Norma Walton, 8 Reasons That Receivership Sales are Always at a Discount

Unfortunately I am something of an expert on receivership sales.  Back in 2013, my ex-partner petitioned our real estate portfolio into receivership without notice to our lenders. As a result, almost every property was sold via receivership or power of sale for a significant discount off the fair market value, all in a rising real estate market.  During that process, I became painfully aware of the eight reasons that Receivership sales are always at a discount.

Reason # 1:  Negative Publicity

Placing a property under receivership requires a court order.  Court proceedings are public.  As a result, there is publicity surrounding receivership sales.  When someone hears that a property went into receivership, the perception is usually that there must be something wrong with the property.  Generally receivership sales are ordered when there is controversy and contention between warring factions, be they partners, a lender and borrower, or family members.  This perceived stigma detrimentally impacts the property.  Negative publicity will reduce a property’s value.

Reason # 2:  The Process

In a private sale transaction, typically one buyer negotiates with one seller to purchase a property.  Receivers don’t have that option; they must run a sales process.  This usually means offering the property to market for a specified period of time with specific advertisements in specific publications, a real estate listing, and an offering to customers of the Receiver’s firm.  Receivers generally want to review all offers at the same time.  This tender process is a disincentive to a lot of potential purchasers.  Potential purchasers prefer to deal one on one with the seller of the property.  Most purchasers don’t want to be put in a competing arena with other purchasers.  Hence the process that Receivers need to run turns away many potential purchasers.

Reason # 3:  Uncertainty

Obtaining approval for a Receivership sale requires a Judge’s approval.  The Judge has a number of competing interests to address and if one of the parties objects to the sale, that objection often delays or stops the sale from being approved.  As a result, there is very little certainty in putting in an offer for a property being sold via receivership.  Until the sale has closed, the sale may be cancelled at any time.  This lack of ability to plan causes many purchasers to not bother offering in the first place.  The end result is so dependent on forces beyond the purchaser’s control that it discourages some purchasers from buying.

Reason # 4:  Higher Deposit Requirements

Receivers want certainty even though they cannot offer the purchasers certainty.  As a result, they usually require at least 10% of the proposed purchase price to be tendered with the offer to purchase during the tender process.  Generally the deposit cheque must be certified.  Hence a purchaser, before knowing if his or her offer is even going to be accepted, has to go to the bank and obtain certified funds for 10% of the proposed purchase price just to offer.  This is a major disincentive for many buyers and thus reduces the pool of potential buyers.

Reason # 5:  Complex Purchase Agreements

The standard TREB or OREA form is fairly straight forward.  Once you have dealt with it a few times, it is user friendly.  Not so with receivership forms.  Offers to purchase through receivership are typically at least four times as long as the OREA form.  They are full of legal language explaining all of the ways the Receiver can exit the deal and everything that must occur before closing.  A prospective purchaser usually requires legal advice just to understand the agreement before he or she can sign.  The need to seek legal advice before offering is a disincentive and reduces the pool of potential purchasers.

Reason # 6:  No Warranties or Representations

A Receiver cannot give warranties or representations.  As a result, a purchaser of a property under receivership takes the property “as is, where is”.  That means the purchaser must be comfortable with more risk than in a normal private real estate transaction.  A Receiver cannot represent the rents being collected on a commercial property, for example, nor can he or she warrant the status of the building systems in any capacity.  They guarantee nothing!  That reduces prices because purchasers must shoulder more risk than in a private sale transaction where there are almost always representations and warranties.

Reason # 7:  Lack of Specific Property Knowledge

The Receiver did not purchase the property.  They generally have not run it very long if at all.  They are not real estate experts.  They generally don’t understand the strategic buyers of a property or its highest and best use.  Their expertise is in accounting.  As a result, the property is generally not marketed as effectively as it would have been if a private owner sold it.  The person who bought it can usually market it better than a Receiver.  This lack of expertise reduces property value.

Reason # 8:  Firm Offers are Preferred

Receivers have to go to Court to recommend that a Judge accept a purchase agreement.  This takes a lot of coordination, effort and paperwork.  As a result, they ideally want to present firm offers.  Otherwise the purchaser could exit the deal after all that time and money is spent to secure approval.  Receivers generally won’t accept anything other than firm offers from purchasers.  This puts purchasers in a position to have to waive all conditions even though they may not have a good sense of the property and its perils.  Having to provide a firm offer instead of a conditional one always discounts prices.

