Monday, May 05, 2008
What Type Of Homebuyer Are You?
Heraclitus was a pre-Socratic Ionian philosopher, a native of Ephesus on the coast of Asia Minor. An ancient Greek, in other words (ladies, never trust a Greek). The reasoning behind his famous quote is the philosophical Law Of Identity, an axiom of Logic, which states that an object is the same as itself. Which then, as it applies to human beings, means that humans tend to project in what they do and in what they choose a reflection of their own inner self. A concept this, which was later on taken up and amplified by stoicists in the Roman Empire and particularly by Emperor Marcus Aurelius.
Marcus Aurelius in fact applied the principle of 'Know Thyself' thoroughly to the various people the Romans had conquered and subjugated throughout the centuries, and when it came to the Germanic Tribes across the Rhine and the Danube he quickly reached the conclusion that those folks did not know themselves at all. So much so, in fact, that he decided to exterminate them entirely (ladies, never trust an Italian).
Now, according to the competition who has conducted this intensive immersion into the depths of civilization, the step between these events that took place in the regions across the Alps and the psychology of the modern homebuyer is clearly very short, at least by cosmological standards anyway - just a handful of centuries.
Following the principle of 'Know Thyself', home seekers can be divided into four types, according to the study in question. Knowing what type you are will enable you to identify and then attract like-minded buyers and increase the resale value of your home when deciding where to sink your home renovation dollars (hopefully, you will not come across a buyer with the mindset of Marcus Aurelius).
The study divides homebuyers into the following four categories (albeit I might add I would have chosen different headings, somehow):
Social Animals
Social animals value spending time with neighbours and going for a walk around the block greeting everybody. They enjoy having a park or community centre nearby, they like to entertain friends, hanging around the kitchen with the family, enjoying the deck or backyard and walking the dog. While the feel of the neighbourhood is a big selling point for these "people's people", renovations that might warm their hearts would be a comfortable new deck, a spacious and homey kitchen, large fireplace, attractive backyard fencing and front curb appeal.
The Epicureans
Above all sun and food traditionalists, they value bright and sunny homes with lots of open spaces, fancy kitchens and gardens, including vegetable gardens, and formal dining and living rooms. Essentially they respond to the materialistic and esthetical aspects of life and want these values reflected in their homes. Renovations that would appeal to this bunch are gourmet elements in the kitchen, a fresh, bright paint job, thoughtful landscaping, opening up rooms by removing partition walls and formal elements such as high quality flooring and crown mouldings.
Pleasure Seekers
For them the experiences in life make it worth living. As such, they are somewhat oblivious to interior decorating and fancy faucets. But show them items such as a hot tub, pool, Jacuzzi, a home theatre room with surround sound system, recreation room complete with entertainment centre, wet bar and pool table, or a backyard deck with built-in barbecue and they will be ready to let the good times roll.
Villagers
Villagers are willing to sacrifice space and even comfort in order to be able to live close to the conveniences they care about. Having groceries stores, restaurants and shops within walking distance or a short car ride away makes life exciting for these urbanites and uses their time in the most efficient manner. Home details that will catch their eyes are an ingenious and efficient use of space, professionally organized closets, open and bright floor plans and high quality materials that improve the looks of otherwise cramped quarters.
So now we know it. This study and particularly its conclusions certainly elevate all of us – shall we say – above the crowd. The sky's the limit. See you all in the stratosphere.
Luigi Frascati
Labels: REAL ESTATE
Saturday, November 03, 2007
Use, Location And Market Timing
The value any talented real estate agent can add goes well beyond the standard of care Clients are entitled to expect, which is the knowledge or competency element of such transactions. Real "value add" derives from the structural elements that flow from experience and counselling. A good agent does not simply warn a client on what he cannot do; the key is how to deal with problems and still fulfill the Client's objectives. Take negotiating an offer, for instance: only rarely are problems insurmountable, especially in a world like real estate where flexibility almost always provides more than one approach.
A good beginning in a Realtor-Client relationship, once the issue of agency has been defined and explained, is always to ask questions and listen to the answers carefully. All experienced Realtors realize that Clients may not frame a deal in particular terms, may not reveal immediately – whether unwillingly or otherwise – exactly what is that they are looking for, may not even know, in fact, what is that they want. Therefore sorting out the various elements such as prices, rent, type of real property asset, selling, leasing, financing and many similar details may not be provided in any particular sequence, or at all. Many good agents are quite talented at the "extraction" of information early on in a clear and useful manner.
One major determination is the purpose of the Client's representation. For instance, it is very different to act on behalf of a corporation seeking to lease space in an office building as compared to a developer with a vision for building value, and how to realize it in a fairly short time horizon. But no matter what, the three old elements of value in real estate – use, location and market timing – apply to almost every transaction.
To appreciate the importance of these three elements one must first realize that real estate is the single most fundamental asset of value worldwide, and it has always been. Land and its potential uses as a resource – for agriculture, grazing, actual occupancy, access to minerals for extraction, access to water, transportation and so forth – has been fought over since Biblical times.
The real value tied up in land is inherent to its use, location and market timing, not merely its existence.
Economics is very concerned with real immovable property and rules like the one regarding its valuation and disposition, and obligations accrueing to its owners. In economic terms, real property consists of some natural capital (land per se) and infrastructural capital (buildings and improvements). Land use and land management practices have a major impact on natural resources including water, soil, nutrients, plants and animals. Land use information can be used to develop solutions for natural resource management issues such as salinity and water quality. For instance, water bodies in a region that has been deforested or having erosion will have different water quality than those in areas that are forested.
