The rental backup plan

Yesterday Vancouver Banker left a comment about a local developer having trouble selling a condo conversion and opting to rent it out as a temporary backup option.  Hot on the heels of that tidbit Pani Pani sent in this link to a story on the Seattle Bubble blog about a project where the ‘vast majority of buyers’ bailed on their presales and that developers decision to convert to rental units.

Some buyers found they could no longer get a loan, particularly for second homes or investment units, while others just got cold feet, Hoy said. “Because the vast majority have bailed out on us, we have no choice now but to turn it into a rental.”

Will we see more of this in a declining market?  I guess each developer has to do the math based on their margins to determine if its worth selling at market price in a dropping market or renting out at a loss while you wait for buyer demand to return.

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Rob A.
Rob A.
12 years ago

ROFL,

"No. It tells us that these developers were betting that the market would go up long enough for them to cash out."

You are saying the same thing as I am you moron. You aren't disagreeing with you you are agreeing me. The fact that builders aren't cashing out shows that experts with a vested intrest think the market is good in the long/medium term. Hence it is a bullish story. Maybe they are wrong, maybe they aren't, but you agree with me when I say all the people seeing this story as a sign of the apocolypse are morons.

Glad we are on the same page, lol.

Vanguy
Vanguy
12 years ago

hey, somebody stole my name.

anyway…

"had someone in that sales office playing solitaire on the computer every day for more than a year."

That's so 1995, wouldn't the bored sales agent spend the day keeping their Facebook up to date?

crabman
12 years ago

Rob A said: So you guys are saying that renting out a condo is bad economics. With the current yields, yes. Even with 50% down, you will have negative cash flow! Then why are developers renting out units? Because they aren't selling. The reason that builders are putting units for rent is that they are long term realestate bulls. They are taking a short term loss to maintain their long term payoff. No. They can't sell them, and they can't afford to leave them empty. Some income is better than none. Softlanding, pause in the market, whatever. That is what this story is telling us. No. It tells us that these developers were betting that the market would go up long enough for them to cash out. They were wrong. Jeez, u ppl can’t even come up with a consistent… Read more »

markx
markx
12 years ago

You know, there's already a name for it. It's call "repartment". The reverse of going condo. This will be the very very beginning. Next come the rigged auctions by developers, then the bank auction at foreclosure proceedings, then rigged REO auctions, then bank collapses, then taxpayer bailouts, etc.

Ah, the anticipation.

mark
mark
12 years ago

Rental prices are dropping too. Sorry if that's been said already. Going through Craigslist, I see some definite patterns.

I noticed one condo for sale that has dropped the price $11,000 in month:

http://vancouver.en.craigslist.ca/search/rfs?quer

Bluesman
Bluesman
12 years ago

Some cool graphs from the IMF comparing the housing debt to GDP for various countries:

(This one is more current – April 2008)

"The sharp weakening of the housing sector

in several advanced economies over the past

couple of years, and especially the financial turbulence

triggered by increasing defaults in the

subprime mortgage market in the United States,

have raised concerns that, as a result of innovations

in mortgage markets, the housing sector

could be a source of macroeconomic instability."

http://tinyurl.com/5akhnb

Bluesman
Bluesman
12 years ago

Here is an historical analysis (1950-1998) I found by the Federal Deposit Insurance Corp (FDIC) on the relationship of home foreclosures to other various factors such as house appreciation rates and loan-to-value (LTV) rates which explain some, but not all of the variance. Increased leveraging was the third hypothesis that was supported.

Unemployment and interest rates fail to explain the foreclosure trend, so it appears that personal financial responsibility is more important than the state of the economy for explaining home foreclosure rates.

http://tinyurl.com/6ot8wj

You might be interested in looking at this.

Please comment.

scoop
scoop
12 years ago

OT – Sun says Vancouver prices are negative YOY:

"The result was Vancouver home prices actually fell 0.7 per cent in July from a year earlier, though it is still the most expensive market in the country with an average price of $575,730."

http://tinyurl.com/5kth4b

stagnate
stagnate
12 years ago

partisan, i think that's a fake story, but if not his/her solution is simple. nothing down so no equity acrued. he/she is going to live a few months for free until the foreclosure runs its course and he/she has to leave. might as well rent out the other suite and stop paying the mortgage/strata fees on that one also.

Partisan Spectator
Partisan Spectator
12 years ago

Help needed!

A co-worker narrated a weepy story and was asking for help.

End of 2007 he bought two apartments in the same strata (one for himself and one for rent) and now he is facing a somewhat 40K assessment for two units combined for some costly repairs. He tried to get a loan or another mortgage from the bank, but as he has 0 down his request was declined. He is desperate as he can't cough up that sum and knows little what he should do next. Anybody could give a hint?

alexcanuck
alexcanuck
12 years ago

On that stocks/re comparison. Just be sure the market, financing, suppliers etc, in fact the whole business model of your stock doesn't depend on Dosh paying his mortgage and flipping for profit. Lots of ways to lose what you actually have, unlike lots of specuvesters without assets worth coming after who will only lose that which they didn't have to begin with.