 

Our real estate portfolio was sold at 70 cents on the dollar in a rising real estate market.  Watching that process made me acutely aware that it is a legal fiction that fair market value is ever achieved through a Receivership sale.  The eight reasons listed above guarantee that Receivership sales will always trade at a discount.

Norma Walton, Not Your Parents’ Workforce

One of our businesses was growing and we were looking for someone to work 16 hours every weekend. I had been doing the work myself while growing the business, but the business had become busy enough that it could afford to pay someone to do that work.

First I chatted with my friend’s husband. He works during the week and is saving up for an apartment for his young family so was keen on weekend work to supplement what he earned from his regular job. He is 27 years old. He did an excellent job for me for a few weekends then told me that he had decided he could no longer work after 5 pm…ever.

Next, I chatted with a hard working woman with whom I work from time to time and I mentioned that we had this position available. She told me her son Mitch was desperate to make money and that she was sure he would love to do it. Mitch is a nice single 35-year old guy whom I knew and liked. I immediately offered the work to him. He thanked me for thinking of him but explained that he never worked on Friday, Saturday or Sunday.

The third was a 32-year old Uber driver named Nur whom I met when he drove me home. A former fighter pilot, he had emigrated from Afghanistan via America. He told me he needed to make money. He did the work one weekend, collected his money, then he just didn’t show up for work the next weekend. It was obviously beneath him. I haven’t heard from him since.

Fourth time lucky. The fellow who now works with me on the weekends is from Barbados. He emigrated to Canada a year ago because it was impossible to make a good life in Barbados unless you were a member of the police or the military and he didn’t qualify for either. He loves Canada because if you work hard, you can create a decent life for yourself. He came here a year ago. He has found opportunities through keenness. He obtained his forklift truck driver’s license. He then started working for an agency each week while working to upgrade his license. He works with me on the weekend and is saving up to secure his own studio apartment near York University and then to afford a car. He is 27 and so far very reliable.

Back when I was a teenager into my early 20s, I was always interested in making money if I could fit it into my school and sports schedule. I began working when I was 13 years old and secured my license the day I turned 16. I was not unusual among my peer group. We all wanted to make money, play sports, drive cars and get our own place. Leisure time was what you grabbed late at night or over a couple of hours on the weekend, if you were lucky and had finished all your chores at home.

In my (now dinosaur-like) experience, if you wanted to make extra money, you needed to work evenings, weekends, nights, mornings, afternoons – basically, anytime anyone would pay you. You needed to show up for work when you were required. Keenness was critical. Asking for more work was important. Basically, everything else in your life took a back seat to making that extra money you wanted so you could accomplish whatever objective you had at that time.

The type of work was not as relevant as how much you were being paid per hour and how many hours you could secure. Being fulfilled at work was not even a consideration. I remember working three summers in a row on the line at Ford putting hood covers on because 27 years ago they paid $25 an hour. I can still do that specific job in my sleep because I put 60 hood covers on every hour for 48 hours a week for three summers in a row…138,240 hood covers. The job was mind-numbing but that money helped put me through school and paid for my car expenses. Needless to say, I had very little leisure time those summers.

My values are no longer prevalent. In seeking to fill this weekend position, it became apparent to me that the workforce has changed since I was a girl. Work-life balance in your 20s and 30s is now valued far more than money. People say they want to make extra money, but they mean only if it does not inconvenience them in living their best life. Hence a lot of people in their 20s and 30s are living with their parents, with siblings or with roommates. They don’t drive. They value leisure time more than making money.

For better or worse, while trying to hire someone for weekend work, I realized that this is not my or my parents’ workforce.

Norma Walton, Saving By Sharing Your Space

Saving money takes effort, work and self sacrifice.

A friend of mine saved money in his 20s and early 30s and bought a house north of the city.  In keeping with his savings mentality, he moved into the basement and rented out the main floor and upper floor to tenants.  He lived that way for five years until he got married, at which point he moved upstairs with his wife and rented out the basement.  Obviously he would have preferred to live upstairs from the beginning, but that willingness to sacrifice to save money helped him pay down the mortgage to the point where he could comfortably afford to move upstairs.  He, his wife and son now have a beautiful semi-detached home in Riverdale as a result of his savings mentality.