According to a report by FAO, land degradation has been exacerbated where there has been an absence of any land use planning, or of its orderly execution, or the existence of financial or legal incentives that have led to the wrong land use decisions, or one-sided central planning leading to over-utilization of the land resources - for instance for immediate production at all costs. As a consequence the result has often been misery for large segments of the local population and destruction of valuable ecosystems.
Such narrow approaches should be replaced by a technique for the planning and management of land resources that is integrated and holistic and where land users are central. This will ensure the long-term quality of the land for human use, the prevention or resolution of social conflicts related to land use, and the conservation of ecosystems of high biodiversity value.
Luigi Frascati
Labels: REAL ESTATE
Saturday, July 28, 2007
The Most Expensive Homes In The World
There is just such a place, a 103-room mansion spreading out over 58 acres of gardens and woodlands called Updown Court located in Windlesham, Surrey, England.
Now, this is quite a home for the extrovert purchaser who is into sports and doesn't mind to carry a little extra mortgage. This particular property offers several ballrooms, an indoor squash court, a two-lane bowling alley and a poolroom just as well. If the wife likes gardening, she will find her pleasures in the 11-acre landscaped and manicured garden, and chatting with fine neighbours the likes of the Duchess of York, Elton John, and, at nearby Windsor Castle, the Queen of England has never been easier.To impress your friends, the entrance hall features a sweeping dual staircase modeled after one in the late fashion designer Gianni Versace's Miami home. Behind the staircase, a great hall supported by marble columns looks onto an ornamental pond, which holds a fountain that, at the flick of a switch, sprays water 200 feet in the air.
Marble abounds. Five acres of more than 30 different types of imported stone line the floors, driveway, and expansive terraces. One indoor swimming pool is styled as a Roman bath, while another is set off by a two-story stone mosaic depicting a snow-capped Mount Fuji (that would be in Japan …).
This 50,000 square foot house may be just what you need to escape your daily routine, with its heated marble driveway, 24-carat gold leafing on the mosaic floor of the study, a helipad for your flying trips to the store, the 50-seat indoor movie theather and the underground garage that has enough room to harbor eight limousines. Guests can be lodged in anyone of the 23 bedrooms but really – and in my professional view this is perhaps the most important bonus – the cost of upkeeping is a modest USD 2 million per year.
Conveniently priced at USD 138 million (that's right, million with a "m" as in Mary), this is no doubt Luigi's hand-picked bargain of the year. And the added plus is that it can be paid for also in Sterlings – now, who could ask for anything more. Just the perfect place to drop your darn Yankee accent … yeah.
If, on the other hand, you do not wish to leave North America and like horses, may I suggest the Hala Ranch to your otherwise inquisitive attention.
The Hala Ranch – as one can intuitively deduct from the name – is the property of Prince Bandar bin Sultan bin Abdul Aziz Al Saud (but make an offer and you can call him Al). The Prince, who used to be the Saudi ambassador to the United States, is selling as he has taken up the position of National Security Counselor back in Saudi Arabia. This 56,000 square feet home is just what you need if you are looking for a little country décor, peace and tranquility. The estate has its own wastewater treatment plant thus allowing you to save on sewer charges, and a mechanical shop with its own gasoline pumps and carwash. Cross-country ski trails are maintained throughout the property. The centerpiece lodge of the estate is larger than the White House, so if Hillary wins you are going to make her green with envy too. It is built in a rustic style, with massive timber beams and stone columns, and contains 15 bedrooms, all with patios, and 16 bathrooms, just in case one gets all clogged up.Conservatively priced at USD 134 million, this is an opportunity one can hardly afford to pass. Trust me on this one, or my name is not Luigi …
Have you ever considered relocating to Turkey? I'm asking because, as you know, although still in Asia (Asia Minor, to be exact) Turkey is poised to become Europe in the not too distant future. The perfect Europe, one might add – without the Europeans …
But really, if you wish to cultivate your talent for archaeology and ancient history there is nothing better than this 30,000 square foot residence overlooking the Bosphorus in Istanbul, Turkey, (Europe). Sited on three-quarters of an acre, the Waterfront Estate offers opulent living with its 64 rooms, which feature large windows looking to the water. You can even fish from your bedroom. This mansion boasts not only gilded mouldings and crystal chandeliers, but it even has a rare quay that is nearly 200-feet long (as I said, you can fish from the bedroom). If you need a boat, the Turks can rent you one for about 1 Euro an hour.Presently offered for sale for USD 100 million, there is a little room for negotiations here. Sorry, only American Dollars accepted by way of cash, Visa or Mastercard or, of course, debit card.
How about a pied-a-terre in none other than New York City for your week-end leisurely trips? Or for your next New Years Eve in the Big Apple, close to Time Square? Think about it, you wouldn't have to watch it on CNN anymore. If this is the case, may I recommend The Pierre Penthouse, a chateau in the sky that occupies the top three floors of one of the poshest hotels in New York City, right abutting Central Park. Guess the price, just guess it – USD 70 million!
Now, this is what I call cheap, cheap, cheap! The original 3,500-square foot ballroom boasts a 23-foot high ceiling, and on each of the two west-facing corners, soaring French doors open up onto terraces offering breathtaking views of Central Park and beyond. The master bedroom suite has two additional corner terraces so that, all in all, the balconies and windows have 360 degree views of Manhattan, Central Park, the East River and the Hudson River. And, with an annual maintenance fee of USD 464,600 which includes the services of a uniformed housekeeper and houseman (yes, I know, I didn't believe it myself), this is a true deal in the making. Hurry, it won't last. luigi@dccnet.com
www.luigifrascati.com/
Real Estate Chronicle
Labels: REAL ESTATE
Tuesday, June 05, 2007
Let's Play Monopoly
The commercial property market REIT's remain piping hot, even as housing shivers.