INFINITY TOWER?? Any news?

vanguy
vanguy
12 years ago

Basically these developers are placing bet that prices will go up from here. Why else would they hold a building that can't even cover costs? I'm honestly shocked to see this turn of events as I expected the developers to dump and run at the first hint of trouble not lock in for the long term.

Anonymous
Anonymous
12 years ago

Rental yields were better than the selling margins?

I worked in that building before Westbank bought it and the rents weren't close to what the asking price was even after they recently did that big 10% off thing trying to drum up more sales. Even at that time rent was fairly high, I don't see how they'll be able to draw much more. The heavy traffic on the bus loop under the north windows was always a bit of a down point.

I wonder what their deal was with Rennie Marketing – they had someone in that sales office playing solitaire on the computer every day for more than a year. Does the marketer only get paid on sales?

Anonymous
Anonymous
12 years ago

Is INFINITY TOWER construction in trouble – or not?

vanguy
vanguy
12 years ago

Wasn't South Granville Lofts all rentals units to begin with? It was suppose to be for artists, and the such as it was granted true work/live status by the city. Despite that, it turned out that only hairdressers, commercial photographers (ie wedding) and graphic designers could afford the monthly nut.

About two years ago, it was suddenly announced that the original bldg owner was selling it off to Westbank ( I guess) who put planned to put a strata in place and sell off the units.

Really not much to see here, other than Westbank decided that the rental yields were better than the selling margins?

Now if TV Towers or one of those other crapboxes downtown were to go all rentals than that would be interesting. But doesn't the pre-sales contracts prevent that sort of thing happening?

jesse
jesse
12 years ago

"Seriously though, are these developers now going to spin that renting is a good idea?"

A full page ad in the Sun:

The dream. The lifestyle. The Action.

Live close to the sexiest neighborhood in North America! Yes you can have everything: close to shopping, clubs restaurants, and the high life for a mere fraction of what it could cost to own. Let us worry about the maintenance and mortgage. Compare our rents to what the banks would charge you to live in the exact same condo. There is no better deal around, giving you plenty of spare cash to live the dream. Of action. Coming soon. Action.

Rob A.
Rob A.
12 years ago

So you guys are saying that renting out a condo is bad economics. Then why are developers renting out units?

The reason that builders are putting units for rent is that they are long term realestate bulls. They are taking a short term loss to maintain their long term payoff.

Softlanding, pause in the market, whatever. That is what this story is telling us.

Jeez, u ppl can't even come up with a consistent model for the world, lmao.

Vansanity
Vansanity
12 years ago

islander – Yes, but you can't paint your stocks. We've been over this. You can't renovate your rrsp, or add a new granite counter top to your segregated funds! Obviously owning is the only way to go. Buy or die. Rob A finally got it right! Developers are onto the landlord's "money tree" as John coined it. No longer will condos sit empty up for sale, now they will sit empty up for rent. The universe is again in balance as the magic money tree continues to provide its obscene harvest to its rightful owner: The homeowner. Seriously though, are these developers now going to spin that renting is a good idea? Not after 8 years of "renting = pissing your money away tactic, surely they wouldn't flip flop to make a dollar. Not the developers, realtors or the real… Read more »

Mold City
Mold City
12 years ago

Not only are stocks cleaner and quieter than tenants they are far less likely to set up a clandestine drug lab in your portfolio

I don't know.. PFE has been up to something in my portfolio and the carpets are totally ruined. Fortunately they pay a good rent and always on time.. Plenty left over to install some cheap laminate and sell for a profit.

Macronomics
Macronomics
12 years ago

So what exactly are you implying?

That even big time developers sometimes don't have a good read on where the market is going?

Why that's just absurd!

jesse
jesse
12 years ago

"they are far less likely to set up a clandestine drug lab in your portfolio"

How many foreclosed meth labs do you think WM has on its books?

bdk
bdk
12 years ago

Not only are stocks cleaner and quieter than tenants they are far less likely to set up a clandestine drug lab in your portfolio

mohican
12 years ago

Oh man, I'm laughing so hard. Keep it up guys!

John
John
12 years ago

I agree I think rentals are a huge profit maker. This is why there have been hardly any rentals built in this area for so long. Landlords were too busy making huge dollars on the rentals to think about building more. Now that the olympics are coming developers know they can make a killing on rent. It's like a magic money tree!!!! I own 12 of them too so I'll be sitting pretty. You bears are dooomed.

islander
islander
12 years ago

@Dosh My stocks don't call me in the middle of a long weekend to come fix the drippy kitchen faucet, clear the gutters, or change a bulb. If I don't like my current list of stocks, I can sell and buy different ones without hiring a moving van, moving my phone/cable, or filling out a change of address card with Canada Post. My stocks can be sold with one phone call to my financial advisor for well under $100. If I need to raise cash, I can sell part of the stocks but keep the rest. If I want to be conservative, I can buy financial instruments that don't lose principal. Even as a small-fry, I can invest in stocks pretty much anywhere in the world. I don't pay an acquisition tax on my stocks, nor a holding tax on… Read more »