Sharing youroommatesr space is never ideal.  Yet in any larger city there are numerous people always looking to rent accommodation.  If you can handle a room mate or create a spot in your house that you can rent out, that money can be dedicated to paying off your mortgage faster or creating savings to purchase another house or condominium.  Many people in Toronto sacrifice privacy for the income provided by renters.  My god mom, who is from Portugal, was looking for a place to stay for a while and she moved in with an older Chinese couple and rented a room from them for far less than she would have paid for her own space. The cultural exchange was sometimes challenging but the savings were worth it for both.

 

Airbnb provides another outlet for turning your house into rental income.  In any large city there is demanairbnbd for short term rentals in lieu of hotels, particularly for larger groups that are coming into town for a wedding or a special event.  We have rented our house out through airbnb in the past and it permits us to spend time up north in the summer that we couldn’t otherwise afford.  It takes effort to ready your house for guests…with four children it takes our family a lot of effort.  But the benefits of canoeing down the Muskoka river with all four children in the boat are more than worth it.

 

Friends of mine ran an international student placement company.  They were always looking for welcoming families in which to place their European students.  Host families were compensated for accommodating those students and introducing them to Canadian culture.  From time to time there would be problems, like under age drinking or stupid behaviour, but that was the exception.  By and large the host families and the students had a good time together and often those relationships lasted long after the student had returned home.  One of those families just welcomed the student they formerly hosted, her husband and their toddler a decade after the hosting ended.

 

My girlfriend had five house mates in university to cut down on the costs of accommodation.  Six girlsroommates-2…one bathroom.  She is now in her early 50s and still gets together with them once a year.  This year was the 30th anniversary of them moving in together.  Each now has multiple bathrooms in her house but the memories they created together when they had to share just one resonate with them to this day.  Being willing to share your space can provide financial benefits along with lifelong emotional connections that may enrich your life and last far longer than the space sharing arrangement did.

 

A former client of mine got divorced and she didn’t want to sell her beautiful heritage house in Cabbagetown.  She started a Bed and Breakfast from it.  She now earns enough from renting out a couple of rooms and providing breakfast for her guests that she is able to maintain the house and pay all the costs associated with it.

Inge og Ole?s bolig
Inge og Ole?s bolig

With the above ideas in mind, take a look around at your space.  Consider whether there is any opportunity to share it to generate some additional income.

Norma Walton, Nine Reasons to Invest in Real Estate

Many people want to own real estate.  People seem to know intuitively that it is a good investment.  But what are the logical reasons that you should consider investing in real estate?

  1. Canada is a stable, attractive country

Canada is a free and democratic country that is attractive and welcoming to immigrants.  Immigration coupled with Canada’s birth rate means that Canada’s population grows about 1.2% per year.  Toronto and Vancouver are destination cities and as such are not affordable for most Canadians, but there are lots of smaller cities in Canada where real estate is affordable.  Real estate anywhere in Canada is generally attractive assuming you pay a fair price for what you purchase.  As Canada’s population increases, there are more and more people wanting to buy property here.

canada-flag

  1. Low mortgage rates support real estate ownership

Since 2008 low interest rates have been a reality.  Given the current global uncertainty, it seems unlikely rates will increase significantly any time soon.  Low interest rates translate into affordable monthly payments.  Low carrying costs make it less risky for you to own real estate.  The less you have to cover, the less you have to charge in rent to make your investment cash flow positive.

  1. Real estate earnings are taxed preferentially

Real estate is one of the few investments, aside from owning your own business, where you can write off part of the cash flow you receive.  Your principal residence is generally tax exempt in Canada, and investment property is also taxed preferentially. You can depreciate your rental house or building as long as you own it.  That depreciation expense usually eliminates or minimizes any income tax you would otherwise owe on your income from your property, hence providing you with free cash flow that is not taxable upon receipt.

