Math? Nobody told me there’d be math!
Shut it, italics man. We don’t have time for your shenanigans today.
Rant time. I’m sick of seeing people (including those of us who should damn well know better) consistently justifying buying too much house.
We’ve seen all the same arguments. Moving is expensive. I want my dream home. We’ll grow into it. All that matters is I can easily afford the mortgage. Hey, I need a sex dungeon in my basement.
Okay, maybe not that last one.
Most people can’t afford extra space. It comes down to that. Think about the average home buyer. They take out a fat mortgage which takes them 20 or 25 years to pay. If they do save any money, it’s 10-15% of their income. A lot of them are a few weeks without a paycheque away from being screwed.
Low rates have also pushed our expectations through the roof. People regularly pay 3x or 4x their gross income for property, justifying it by saying “hey, at least I didn’t pay 6x!” It’s the low-tar cigarette argument.
Extra space doesn’t even make economic sense (unless you monetize it, of course). If the average house costs $200 per square foot to put up (which is way too low, btw), a 12×12 spare bedroom costs $28,800 just to build in the first place, never mind furnish, heat, or finance. That spare bedroom that you use five times a year could end up costing $50,000 over the life of a house. It would be way the hell cheaper to foot the bill for your mother-in-law to just stay in a hotel five times a year.
The too much house equation
I’m strictly opposed to people who can’t afford it buying too much house. When I am GOD (and I will be one day, mostly likely on Tuesday), I will forbid it from happening.
How can we determine if someone has too much house? I made up a formula. Don’t worry, Italics Man, there’s hardly any math at all.
It goes like this: if your mortgage is greater than your liquid net worth (which excludes your principal residence), you can’t have too much house. It’s that simple.
The condensed form of the formula is: LNW > Mortgage
I don’t care how much you tell me you’re going to grow into the house. Or that it’s your dream home. Or that you can afford it. The answer is still no if you couldn’t conceivably sell off everything that you own and pay for the place.
(That’s a bad idea, of course, but it does nicely guard against people buying too much house)
People tend to forget that real estate you live in is a pretty crummy investment. You have to spend money each year to maintain it. The government taxes it. You can’t deduct any associated expenses. And it tends to only slightly outperform inflation over time.
And then, people make this investment even worse by buying too much house. It truly boggles the mind.
Buying a house isn’t an investment. It’s nothing more than a big-ass consumer purchase. It’s a big purchase that makes sense in certain markets at certain times, while not making sense other times. Like in Toronto or Vancouver today.
This is the end
We constantly rag on people who buy too many video games or finance vacations, but we cheer people who make a similar mistake with their houses. The fact is the easiest way for the average person with only a small net worth to save more is to cut their fixed expenses, starting with housing.
You might think my too much house formula is too strict. Fine. Loosen it a bit, see if I care. The point is we’re all collectively buying too much house, and it’s killing our ability to save.
When it comes time to buy a house, traditional thinking goes something like this.
“You need a good Realtor guiding you though the whole process. It’ll make buying a house so much easier to have someone you can trust in your corner.”
This doesn’t go over so well in reality. Back when I was a Realtor, I sold some friends a house. They came in with an offer at about 10% under asking. After telling them that wasn’t going to happen, I asked what their bottom line was. And they refused to tell me, saying it would weaken their negotiating stance.
(They ended up buying the place for about 4% under list price. A win, I guess? I dunno.)
A lot of people only begrudgingly use a Realtor when they buy a house. Sure, the average Realtor clearly knows more about houses than a typical home buyer. Even a crummy Realtor is far more knowledgeable than 80% of first time home buyers. Have you met the average home buyer? They’ve got the intelligence of an empty Coke can.
But there are plenty of criticisms towards Realtors, too. Many refuse to show houses that don’t offer full commission. Others will lose enthusiasm about six houses in. Most just care about getting the deal done. And if the deal goes smoothly, the hourly wage often eclipses $1,000 an hour.
What’s a buyer to do? Sure, you could ask around and find a great agent. Or you could do things the easy way and just use the listing agent.
Why use the listing agent?
I really liked what Reddit user Absolute2014 had to say about the topic.
(Click vigorously to embiggen)
This strategy is so simple and so brilliant I just had to share it. Well played, Mr. Absolute2014, IF THAT IS YOUR REAL NAME.
It’s clear he’s talking about the Toronto market, but it makes sense no matter where you live. The listing Realtor wants activity. They want showings. And if you show up, they’ve got the potential to show you different places. You probably don’t want to take them up on that, but they don’t know that.
Remember how real estate commissions work. A listing agent negotiates a fee. If a pesky buyers’ agent shows up, they’ve got to split that fee in two. And as one four-year-old once told me, sharing is for suckers. That dinosaur was HIS, DARGBLOOMIT. Yes, I know a four-year-old that talks like a 19th century pirate.
If you exclusively use the listing agent, he isn’t forced to split that fee. I guarantee he’s going to push your offer harder than a competing offer.
Still, do your due diligence
There is one problem with buying a house this way.
The selling agent has to dance a tricky line between representing both the buyer and the seller in such a situation. What they’re supposed to do is try to write up a contract that’s fair to both parties while keeping each side’s confidential information a secret.
Reality doesn’t usually work out like that. Most agents disclose confidential information back and forth all the time. They’re just sly about it.
“I like this house. I’d be willing to pay $225,000 for it.”