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Last year’s acquisition by The Blackstone Group (www.blackstone.com) of Equity Office Property Trust for USD 36 billion was the largest buy-out ever of an owner of office buildings. More importantly, it signaled that the commercial property market is healthy, now more than ever, and that is not afflicted by the same ailments so characteristic of the residential markets, much less by bubbles of any color, shape or form.
Albeit the biggest deal ever, Blackstone’s move was one of the many transactions leading to the privatization of the commercial property markets, a trend that since then has seen some USD 100 billion change hands and disappear from public ownership both in the United States and Canada. Today’s property barons can borrow against the value of the assets and use the cash-flow from rental income to meet the interest payments. With property values rising fast, they can afford to strike any deal they want.
This Monopoly-like craze is not confined to America. Just as bonds, stocks and shares are freely traded across borders, so is ownership of commercial property assets. Monopoly goes global!
The Bank of Canada reports, for example, that cross-border commercial and office property investment worldwide hit USD 290 billion in the first half of 2006 – a 30 percent increase over the same period in 2005. In the process, once obscure markets have been swept into the mainstream. Take the Euro Zone, for instance. Practically all new entrants into the European Union have benefited from the convergence of Western investors looking to snatch up buildings at rock-bottom prices. Bulgaria is the latest example of this trend.
Commercial real estate is all part of the same ‘search for yield’ trend that has seen investors hunting around the globe for other high-income assets. It is all part of globalization and governments – especially Western governments – see it in a positive light. Because of this the gap between yields on the highest-quality properties and the second-tier sites, especially those located in what used to be second-tier nations, has narrowed everywhere.
Commercial property is a hybrid asset. It offers high yield, giving it bond-like characteristics. And moreover like shares and unlike bonds, investors can expect that yield to grow, at least in line with inflation. Enthusiasm for the sector waned in the 1980’s and 1990’s because of fat Stock Market returns. In this day and age, however, pension funds are desperate to diversify from shares and bonds, and commercial property is benefiting from capital being diverted by investors from the Stock Exchange.
Not everything is rosy, though. The catch is the lack of liquidity. It takes time and know-how to buy and sell a building, especially in farfetched places, and recruiting and managing tenants as well as maintaining and up-keeping those buildings involves an organization all by itself. So as the market develops, investing becomes more and more sophisticated.
The key to the growth of the commercial property markets and their widespread globalization has been the ever-increasing development of REIT’s or Real Estate Investment Trusts. These are companies quoted in the Stock Market that bundle together portfolios of buildings, allowing investors to buy and sell whenever and wherever they wish.
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE
Saturday, May 26, 2007
Recreational Properties
A niche market that never seems to slow down.
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Many of us have fond childhood memories of dad loading up the station wagon or van and heading out of town for a long week-end.
For some the destination was a lakeside campsite, but for many it was the summer cottage or cabin by the lake. For others it was a Winter activity that brought with it the long-anticipated excitement of driving up to the favourite mountain and throwing open the doors to a modest old ski lodge that one could call home for the next week or so. But unless one was lucky enough to inherit dad's cabin, the thought of purchasing one piece of recreational paradise can be daunting for most young families.
With prices still on the rise and demand for vacation homes brisk notwithstanding the general slowdown in real estate, there are a few bright lights for homeowners looking to pick up a second home or recreational property.
The Canadian Mortgage And Housing Corporation has instituted recently a new program that will provide Homeowner Mortgage Loan Insurance for borrowers with more than one residential property. This means that Purchasers can now obtain a mortgage insured by the Canadian Mortgage And Housing Corporation on a recreational property with as little as five percent down.
Traditionally getting institutional financing for a vacation property was a challenge, because lenders typically based their lending decisions on the risk of reselling this type of properties. As many second homes are located outside urban centers and, more often than not, in remote rural or coastal areas they might have limited resale potential, which from a mortgaging point of view increased the risk of financing. To mitigate this risk, lenders would require borrowers to put up more money down - as much as thirty-five percent or more, in fact. Even well-known and popular destinations such as Whistler, British Columbia required a minimum of twenty-five percent downpayment.
But lifestyles are changing and these changes affect decisions that real estate consumers make regarding how and where to live. So the Canadian Mortgage And Housing Corporation has made a move to put vacation properties within reach of more people. With a constant and steady increase in demand for this type of properties, the Canadian Mortgage And Housing Corporation has determined that the market is such that it is willing to insure lenders against potential losses. This is welcome news for those who have been longing to get a recreational property but did not want to wait until retirement to come up with the downpayment.
All Canadian Mortgage And Housing Corporation's products are permitted to be used with the Homeowner Mortgage Loan Insurance and since most major institutional lenders already have their own recreational property mortgage products, consumers have the flexibility to choose the type of financing that is right for them.
However, as with most types of financing, there are some key limitations that is important to be clear on. The purpose of the Homeowner Mortgage Loan Insurance is to make it more feasible for consumers to purchase a second home. It is important to distinguish between a second home and a rental property. The Homeowner Mortgage Loan Insurance is not intended to allow an investor to purchase a rental property with five percent down. The guideline states that at initiation the real capital asset that secures a mortgage insured by Canadian Mortgage And Housing Corporation must be intended for occupancy at some point during the calendar year by the borrower or a relative of the borrower on a rent-free basis. If a rental income is anticipated from the property at a future date, it will not be calculated for the purpose of assisting the Purchaser to qualify for the loan.