  1. Leverage can be used when purchasing property

Most people pay for their real estate partially through savings and partially through mortgage debt secured against the property.  This means that with savings of about $50,000, you can generally purchase a property worth $200,000.  You pay the $50,000 down and take out a mortgage for the $150,000, thus purchasing an asset worth four times your savings.  If the property is a rental property, then ideally your rental income pays the monthly payments on the mortgage until the mortgage is paid in full.  Hence you are using leverage to purchase an asset worth more than the amount of your savings.

debt-free-sign

  1. Real estate ownership gives you control over your investment

A lot of people fret and worry when they give someone else control of their money.  The beauty of owning real estate is that you control the investment.  You own the property and you are the only one who can determine what happens with that property.  You choose the house or building you wish to purchase; you decide to whom you want to rent your property; and you manage and fix it up the way you want to.  You have control over every decision to be made.

  1. Your actions can add value

Real estate can be a very active investment.  If you are handy and knowledgeable, you can purchase a property in need of renovation or fixing up or demolishing or subdividing.  That type of repositioning of property has the potential to dramatically increase the value of what you purchased, sometimes doubling or tripling the value of your initial purchase price.  It is gratifying when your direct actions increase the value of what you purchased.

renovation

  1. Property makes a good long term investment

Real estate historically goes up.  So long as you intend to hold your property long term and ensure the carrying costs are affordable for you to hold it long term, the odds are that your real estate will be worth far more, often many multiples more, when you want to retire than when you purchased it.  This makes it a great way to create wealth over time.

  1. Land is a fixed resource

“Buy land, they’re not making it anymore” said Will Rogers.  That quote still applies today. Any freehold purchase you make takes advantage of the scarcity of land.  There is a fixed amount of it so the more people want it, the higher its value because the supply is fixed.

land

  1. Real estate should continue to make you money when you are sleeping

If you are smart and a bit lucky, your rental real estate investments should become passive investments over time such that they make you money when you sleep.  The objective is that your property should provide free cash flow without your having to put hours in to make that money, and your property should increase in value year over year, creating capital gains.

It is comforting that our visceral belief about real estate being a good investment can be backed up with logical reasons why that belief is true.

Norma Walton: How Much is Enough?

North American society promotes the concept that having money creates happiness.  Certainly having enough wealth to cover your basic needs is important – a roof above your head, sufficient money for food, a clean supply of water, basic clothing and a healthy environment.  A lack of those essentials will create misery.

money happiness

Once you achieve the above, there is value in considering how much more money you need.  Beyond covering your basic needs, below are some reasonable objectives that you may want to consider when you decide how much money you require:

  1. A reasonable spending plan: Charles Dickens proposed the theory that if your income is $100 per day and you’re spending $99, you will be happy.  If your income is $100 per day and you’re spending $101, you will be miserable.  That is wise advice.  If your expenses exceed your income, you will be constantly scrambling to cover your bills and will head into debt, which is stressful.  Focusing on reducing your expenses or increasing your income so that your income is greater than your expenses is time well spent.
  2. A plan to pay off existing debt: My grandparents’ generation saved their money before they would buy a car.  They saved their money to fund their vacation.  They paid off their mortgage as soon as they reasonably could and would have considered it baffling to refinance to pull out wealth from their house.  Debt often causes stress and tension in your life.  Debt sometimes makes you feel out of control of your financial situation.  Hence a focus on paying off debt will permit you to enjoy your money more as you pay the debt down.

    3d people - human character person carrying word "debt" on his back. Debt concept. 3d render
    3d people – human character person carrying word “debt” on his back. Debt concept. 3d render
  3. An emergency fund or line of credit: If you were to lose your job, do you have enough money to survive until you find a new one?  For some this amount will be one year’s worth of income savings; for others this amount will be a month or two.  It is prudent to have some money available if something happens that impacts your ability to earn an income for a period of time.
  4. A retirement fund: The Canadian banks focus on retirement planning.  They sit down with their customers to discuss how much you would need to save to fund a comfortable retirement.  They create charts and objectives for savings to try to get people thinking about where they want to be when they are ready to retire.  This is a good exercise for most people and helps people set goals for savings and calibrates their financial expectations for when they finish working.
  5. An insurance policy to provide for your dependants: If you were hit by a bus today, who would be in trouble without you around?  Think about the financial needs of your dependants and ensure that you have term life insurance in a sufficient amount to cover those needs.  Once you no longer have dependants who need your income to survive, you can reduce or eliminate that insurance.

piggy bank

Once you turn your mind to how much money is enough for you, you can review the above items and create a plan to ensure you have what you need.

