how a house has sold twice this year below assessed value, each time lower than the time before.

Another example of a speculator getting burned is...

3475 West 26th Ave in Vancouver

From the description:
True quality and attention to detail is the best way to describe this beautiful 4 bed, 3 1/2 bath Dunbar Craftsman home. Showing better than new with open living gourmet kitchen, beautiful hardwood floors, mouldings & built-in cabinetry.Very generously sized bedrooms incl. huge master with bright and spacious en-suite and walk-in closet. Quality features include in-floor radiant hot water heat on all 3 levels, built-in speakers for sound on main & upper floors, granite counters throughout and newly renovated basement with 8 1/2 ft. ceilings, bar, surround sound & full bath. Basement has its own outside access and could be easily suited. Extremely private professionally landscaped back garden and 2 car garage. Steps to Lord Kitchener Elem.
Now this house was only built in 2003, so no developing or upgrades to be done here. So you have to figure when our latest speculative investor grabbed this one, he was simply hoping to play the flip.  

In 2011 he paid $2,410,000.

Assessed value? $2,286,000.

It was sold this month for $2,185,000.

That's a loss for our speculator of $225,000 off the original purchase price, a cost in commission of $66,000 and property transfer tax of $46,000.  Total loss: $337,000 in 16 months.

Then there is...

4490 Blenheim Street in Vancouver

From the description:
BEAUTIFUL BIG LOT AT CORNER of W 29TH AVE & Blenheim in PRESTIGEOUS MacKenzie Heights area! Lot SIZE 56.10X122, UPDATED home with newer kitchen and S/S appliances, newer flooring & bathrooms, newer double-glazed windows, functional layout with 4 generous sized bdrm up, elegant living and dining rm, 2 bdrm suite in bsmt is great for mortgage helper. CLOSE TO ST. GEORGE'S & CROFTON HOUSE PRIVATE SCHOOLS, PW HIGH SCHOOL, UBC, shopping and transit. To hold or build a 4790 sf new home, MUST SEE!
4490 Blenheim is only assessed at $1,716,000...

... but it was one of those properties where you really get to see the speculative rolling of the dice.

4490 was bought in July 2011 for $1,920,000.  That's right, in July 2011 they paid $200,000 MORE than assessed value.

In January 2012 our speculator tried to flip the property by listing it for $2,380,000.  But no greater fool was forthcoming.

It finally sold this month for $1,630,000.

With realtor commissions and property transfer tax, that's a loss of over $400,000.

In all three cases the sale price is not a stunning drop below assessed value, but unlike Boomer Trigger types (who have sold dramatically below assessed value and still reap a healthy profit), these are speculators who are cutting their losses and getting out of the market.

And that's point.  It's another canary in the proverbial coal mine.

Experienced investors are starting to accept they have mistimed the market.

Rather than hold and wait, they realize the future is only going to get worse and the collapsing market is  not going to turn around anytime soon.

So these guys are taking the hit and getting out before it get's worse.  More significantly... they aren't lining up to buy 'investment' properties either.

In it's own way, it will have a significant impact on our market as well.

(hat tip to Makaya on VCI for these 3 examples)


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Please read disclaimer at bottom of blog.


  1. The knock-on effect of speculators vacating the market because speculation is no longer a nearly guaranteed method of making money should be interesting. Even if there isn't a remarkable crash (which I'm not saying there won't be,) the return of sanity will just see prices slowly slide back down over the next several years.

    One way or another things are going back down to be in line with local market fundamentals. It just depends how fast.

  2. Can they write off their losses on their income taxes? I'll bet a least some can, which would make other taxpayers the real Losers

  3. A few formerly stupid are wising up, but there's so many who aren't. Still some people are paying 2010-2011 prices right now, losing 10-20% before they even take possession.

  4. You could update your post with the other (and worse) example I posted yesterday on VCI...

    "4490 blenheim
    56×122 lot
    reno’d (cheaply)
    HAM sale
    2.38M in jan finally sold for 1.63 (after some reductions).

    the owners paid 1.92 for it in july 2011.

    thats almost a 400k loss after PTT and commission. in 14 months."

    1. Thanks Makaya, post updated and example added.

  5. Good post Whisperer and agree - This is the smart (or at least semi-smart) money, exiting stage left now in anticipation of a hard market turn.

  6. When the momentum of the crash gets going, these $100,000 loss will look like drop in the bucket.

  7. Great post.

    The same thing happened in the US during the crash with many condo projects. Either the buyers sued or just walked away, as their loss from walking away was smaller then buying and then having to sell. This happened even long into the recovery.

    I think this sets the stage for three market catalysts which present IMO the great threats to the Van RE market, again with similarities to the US crash.

    I want to point out that what I'm saying isn't just an opinion, this info has been giving to me from highly knowledgeable friends who work in the Canadian and US financial systems and for developers.

    1. Buyers walking away. Like described buyers are starting to walk which puts financing pressure on developers. I understand financially this is worse for completed projects because they have all the bills to pay and can't halt once they realized how screwed they are.

    2. Commercial loan fraud. I'm sure many have heard of the Bear Mountain (the irony) development in Victoria. A friend of mine worked for the developer. The developer, under tremendous pressure from creditors to get paid, was cooking the books to get more money from lenders. It was a pseudo ponzi scheme. I'm sure this isn't an isolated instance.

    3. Bank fire sales. I believe banks will be aggressive in taking over defaulting projects, finishing them, and selling them as quickly as possible. Since the banks are more interested in cutting loses then making a profit, they will undercut the market. I think this has been pointed out before, lowering values doesn't require everyone lowering their prices simultaneously, just enough sellers to put the downward pressure by undercutting everyone else and setting the pricing precedence.

    To elaborate a bit on the bank default statement. I believe there are already a number of large projects in default. I'm not very intimate with the downtown market, but there are two I know of in Maple Ridge that are very suspicious. In one instance the developer for the last 6 months has been moving at a snails pace, and has only finished a couple of houses out of several dozen which are half completed, which are now for sale. It's my belief that the developer is so short on cash that the only way to continue is to finish isolated units, sell, and use the proceeds to fund continued development. It's a bit anecdotal, but having worked in the construction industry the pattern isn't matching a standard development cycle, it matches one of desperation.

    1. If you are having trouble understand my flow of logic, there is a reason, as my train of thought was based on todays VCI post about condo buyers suing for their down payments. I just felt like posting it here instead. My apologies.

    2. Yes, the VCI post today is excellent and another 'canary-in-the-coalmine' example. It will be interesting to watch how many other lawsuits come up in the months ahead as people try to escape pre-sale contracts. Thanks for the comment JR.

    3. If you get more information on those examples, let us know.

  8. I just received a special offer of $75,000 off of new condos on the North Shore-700Marine. 13% discount. Pre sale only. Limited time offer. Ends Nov 18th.
    Exclusively for me- only 4 days before it goes to the public.
    I think we will see much more of these.

  9. The income tax loss would only be a capital gains loss. The loss is either carried forward or used to offset other capital gains.

    With capital gains half is taxable while the other half is not. So example 3 for example (45% tax rate) A $400,000 loss would equate to a $90,000 tax loss carry forward.

    1. Actually, the income tax loss would be a capital loss ONLY IF the property was used for the purpose of earning income (i.e. - rented out). If the property was held as a vacant house, there is no capital loss and no loss that can be claimed for income tax purposes, so the "investor" has to eat the loss.