The location of the property is not restricted to major resorts or popular vacation spots, but there are some general requirements that apply as well. For instance, the recreational property must be suitable for and available for year-round occupancy. Properties that are constructed for seasonal use or have seasonal access are not eligible. As such, vacation cottages located on an island must have year-round bridge or ferry access. And finally, timeshare interests, life leases and properties in rental pools are not eligible.
The Canadian Mortgage And Housing Corporation's website can be found at http://www.cmhc.ca/
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE
Wednesday, May 23, 2007
A Contract To Enter Into A Contract Is Unenforceable
There is no such a thing in Real Estate as agreeing now to agree at a later date.
There is no grey area in Real Estate, which one can find otherwise in commerce and trade. For instance, letter of intents that are widely used prior and during negotiations between corporations or between individuals and corporations have no place whatsoever in the world of real estate, where the only subject matter of trade is the exchange of titled interests in land for money. One cannot stipulate today to contract out in the future and hope the stipulation will be upheld, unless such an agreement is contained in a contract drafted and accepted today and is in the form of an option.
In essence, a stipulation to contract out at a later date is a void contract, meaning that such a stipulation does not exist under the law of real estate because no contract ever existed in the first place. Therefore the parties to the stipulation must be returned to their original bargaining positions as far as it is practically possible. This is also the case in the situation where both parties want the stipulation to continue - an impossibility since no contract exists between them in the present tense.
This principle was recently reaffirmed in the Supreme Court of British Columbia in a case involving a private transaction between a prospective Purchaser and a prospective Seller. In this case there was a document executed between the parties, which clearly set out the legal description of the real property to be exchanged as well as the purchase price - CAD 580,000. The document also set out that there would be a deposit of $10,000 held by the purchaser's lawyer in trust, that the deposit would be applied towards the purchase price and that it would be returned to the purchaser if the sale failed to complete.
Although on a cursory examination this document closely resembled a Contract Of Purchase And Sale there was, however, a fundamental element entirely missing: the date of completion. As no completion date had yet been agreed upon, a paragraph was inserted in its lieu that read as follows:
"The Contract of Purchase and Sale of the Property will be prepared by the Purchaser's lawyers with terms & conditions, and the date of completion of the Property to be agreed by the Vendor and the Purchaser".
Later on a completion date was actually agreed upon by the parties, stipulated to be March 3, 2005. On February 24, the solicitor for the Purchaser forwarded to the solicitor for the Vendor the necessary documents to complete the transfer. However, on March 3, 2005, the completion date set out in the document, the vendor declined to complete, on the grounds that there was only an agreement to agree in the future to the purchase and sale of the subject property.
The Court agreed with the Vendor. In reaching his conclusion, the Trial Judge opined as follows:
"Here the wording of the executed document is clear. The parties have said that a contract will be prepared with terms and conditions to be agreed by the vendor and the purchaser. "To be agreed" means some further agreement is necessary in the future. [...] this is a circumstance where "the execution of the further contract is a condition or term of the bargain".
In other words, where the parties have stated that the terms and conditions are to be agreed, it cannot be said that the document is the mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through.
The deposit was ordered reimbursed to the Purchaser forthwith.
Luigi Frascati
Labels: REAL ESTATE
Friday, May 11, 2007
Hazardous Trees And The Duty To Inspect
A recent Court case based on the Common Law concept of private nuisance clarifies the duty of real property owners to have trees on their properties routinely inspected.
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Trees can be a nuisance.
Common Law recognizes two types of nuisance: public nuisance and private nuisance. A public nuisance is defined as an unlawful act or omission, which endangers the safety or comfort of the public. Examples of public nuisance include obstructing a highway, keeping a common gaming house or selling unwholesome provisions. On the other hand, there are two types of private nuisance. The first involves any wrongful disturbance of an easement or other right in respect of land. The second, by far the most common, involves the act of wrongfully causing or allowing the escape of injurious things onto another person's land such as, for example, water, smoke, smells, fumes, gas, noise, heat, electricity, vibrations, animals and vegetation.
A shade tree that is an object of beauty to the owner of the property upon which the tree stands, may be nothing but a nuisance to the next door neighbour. The neighbour may have to contend with falling leaves, overhanging branches, roots that extend into his drains or the wind-driven fall of the tree onto his property. Since the planting and growth of a tree is a natural use of one's property, the question revolves around the type of remedies that are available to the adjoining neighbour to combat these nuisances. Negligence may come to the neighbour's aid, but the law of nuisance is the principal remedy. Nuisance in this sense refers to a use of one's property, which causes material discomfort and annoyance for the ordinary purposes of life, to a neighbour or to his property.
The most troublesome source of damage is the tree that falls onto the neighbour's home. In one case a windstorm which evidence indicated could occur once every two years, broke off the top portion of a tree approximately thirty-five feet above the ground, which fell on the roof of the adjoining home. While the break occurred because of advanced internal decay and ant-tunnelling, there was no reason for the tree owner to know that the tree was decayed or dangerous and should have been cut down. There was evidence that the neighbour enjoyed the shade provided by the tree which was very close to the property line, and that the neighbourhood in which the two properties were located was well treed and homes were normally built among the trees.