Norma Walton, Toronto Needs a New Home Lender

The big five banks control the majority of Canadians’ money.  Those banks love residential mortgages at no more than 80% loan to value.  Anything above that ratio will require Canada Mortgage and Housing insurance to protect the banks against any possible losses, with that insurance paid for by the borrowers.  Those bankers want to lend to Canadians with good credit ratings and regular employment income.

big five banks

The Canadian banks sailed through the 2008 credit crisis relatively unscathed and became the envy of the world for their strength and conservative balance sheets where other banks failed.  Although their loan loss provisions have recently been taxed somewhat due to the plummeting price of oil and their lending to that sector of the economy, they are still immensely solid and strong without exception.  Each earns billions of dollars of profits each and every year.  They succeed because they are a protected sector of the Canadian economy and they are immensely conservative.

approved

This is all well and good if you are a Canadian with good credit and a good job.  You will be offered a variety of 2.3% to 3% five year mortgage options and can sometimes even create a bidding war amongst a couple of different bank lenders if you fit into that perfect borrower profile.  So if you do, you don’t need any new home lender as you will be immensely well served by the big five banks.

self employed

For the rest of us, Canada is a somewhat hostile place for securing a mortgage.  There are few attractive options for self employed individuals.  Scotiabank tries to understand those who run their own businesses as does Street Capital and Home Trust.  Their lending standards, though, are still arduous to qualify for and their interest rates are generally higher than the 2.3 to 3% offered to their employed peers.

bad credit

For those who are self employed with less than stellar credit, the options are very poor.  Even those who already own their own homes have trouble renewing mortgages and find it near impossible to increase their mortgage principal.  For this reason Northwood Mortgage advertises on 680 News focusing on their approval of any borrower who already owns their own home.  That is an underserved market.

northwood mortgage

There are countless places, many located in the Allen Road and Sheppard area of Toronto, offering 100% approval for car loans regardless of credit.  There are no home lenders offering the same.

Toronto could benefit from a few new lenders offering the following lending services:

  • Those that permit equity only lending
  • Those that permit lending without personal guarantees and price in the risk of the lack of guarantee
  • Those that price in the risk of lending to employed individuals who have bad credit
  • Those that lend to self employed individuals with good credit
  • Those who lend to employees who are paid in cash so don’t have qualifying income but have a sufficient down payment to buy a house
  • Anyone else who doesn’t fit the bank’s very restrictive lending criteria

The services described above would benefit Toronto residents who don’t now qualify for mortgages or who have to approach private lenders now if they wish to buy real estate.

houses

 

Norm Walton, House Rich or House Poor

Some days Torontonians love their real estate…and some days Torontonians hate their real estate.  That love-hate relationship can even happen all on the same day.

What is to love?

  • Toronto’s real estate is coveted internationally
  • There are approximately 100,000 new Canadians moving into the Greater Toronto Area each year, all needing housing
  • Toronto is cheaper than other major international cities
  • Toronto’s stock of freehold houses is relatively new and in decent shape relative to other large cities
  • Toronto is a fairly safe city
  • Toronto is the most multicultural city in the world and welcomes all people
  • Investments in improving residential houses in Toronto pays off when the property is then sold or refinanced

What is to hate?

traffic

  • There are no affordable freehold houses in Toronto
  • In a city of more than 2.6 million people, there are a mere handful of detached freehold houses for sale at any point in time, most of them adjacent to housing projects in far less desirable neighbourhoods in Toronto and even in those neighbourhoods, most freehold houses sell for closer to $1 million
  • Torontonians pay a large proportion of their take home pay on their housing costs, with most households paying at least 33% of take home pay on housing
  • Average mortgage costs in some higher end neighbourhoods are more than $10,000 per month
  • Average house costs in some higher end neighbourhoods are more than $2.5 million
  • The trend is to buy a house for $1 million plus and rip down whatever is there now to build a monster house to the maximum allowable density
  • Transaction costs in Toronto are far higher than surrounding areas because Toronto tacks on a city land transfer tax of about 1.5% of value in addition to the provincial tax of another 1.5% of value
  • There is a large number of condominium projects in the works and even the price points for condominiums is at least $250,000 for a tiny bachelor unit along with significant monthly common element fees

monster house 2

Predictions for the future:

