High returns or security

A cautionary tale in todays Vancouver Sun for those seeking high returns AND security in a real estate investment: Two time real estate loser leaves investors high and dry.

A former bankrupt, Hauff made his first stab at developing the 35-acre residential project on Bullock Lake near Ganges in 1996. To fund the development, he borrowed millions of dollars from Multimetro Mortgage Corp. at up to 20 per cent per annum.

Multimetro, run by Vancouver businessman Ken Megale, raised most of the money from mom-and-pop investors. He promised them extremely high rates of return and assured them it was a safe, fully secured investment.

In fact, the project was mismanaged from start to finish, and ended in foreclosure. Multimetro lenders, who were owed $11 million including accrued interest, lost everything.

… but dreams die hard, so Hauff bought the property back out of foreclosure for $9 million and started all over, this time with money from Calgary based Gibraltar Mortage Corp at a 24% per annum rate.

Like Multimetro, Gibraltar raised the money from many small investors, promising them high returns on a supposedly fully secured basis.

Alas, under Hauff’s stewardship, the project once again stalled. In February 2007, Gibraltar called its loans and David Bowra was appointed receiver.

Subsequently, the resort lodge and spa burned down. The insurer has agreed to pay $7.4 million compensation. The property, as is, is estimated to be worth another $18 million to $20 million. So in total, creditors might realize anywhere from $25 million to $28 million.

Meanwhile, there is about $36 million worth of debt on the property, most of it owed to Gibraltar investors. Interest is accruing at the rate of about $600,000 per month. There are also property taxes and professional fees to be paid. So even on a best-case scenario, creditors are going to take a serious hit.

Read the full article here.

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Warren
Warren
12 years ago

Aleks,

Please provide a link with the amount of these cost overruns.

Aleks
Aleks
12 years ago

The skytrain won't disappear, but neither will the debt from cost overruns.

umdesch4
umdesch4
12 years ago

-b Too true. A friend at work is going through this now. He bought a new place, and it was delayed over a year. When he finally got to the walkthrough last week, there were a ton of problems…wrong colours, cracked tiles, chipped bathroom sink, heavy floor damage, etc.

I guess I was thinking more of infrastructure. High property value means high taxes, which means stuff like the new skytrain line, etc. Those things won't all go away once the correction comes.

digi
digi
12 years ago

Speculation encourages a construction boom, increasing supply and making future prices and rents more competitive. Just look at all the articles out of the states about developers selling houses with 'two for one' deals, renters having tons of empty places to choose from at reduced rent, or 'foreclosure bus' tours. Using up future demand today just means better deals once the speculators are wrung out.

-b
-b
12 years ago

… blueray is an improvement but the new condos suck.

umdesch4
umdesch4
12 years ago

Actually, I understand the sentiment of that article linked above. It's very much like "early adopters" of technology.

Of course it never really works out for the early adopter, as they get stuck with a piece of obsolete hardware they paid way too much for (HD-DVD, anyone?), but their willingness to throw money at this stuff benefits the industry as a whole.

I hope that's a decent analogy…

blueskies
blueskies
12 years ago

craigslist word search "desperate"

http://tinyurl.com/6r8bo8

interesting!

Brittanny Spears
Brittanny Spears
12 years ago

Bubble sheeple people herds ran the market up the hill, now they have changed direction. Always the same. You would think it would change, but it never does. I think it is because the fundamental psychology of human behavior has not evolved much in the last 100 years or so.

Drachen
Drachen
12 years ago

Jesse

Well none of it really makes much sense. It's kind of like saying it's great when your arm gets amputated because you get to try out the wonderful new prosthetics these days!

It's looking at the positive side of a bad thing but ignoring the bad side. I'm quite certain the positives of the housing bubble will not outweigh the bad, except perhaps if governments finally decide that the boom/bust culture needs better regulation.

jesse
jesse
12 years ago

"entrepreneurs can tap into the legions of users who were coaxed into the market during the bubble"

Yeah. How do I tap into those owners with negative equity exactly?

bdk
bdk
12 years ago

Great Article -A- I especially liked this part. Perhaps as a joke a few of us can buy Satv/Krissh/idiot/thumsup crappy studio when he goes bankrupt. One other thing dunce, did you imply earlier that a Bosa has never gone bankrupt? I know you won't answer that but you're mistaken if you think it hasn't happened. Secondly if you really sold your place give me the MLS number I can check it on the Xchange. ""The stuff built during infrastructure bubbles—housing and telegraph wires, fiber-optic cable and railroads—doesn't get plowed under when its owners go bankrupt," writes Daniel Gross in Pop! Why Bubbles Are Great for the Economy. "It gets reused—and quickly—by entrepreneurs with new business plans, lower cost bases, and better capital structures. And when new services and businesses are rolled out over the new infrastructure, entrepreneurs can tap into… Read more ยป

rx
rx
12 years ago

It could be a good time to lock in some of that cheap credit if you can find a deal – if interest rates start going up to combat inflation it would be better to have large debt at todays super-low rates than chasing rate increases uphill.