The Judge decided that there was no liability because the growing of the tree was a natural use of the property.
A recent decision, however, examines a different question: whether Common Law imposes a duty on property owners to have trees on their land routinely inspected by an expert to determine whether any of them constitute hazards. This particular action was based on damages as a result of a tree falling on a wharf. The tree was approximately 125 to 150 years old, approximately 180ft. long and approximately 4ft. in diameter. The tree fell because it suffered from a disease, which causes root and trunk rot. There was no wind or other external force that caused the tree to fall. The defendant did not know that the tree was a hazard or that it was under distress of any sort. He also did not have the expertise to recognize a tree that was in distress. He was able to see the top of the tree from his home because eagles perched on it. He did not think that the tree was lacking in foliage.
From a practical point of view, the only way the defendant could have known about the hazardous tree would have been to have his property inspected by an expert. No experts had inspected the property prior to the accident. In fact, the tree grew at the top of a steep, forested slope and, while it was clearly visible from the neighbour's house, the defendant was unaware of the condition of the tree also because it was difficult to access.
On crashing down on the wharf, the fallen tree caused CAD $35,000 in damages and the waterfront owner lost his dock.
There was a difference of opinion between the expert witnesses called by each party as to whether the amount of foliage, the discoloured and raised bark and a ten-degree lean towards the dock were evidence enough of a hazardous tree. However, they did agree that only an expert would have been able to determine that the tree was diseased.
On examining the case law brought forth by the lawyers, the Judge found no duty on the part of property owners of relatively inaccessible, densely forested land to hire experts to routinely inspect trees. In fact, the Judge commented as follows:
"In my view the law does not impose on landowners in British Columbia a duty to hire an expert to routinely inspect their forested land. Reasonableness requires that the landowners pay attention to trees that line busy roads, or are adjacent to homes or areas where there is frequent human traffic. Reasonableness also requires some action to be taken if signs of decay become visible to the ordinary person from a routinely accessible vantage point. It is not reasonable to require landowners to retain an inspector to scale steep slopes and wade through dense underbrush in order to locate signs of decay."
Whereas the instant case was therefore dismissed, the Judge further commented that landowners "[...] who live next to busy roads or homes or areas used by the public, and who have reasonable access to the trees on their properties, have a duty at Law to inspect those trees for signs of disease that justify obtaining expert advice".
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE
Monday, April 23, 2007
The Duty Of Confidentiality In Real Estate
Is there any such thing as a realtor-client privilege? An article of interest particularly to fellow Realtors.
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In any Listing Agreement there is a point in time when the agency relationship ends.
A Listing Agreement, as it is widely known, is none other than a contract between the rightful titleholder of an interest in land (the ‘Principal') and a duly licensed real estate firm (the ‘Agent'), whereby the firm stipulates and agrees to find a Buyer within a specified timeframe who is ready, willing and able to purchase the interest in land that is the subject matter of the contract while acting within the realm of the authority that the Principal confers onto the Agent, and wherein furthermore the titleholder stipulates and agrees to pay a commission should the licensee ever be successful in finding such Buyer.
As in all contracts, there is implied in a Listing Agreement an element which is commonly know at law as an ‘implied covenant of good faith and fair dealings'. This covenant is a general assumption of the law that the parties to the contract - in this case the titleholder and the licensed real estate firm - will deal fairly with each other and that they will not cause each other to suffer damages by either breaking their words or otherwise breach their respective and mutual contractual obligations, express and implied. A breach of this implied covenant gives rise to liability both in contract law and, depending on the circumstances, in tort as well.
Due to the particular nature of a Listing Agreement, the Courts have long since ruled that during the term of the agency relationship there is implied in the contract a second element that arises out of the many duties and responsibilities of the Agent towards the Principal: a duty of confidentiality, which obligates an Agent acting exclusively for a Seller or for a Buyer, or a Dual Agent acting for both parties under the provisions of a Limited Dual Agency Agreement, to keep confidential certain information provided by the Principal. Like for the implied covenant of good faith and fair dealings, a breach of this duty of confidentiality gives rise to liability both in contract law and, depending on the circumstances, in tort as well.
Pursuant to a recent decision of the Real Estate Council of British Columbia (http://www.recbc.ca/) , the regulatory body empowered with the mandate to protect the interest of the public in matters involving Real Estate, a question now arises as to whether or not the duty of confidentiality extends beyond the expiration or otherwise termination of the Listing Agreement.
In a recent case the Real Estate Council reprimanded two licensees and a real estate firm for breaching a continuing duty of confidentiality, which the Real Estate Council found was owing to the Seller of a property. In this case the subject property was listed for sale for over two years. During the term of the Listing Agreement the price of the property was reduced on two occasions. This notwithstanding, the property ultimately did not sell and the listing expired.
Following the expiration of the listing the Seller entered into three separate ‘fee agreements' with the real estate firm. On all three occasions the Seller declined agency representation, and the firm was identified as ‘Buyer's Agent' in these fee agreements. A party commenced a lawsuit as against the Seller, which was related to the subject property.
The lawyer acting for the Plaintiff approached the real estate firm and requested that they provide Affidavits containing information about the listing of the property. This lawyer made it very clear that if the firm did not provide the Affidavits voluntarily, he would either subpoena the firm and the licensees as witnesses to give evidence before the Judge, or he would obtain a Court Order pursuant to the Rules Of Court compelling the firm to give such evidence. The real estate firm, believing there was no other choice in the matter, promptly complied by providing the requested Affidavits.