  • In my opinion, Toronto’s freehold real estate will continue to increase in value over the long term given the demographics
  • Monster houses will continue to be built in higher end neighbourhoods, occupied by between two and four people at a ratio of 1 person per 1500 to 3000 square feet
  • There will continue to be a flight of young families and retirees to communities west, north and east of the city because they cannot possibly afford to live in the city
  • Basement apartments will be built in existing houses due to the immense demand for affordable rental housing of any kind and the need for homeowners to supplement their income to pay their mortgages
  • Despite the recent push by all levels of government to improve transit, commute times will continue to climb for those workers who live outside Toronto but work in the city and congestion on highways will worsen
  • The surrounding communities will benefit from an influx of numerous new residents as these bedroom communities evolve into hubs of their own over time
Happy young family spending time together outside in green nature.
Happy young family spending time together outside in green nature.

As illustrated above, the insatiable appetite for Toronto’s freehold real estate has both pros and cons.  Hence in the same day you can both love the market and hate the market.  The course of Toronto’s market seems unstoppable regardless of your personal views.  Hence you should probably either get on board with the lack of affordability in Toronto and embrace the city’s offerings or start looking for a house in the surrounding region and ensure your car has no kilometer restrictions on trade in.

yorkville

Norma Walton, The Benefit of Slow and Steady

My great grandfather died of a heart attack.  So did my grandfather.  My dad needed a stent at age 60.  It is thus likely that I will also suffer heart problems.  As a result, I try to follow all of the heart healthy advice, one part of which is to try to exercise for at least 30 minutes every day.  I certainly don’t succeed every day, but every day I try.

walking Life is truly a minute by minute, hour by hour, day by day, week by week journey.  Building your net worth, your wealth and your income is the same sort of trip.  If you spend 15 minutes a day focusing on your financial health, you will slowly, steadily succeed.

You could spend your 15 minutes a day doing any of the following:

  1. Look at your monthly budget to try to realize savings.
    1. A lot of folks enjoy a Starbucks coffee every morning. That $5 a day adds up to over $1,750 a year.  Is there something else you would rather do with that money?
    2. Do you need a fancy cable TV package or should you convert to the basic $25 a month package?
    3. Is your cell phone plan the most cost effective plan you can have or are there savings that you could realize by switching or changing?
    4. Are you turning off your lights and fixing any water leaks and trying to keep your house at a reasonable temperature throughout the year to reduce your utility bills?
  2. Sort through your home with a view to selling items you no longer use and no longer need.
    1. Kijiji and Craigslist are two sites that effectively provide a large marketplace in which to sell items you no longer use for decent prices;
    2. Ebay and Amazon are two sites that offer a worldwide audience for your items; and
    3. Garage and estate sales are effective means of reducing the clutter in your house and generating some money.

yard sale

  1. Analyze your work productivity with a view to focusing on the activities that are most likely provide you with more income.
    1. Can you take on more responsibility at work in exchange for more money? Are you able to work overtime one week a month to increase your income?
    2. Could you take on a second source of income, perhaps child care in your spare time or selling something online or working for friends on the weekend doing odd jobs? If you were to earn an extra $50 per week that tallies to over $2,500 per year of extra money you can put aside or use to spend on items you need.
    3. Are there things you do during the day that don’t provide you with any financial return? Can you streamline or eliminate those items to shorten your day without impacting income?
  2. Seek out savings on items to purchase.
    1. Flipp provides coupons for grocery and drug store items that my girlfriend attests saves her about $50 per week. There are many other online coupons that can be printed to save you money.
    2. Can you purchase something that you want through kijiji or craigslist or groupon rather than pay full retail price?
    3. Can you delay your purchase until Boxing Day or Black Friday or some other time when you’ll be able to realize significant savings?

groupon

 

These are just a few ideas.  I am sure you will generate many more if you carve out 15 minutes a day to focus on building your net worth, increasing your income, and becoming wealthier.  Every minute, hour, day and week, keep trying and you are sure to progress slowly and steadily.