Dr. Garth

“I appreciate the effort you and your team puts into clarifying a perspective that is often lacking on the web today,” writes Sam. “Here’s a twist on the post you did about those Ottawa buyers walking away from their deals

“My nephew lives in Victoria and signed a contract with a builder pre Covid.  They have been patiently waiting for completion for a few years now.  Significant deposit has been sitting in trust since the project started.  The original builder went belly up and it looked like the project would not get done ever.  Then a new company stepped in and has taken up the job. Last week they sent a letter saying they’ll need hundreds of thousands more as prices for everything have gone up so much they cannot possible sell for the original contract price.  The Nephew can probably make the payments on the original contract price but cannot take on another 200k and cannot afford a costly legal scrap to hold these guys accountable. What to do?”

The kid is learning a lesson. Never buy pre-con – the risks are too great that the end product won’t be what was anticipated, that quality of construction may be subpar or the thing will never get built. If you’re reckless enough to do so, ensure the contract is approved by your own lawyer prior to signing. Deals with builders/developers are notoriously one-sided allowing them to make substitutions, floor plan changes or to endlessly extend closing. It’s a gamble.

In this instance, insolvency of the original builder likely meant abrogation of existing contracts, unless the new company legally agreed to assume them and take over the liability plus the deposits. That was another moment for your nephew’s lawyer to be involved. And this is the third time.

The new builder may have a contractual right to ask for more money – or perhaps not. Your nephew should have the choice of getting the deposit back, with interest, or throwing in more cash and hoping for the best. The first option would be reasonable. The second option perhaps suicidal. Finally, remind the kid that the only potential advantage of buying pre-con (getting a unit for less than it will be worth upon completion) is being wiped out by the request for extra cash. There is nothing but heartache to collect.

Now, here’s Matt. He’s a new dad, so naturally not thinking straight. He & squeeze are both early 30s and renting in Toronto ($2,600/month). “We’ve just had our first kid, and this place is great but it really has no real bedrooms, and with the kid it’ll be hell to babyproof.”

Close to three grand a month and no bedrooms? What were they thinking? Of course, they now have hormones which means they’re obsessing about real estate.

“Our household income is in the ~$340k/year range, and we’ve got about ~$1.3mm in invested assets. Our original budget was around ~1.1mm, but there is absolutely nothing, so we’re thinking of bumping it up to ~1.3mm. For us, we’re concerned with maintaining our lifestyle and cashflow, so we’d probably not want more than a $700k or $800k mortgage… The rest we obviously have the cash to do a downpayment. With our situation, are we crazy to consider buying?? It seems like in Toronto it’s just going up, up, up, and there’s really no other options right now if we want to stay in this hood. Curious your thoughts and advice… you always bring a different and honest perspective, which we sure can’t seem to find in the real estate industry.”

Thirty-two years old with a family income north of three hundred large and $1.3 million saved. Not your average Millennials, of course. One reason they have a high net worth, no debt and lots of flexibility is precisely because they rent. It’s affordable, relatively low-cost, involves tying up zero capital, without property taxes, costly insurance, maintenance or repairs. But there’s the bedroom thing, and space.

First, babies don’t care where you live. Nor do toddlers. Only when the kid gets trucked off to elementary school and runs into the sons and daughters of realtors and rabid blog readers does the renter-stigma click in. So there is no panic or rush to buy. Just get a mess of baby gates.

Second, Toronto real estate is not actually going up. Listings have increased. Average detached  and condo prices are below levels of two years ago and sales have slumped to the point that everyone agrees it’s a buyer’s market. This may change. Nobody knows. It’s a volatile time.

Third, be aware of the cost. Buying for $1.3 million with a $800,000 mortgage means a downpayment of half a million and a true monthly nut of about $8,500 (mortgage + property tax + insurance + opportunity cost of deposit). So the monthly hit increases by almost six thousand dollars, or 225%, while debt goes from zero to eight hundred thousand.

Is it worth it?

That’s an emotional decision more than a financial one. Matt, you have the money to blow on a house. You can pony up the downpayment from your portfolio and have sufficient cash flow to cover the loan. Of course, you will be saving/investing $6,000 per month less, be assuming interest rate and market risk, and end up in a piece of real estate which – at that price point in that city – is something you’ll likely regret. One point three does not exactly buy a forever house. More like a starter slanty semi on a faceless street.

Have you looked into what eight grand a month will rent? With no debt? And you get to keep and grow your $1.3 million?

Stay sane.

About the picture: “This is Lettice (pronounced Lettuce),” writes Jennifer, “our sweet pup that came from a high kill shelter in Quebec and she is an absolute sweetheart……to the people she knows anyways! I have been reading your blog for years and am forever grateful for your daily words of wisdom, guidance and advice!”