As a direct and proximate result, the Seller filed a complaint with the Real Estate Council maintaining that the information contained in the Affidavits was ‘confidential' and that the firm had breached a duty of confidentiality owing to the Seller. As it turned out, the Affidavits were never used in the court proceedings.
The real estate brokerage, on the other hand, took the position that any duty of confidentiality arising from the agency relationship ended with the expiration of the Listing Agreement. The firm argued, moreover, that even if there was a duty of continuing confidentiality such duty would not preclude or otherwise limit the evidence that the real estate brokerage would be compelled to give under a subpoena or in a process under the Rules Of Court. And, finally, the realty company pointed out that there is no such thing as a realtor-client privilege, and that in the instant circumstances the Seller could not have prevented the firm from giving evidence in the lawsuit.
The Real Estate Council did not accept the line of defence and maintained that there exists a continuing duty of confidentiality, which extends after the expiration of the Listing Agreement. Council ruled that by providing the Affidavits both the brokerage and the two licensee had breached this duty.
The attorney-client privilege is a legal concept that protects communications between a client and the attorney and keeps those communications confidential. There are limitations to the attorney-client privilege, like for instance the fact that the privilege protects the confidential communication but not the underlying information. For instance, if a client has previously disclosed confidential information to a third party who is not an attorney, and then gives the same information to an attorney, the attorney-client privilege will still protect the communication to the attorney, but will not protect the information provided to the third party.
Because of this, an analogy can be drawn in the case of a realtor-client privilege during the existence of a Listing Agreement, whereby confidential information is disclosed to a third party such as a Real Estate Board for publication under the terms of a Multiple Listings Service agreement, but not before such information is disclosed to the real estate brokerage. In this instance the privilege theoretically would protect the confidential communication as well as the underlying information.
And as to whether or not the duty of confidentiality extends past the termination of a Listing Agreement is still a matter of open debate, again in the case of an attorney-client privilege there is ample legal authority to support the position that such privilege does in fact extend indefinitely, so that arguably an analogy can be inferred as well respecting the duration of the duty of confidentiality that the Agent owes the Seller, to the extent that such duty extends indefinitely.
This, in a synopsis, seems to be the position taken by the Real Estate Council of British Columbia in this matter.
Clearly, whether the duty of confidentiality that stems out of a Listing Agreement survives the termination of the contract is problematic to the Real Estate profession in terms of practical applications. If, for instance, a listing with Brokerage A expires and the Seller re-lists with Brokerage B, if there is a continuing duty of confidentiality on the part of Brokerage A, in the absence of express consent on the part of the Seller a Realtor of Brokerage A could not act as a Buyer's Agent for the purchase of the Seller's property, if this was re-listed by Brokerage B. All of which, therefore, would fly right in the face of all the rules of professional cooperation between real estate firms and their representatives. In fact, this process could potentially destabilize the entire foundation of the Multiple Listings Service system.
In the absence of specific guidelines, until this entire matter is clarified perhaps the best course of action for real estate firms and licensees when requested by a lawyer to provide information that is confidential, is to respond that the brokerage will seek to obtain the necessary consent from the client and, if that consent is not forthcoming, that the lawyer will have to take the necessary legal steps to compel the disclosure of such information.
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE
Friday, April 20, 2007
Encroachments
A recent appellate decision underscores the importance of taking care of land encroachments immediately as soon as they are discovered, before things get really out of hand.
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'Never impose onto others what you would not choose for yourself' [Confucius in ‘The Analects' (XV.24)].
In its simplest form, a real estate encroachment is real property that extends onto adjacent land owned by someone else. For example, if someone builds a shed at the edge of their property without knowing the actual property boundaries, the shed may extend onto land that they do not own.The building of a structure entirely or partly on a neighbour's property constitutes an encroachment.
Encroachments may occur due to faulty surveying or sheer obstreperousness on the part of the builder, or both. Having a professional survey performed before building near the property boundary is a good idea if no survey records are available, so that any possible encroachment issues can be avoided.
If one is found guilty of encroachment, the neighbor typically has legal grounds to sue and force removal of the building or compensation for what he/she has lost in reduced property space and value. The optimal solution is never to get involved with properties that have encroachment problems. Sorting out the legal mess that encroachments onto someone else's land can cause is invariably expensive and time consuming, as the following court case, which ultimately landed right in front of The Court of Appeals of British Columbia, can confirm.
The Plaintiff, a single woman, and the Defendants, husband and wife, live next door to each other in Mission, B.C. The Defendants purchased their 5.5-acre property in 1996. The Plaintiff bought her 4.4-acre property in 1999. Each bought their property under the impression that the Defendants' driveway formed the Southeast boundary of Defendants' property and the Northeast boundary of Plaintiff's property. The previous owners of Plaintiff's property had maintained the land between their house and the Defendants' driveway (the "Northeast segment"), and the Plaintiff continued to maintain the Northeast segment after she moved in, including creating a garden there.
As a result of an informal survey done by one of the Defendants - the wife to be specific - in 1997, about a year after moving onto the property, she concluded that some of the outbuildings on the Northeast segment were actually on the Defendants' land. She said nothing about this to her husband, even when the previous owners sold their property to the Plaintiff. In fact the husband believed the driveway marked the boundary between his property and the Northeast segment until he received an official survey in February 2000.