-A-
-A-
12 years ago

"Men Think in Herds

Bubbles are the most fascinating and frightening stories in finance. The dot-com and housing market bubbles are only the most recent episodes of speculative frenzies, a legendary history that includes debacles such as tulip mania, the South Sea Bubble, the Mississippi Bubble, and the Roaring '20s"

But none of these manias come close to the Vancouver Housing Bubble.

http://www.businessweek.com/investor/content/jun2

Warren
Warren
12 years ago

Bad economic signs does not equal fraud. There are still good investment opportunities in commercial projects, and probably some residential somewhere.

ted
ted
12 years ago

One bad business man doesn’t mean the whole sector is a bad investment.

No, what makes the sector a bad investment is the fact that its overpriced driven by loose credit and speculation. That combined with a negative outlook for the economy in general, falling incomes and skyrocketing inventory as people try to cash out make the sector a bad investment in most of BC.

Lager not Logger
Lager not Logger
12 years ago

Comment #17! ๐Ÿ˜€ ๐Ÿ˜€ HAHAHA ๐Ÿ˜€ ๐Ÿ˜€

Lager not Logger
Lager not Logger
12 years ago

Dosh do you make any distinction between investing and gambling?

/dev/null
/dev/null
12 years ago

I think the issue is that the risk was misrepresented. A common theme lately.

Dosh
Dosh
12 years ago

Investors that have made high returns on realestate investing aren't complaining. One bad business man doesn't mean the whole sector is a bad investment.

-A-
-A-
12 years ago

"Multimetro, run by Vancouver businessman Ken Megale, raised most of the money from mom-and-pop investors. He promised them extremely high rates of return and assured them it was a safe, fully secured investment."

When it sounds too good to be true…….

I won't shed a tear.

Hey Thums up,(Rob) I stopped posting on your blog, but somehow it's become a gong show without any effort on my part. Gongrats, have you thought of charging people to visit? It's quite entertaining.

bdk
bdk
12 years ago

Can anyone else understand what Krissh is trying to say here?

Is she trying to do a book report on a book which she hasn't read? Imagine Satv reading a book!

It's good she has a dream. You haven't told me anything you've written a bunch of words, I know five year olds with more brains than you.

Thums up2
Thums up2
12 years ago

Van Zee Rudyard Kipling also wrote a book called "THE ROAD NOT TO BE TAKEN"the story apply to the guys who Scientifically are bears look for the reason to ride market cyclically as Bears say:Oh prices are going up there is a bubble against fundamental,Oh prices are going down there is no bottom in sight then countinue….btw the road they have chose has nothing to do with the life term other than lurk!lurk!lurking to kill their option and oppertunities when they realise sometime in future then they come to know that was a road not to be taken. Bdk, It doesn't matter what we drive when we know what is entrepreneur we can easily drive bears out with bubble. "How is driving a pallette jack related to being an entrepreneur?" I don't have to confirm weather you are right or… Read more ยป

Drachen
Drachen
12 years ago

"How is driving a pallette jack related to being an entrepreneur?"

It's pallet. A palette is a board for paints. A pallet is a platform for transportation and storage of goods. Pallette is not a legitimate word.

Sorry, I'm not normally one to jump all over improper language but I just found the image of Krrish driving a forklift around with a little artist's palette amusing ๐Ÿ™‚

/dev/null
/dev/null
12 years ago

Entrepreneurship requires you to think outside of the box. He deals with boxes every day and he is inside none of them. (Step 2 is the thinking, which is coming along more slowly.)

bdk
bdk
12 years ago

"first step to learn in bussiness or invetments required an interpreneure skill"

Okay Krissh.

So I work at one of the worlds largest companies where a grade 5 education simply wouldn't cut it.

What is it that you do?

How is driving a pallette jack related to being an entrepreneur?