“I think a reasonable counter-offer in this situation is $225,000. Jimbo does need to buy a house.”
As long as both the buyer and seller are happy, nobody cares. And the Realtor gets both halves of the commission.
Also keep in mind a selling Realtor may be more inclined to keep certain information about the house private in an attempt to protect the sellers.
Let’s wrap it up
I think this whole strategy is a really smart way to buy a house. I’ve already tried it with one Realtor in town, telling them “if you have any listings where the seller wants out bad, come and talk to me.” I’ll let you kids know how it works out.
I can’t believe I haven’t told this story yet. It’s one of my best ones.
The year was 2009. At least I think it was, like y’all can expect me to remember that far back. I can barely remember what I had for breakfast.
I was a terrible real estate agent/mortgage broker. It all came together one year and I made decent money, but the other two years I didn’t make much more than minimum wage. I just didn’t have the killer instinct needed to be a decent agent.
It wasn’t just about networking, which I sucked at (still do, in fact). I wouldn’t even do basic stuff like phone people back if I saw a house they might like. I considered all that stuff to be “slimy used car salesman stuff.”
No wonder I basically starved.
But I did sell quite a few places over the years, including one that ended up being used for some very bad things. Here’s how I was an unwilling participant in mortgage fraud.
It all began…
When one of my office’s female agents decided she didn’t want to deal with a group of guys who phoned her up. They weren’t originally from Canada, and therefore gave her the creeps. Hey, it is small town Alberta we’re talking about here. Casual racism is a thing.
Let me tell you kids something about being a real estate agent. Whenever somebody in your office wants to give you a client or listing, know that the lead is absolute garbage. If it was good, they’d jump on that like a while girl and pumpkin spice *anything*.
But she was nice and I was ambitious, so I took on these guys anyway. They told me they owned a construction company and they were looking to buy a place for about a year while their crew did some work building a new school. The story seemed plausible enough, so I volunteered to take them to a half dozen houses the next day.
We go out to the first place and the lockbox doesn’t actually have a damn key inside. I phone up the Realtor who had it listed, but he’s got no idea what’s going on. So all we can do is look around the outside of the place.
I apologize profusely, but these guys don’t seem to care. They love the place. The price was right, it had plenty of off street parking, and they thought the inside looked great through the windows.
(It turns another Realtor had shown the place and forgot to put the key back. We didn’t find this out until the next day).
We go and view the other five houses, but these guys don’t seem to care. We spend less than five minutes inside each one. They still love the first one. After the last showing, they come back to the office and decide to write up an offer.
This place was listed for $80,000. Remember, I come from a small town with very reasonable real estate values. So this place was cheap, but not overly so when compared to other similar houses. It wasn’t a smoking deal, in other words.
The bottom end of the market was slow, so I encouraged them to come in a little low with their first offer. My warnings fell upon deaf ears. They offered $78,000.
I wasn’t there, but I can only assume this was the seller’s reaction:
I also had to convince the buyers to add a property inspection clause. Not from a home inspector, but from the guys themselves. Remember, they still hadn’t been inside the place.
When things started getting weird
At this point, this is one of the oddest deals I’ve ever done, but there’s still a reasonable explanation behind everything.
But then it started getting weird.
First, the guys insisted on buying the place through their limited company. Except when I Googled it there was no evidence of this company ever doing anything remotely related to construction. As far as I could tell it was an oilfield services company.
Then they come back and we finally get them in the place. We stayed for about a minute and a half. They didn’t even go into the basement.
They also wouldn’t pick a lawyer. It took them at least a week after conditions were lifted. I googled the guy to find his address and the first result that came up was disciplinary actions taken against him by the Alberta Bar Association.
The biggest red flag was probably when I had to fill out the mandatory Fintrac money laundering form. This was a brand new form (at the time) that forced Realtors to make sure the person we were dealing with was indeed the guy who was buying the place.
When a limited company bought the place all I needed to do was get the info for the guy with signing authority. I presented him with the form and his face went white. You could tell he did not want to sign it.
After a brief conversation in their native language, the lead guy handed over his driver’s license and I recorded all of his info. And then I never saw him again.
A couple of months later I got a phone call from the existing tenant. The seller never bothered to contact him. He hadn’t paid a nickel of rent since they took possession. I thought that was weird, especially considering the intended use of the property. So I gave him the new owner’s phone number.
Which was disconnected.
Probably six months after that I got a call from an appraiser. He was doing some research on the property for the Bank of Montreal, and had some questions. How big was it? What was the condition? And most importantly, what did it sell for?
Here’s what happened. These guys bought the place for $78,000. They then altered the purchase contract to say $220,000 and the feature sheet to say the place was far bigger than it really was. These forged documents were then used to get a $200,000 mortgage.
The lawyer’s job was to inform land titles that these guys did indeed pay $220,000 for the place.
And then they never made a payment. I’d assume they did this a few different times and then buggered off to some country where they can’t be extradited.
Wrapping it up
And that’s how I became an accessory to a major crime. It’s been eight or nine years now, so I think I’m in the clear. In fact, I was never even questioned. I never talked to anyone from BMO directly. And I certainly didn’t talk to any cops.
The lesson? Do your job right, kids. Because I insisted on getting all the proper forms, I was in good shape. I suppose I could have done more when I first had suspicions, but I had no proof of anything. It was all just weird.