In the Fall of 1999, the Defendants began to build a road branching off from the driveway to the rear of their property. They needed the road for access to some buildings they were constructing for their businesses. As a result of the road construction, both parties commissioned surveys early in 2000.The surveys revealed that some of Plaintiffs' structures in the Northeast segment (part of her garden shed; part of a storage building she uses for wood storage and to house a generator; part of a fenced run attached to the storage building; a satellite dish on a post; and an underground propane supply line) encroached on the Defendants' land. The surveys also revealed that there had been a trespass by the Defendants' contractor onto the Northwest part of Plaintiff's land that resulted in trees and bushes being destroyed (the "disturbed area").
Relations between the parties grew acrimonious after Plaintiff's counsel contacted Defendants to discuss compensation for the disturbed area. Defendants became very angry and told Plaintiff to move her buildings off their land. They also told her they intended to build a chemical storage facility on the Northeast segment. In the Spring of 2001, Plaintiff planted two shrubs on the Northeast segment, and Defendants phoned her threatening to build a parking lot on the segment. Also in the Spring of 2001, Plaintiff visited the disturbed area and found that Defendants' new road had been widened. She commissioned a new survey, which revealed that the road and roadbed actually encroached on her land to an extent of 241 square meters (about 2,500 square feet).
Relations between the parties continued to deteriorate. Defendants informed Plaintiff that they would be bringing heavy equipment onto the Northeast segment, cutting down all the trees, adding fill to the area, doubling the size of their dog kennels, and placing a chemical storage facility within feet of her home.
Plaintiff's lawyer filed a Statement Of Claim and applied for an injunction. She sought either an easement or vesting of the Northeast segment under s. 36 of the Property Law Act of British Columbia, general, special, aggravated and punitive damages and damages for diminution of the value of her property, the value of the lumber removed from her property, and the cost of restoring the disturbed area.
In their Statement Of Defense the Defendants admitted to a "minor trespass" on Plaintiff's property. They counterclaimed seeking an order that required Plaintiff to remove all encroachments from their land (that is, from the Northeast segment) and damages for trespass.
The Trial Judge found that the requirements of s. 36 were met by the Plaintiff. The Trial Judge held that Plaintiff undoubtedly had an honest belief that her property included the Northeast segment, that the buildings were of a permanent nature and could not be easily or inexpensively moved and, in the absence of any evidence about the value of the Northeast segment or any diminution in value of either property depending on the outcome of the litigation, that the Northeast segment was of more value to the Plaintiff and any subsequent owner of her property than to the Defendants.
The Trial Judge further noted that Plaintiff's house was close to the property line and that the Northeast segment provided a buffer and privacy from commercial traffic on Defendant's driveway. Her use of the land for her garden and outbuildings did not inconvenience the Defendants or precluded them from widening their driveway. In the result, the Trial Judge concluded that the balance of convenience was substantially in Plaintiff's favor and, moreover, that an easement would not address all of the equities and the need for finality in the dispute. She ordered that title to the 241 square meters in the Northeast segment vest in Plaintiff. The Judge further noted Defendant's wife failure to alert either the previous owners of Plaintiff's property, or her own husband or the Plaintiff to her discovery that the outbuildings encroached on the Defendant's land, and determined that this fact was instrumental in vesting the Northeast segment to Plaintiff.
As to the matter of compensation, the Trial Judge also made orders that Plaintiff pay to the Defendants the difference in value between the 241 square meters in the Northeast segment and the area encroached on by the road, that both parties pay damages for trespass, and that the Defendants pay Plaintiff punitive and exemplary damages.
This decision has now been upheld in Appeal.
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE
Saturday, April 07, 2007
Real Estate: The Power Of Mind Over Money
"Give me a million dollars, and I will turn it into two millions". Forgive me, but if anything were to qualify as a silly statement, this would be it. Not because this statement is untrue, but because it is inherently obvious. Anybody can turn a million dollars into two millions. The trick, of course, is to get the first million.
Or how about this one: " The rich get richer, the poor get poorer". Politicians as well as ordinary people use this statement as a political weapon to endorse the idea of taxing the rich, so as to redistribute their wealth to the poor. But even at the risk of being too blunt, the reality of it all is that giving money to the poor does not make them rich. If it did, all those welfare recipients out there would be millionaires.
"The rich get richer, the poor get poorer" is true, but within an entirely different context. It does encapsulate, in fact, the secret to accumulate wealth. The reason as to why rich people get richer and poor people get poorer is that rich people continue to do all the right things that got them rich in the first place, whereas poor people continue to do all the wrong things that got them poor. Naturally, then, it is of extreme importance to find out how rich people got that way.
Statistics show that if one goes back far enough in the family history of wealthy people, it comes to a point where none of them started rich. There was a time when the rich were poor - as poor as today's poor. In fact, to be more precise, there was a time when the rich were ‘broke'. To be poor is a state of mind, to be broke is a state of ... money, and lack thereof. With the difference consisting in the fact that one can always fix being broke, whereas it is not so easy to fix being poor.
So, how does anyone fix being broke? There is no magic: work hard, get a little money,save some of it and then invest it. Eventually, with time, one will not be broke anymore. That is according to study after study conducted by financial researchers everywhere. This is why, as I have stated above in my opening line, to make the first step in the world of real estate investing it takes a little money and a lot of time. Saving is what will get anyone to the first million dollars.
Wealth accumulation in grand style, especially as it relates to Real Estate, has nothing at all to do with large inheritances, sizable insurance payouts, business fortunes or even lottery winnings - much less lottery winnings, in fact. More than 95 percent of the wealthiest people in North America have made their money and got where they are today solely through their own efforts. They worked hard, got an education and a good job, saved whatever money they could here and there and took the plunge into Real Estate. They did not begin with $300,000, or $200,000 or even $50,000 to invest. In fact, a recent survey of successful American real estate investors conducted by The Spectrem Group (www.spectrem.com), a financial analyst firm, reveals the following common trait characteristics:
[ ] They began investing in Real Estate when they were young. The average age when they made their first investment was 24, and 10 percent of them began investing before they were 20 years old.
[ ] They invested as often as they possibly could. A whopping 92 percent saved regularly, adding to their savings after the initial real estate investment.
And the most remarkable statistic of them all is that, despite all the things that happen to all of us in life, an incredible 31 percent (almost one out of three) said that nothing ever interrupted their savings efforts.
The single biggest recognized untold secret of successful people for accumulating wealth in Real Estate is to save and reinvest the savings, with perseverance, throughout the years.
Labels: REAL ESTATE
Sunday, March 18, 2007
Power Of Attorneys, Probates And Real Estate Trusts
The written authorization must set out the exact terms, conditions and scope under which the agent is authorized to sign. A telegram, letter or fax may be used for this purpose, but it must be received by the agent before he/she attempts to act on the Seller's or Buyer's behalf. Agents must avoid signing documents on behalf of anyone based on verbal, telephone or e-mail instructions. Furthermore, evidence of written authority granted by one party to a real estate transaction must be attached to any and all documents where the agent has signed on behalf of the party.
Powers Of Attorney
Where it is desirable or necessary to rely on a Power of Attorney, it is widely recommended that it be granted to someone in accordance with the advices of a lawyer. When a person who has been granted a Power of Attorney signs a contract involving land or an interest in land on behalf of the person granting the Power of Attorney, the correct way for the contract to be completed is as shown on the following example:
"Mary Smith grants a Power of Attorney to Ted Lee to enter into a contract for the sale of her property located at [address in full]".
Ted Lee, then, would sign both the Listing Agreement and the Contract of Purchase and Sale using the following statement:
"Mary Smith, by her attorney in fact" followed immediately by Ted Lee's signature.
Furthermore, a transfer of title executed under a Power of Attorney to be filed at the Land Title Office (in British Columbia) at the time of completion requires the Power of Attorney to be drafted in proper form. This is so, because different Power of Attorneys can be granted by one person to another. While the form of such authority may authorize a party to sign contracts and certain other documents for another party, it may not be sufficient for Land Title registration purposes. Therefore, whenever a Power of Attorney is contemplated or utilized in a trade involving real estate, the parties ought to seek the advices of legal counsel as soon as possible to ensure the form of the Power of Attorney being used is valid and is acceptable for registration. It should be also noted that the Power of Attorney may expire after a specific time or be invalid for other reasons. Therefore the advices of a legal practitioner specializing in real estate transactions are always the best venue.
Dealing With Legal Or Beneficial Owners
The person or legal entity shown as the registered owner of a real property on the Certificate of Title at the Land Title Office may not be the person or entity that signs the Contract of Purchase and Sale as Seller of that particular property. This is a relatively common occurrence in the real estate trade. For a variety of reasons one entity may appear as the registered owner, while another entity may sign the Contract of Purchase and Sale as the Seller. This may happen, for example, if the registered owner holds the subject property in trust for another entity. In this case the beneficial owner (the person for whom the property is being held in trust) may sign the contract.
If the contract is signed by the beneficial owner, there will usually be a recognition of the trust in the contract {for example, John Doe in trust for Mary Black). As well, there will be normally a covenant by the Buyer to accept a transfer from the registered owner and not the beneficial owner who signs the contract. This covenant acts as a waiver of Section 6 of the Property Law Act (in British Columbia), which provides that the person who signs the contract as Seller is the person who must sign the transfer. There may be warranties or representations of the beneficial owner, of the registered owner, of both, or limited warranties and representations of each.
In other circumstances the registered owner may wish to structure the transaction as a sale of shares rather than a sale of real property. Such sale may involve the shares of the registered owner or the shares of the beneficial owner of the interest in land.
It is always advisable to deal with legal or beneficial owners after a thorough title search has been executed. For example, in a typical residential real estate transaction problems can arise when a Contract of Purchase and Sale is drafted with the Seller when, in fact, the property is legally owned by some other person or company. In this particular case the Seller may have to transfer the subject property into his or her own name to comply with Section 6 of the Property Law Act (a costly transaction involving, among other things, payment of taxes), or face the possibility that the Buyer may legally refuse to complete the transaction if presented with a transfer from the Seller as shown on the contract, rather than the registered owner as shown on title.
Buying From An Estate
A Buyer purchasing from an estate must be assured that the title must pass to him or her without legal problems, and that all parties who can claim against the estate have had their opportunity to do so. If Letters Probate have been granted already and the Wills Variation Act (in British Columbia) has been complied with, no additional clause is required. If, however, these steps have not been concluded a clause similar to the one that follows should be incorporated into the Contract of Purchase and Sale:
"Subject to the Seller receiving the following by [date]:
1) copy of Letters Probate; and 2) assurance that everyone entitled to claim under the Wills Variation Act has waived or released his or her claim against the subject property". An example of a proper way for an executor to sign a contract on behalf of the estate is:
"John Smith, Executor for the estate of (name of the deceased).
In some cases there may be a delay in obtaining Letters Probate. Should that occur, the Buyer may agree to an extension to allow the Executor additional time to obtain the Letters Probate.
Luigi Frascati
Labels: REAL ESTATE
Sunday, February 25, 2007
Real Estate And The Media
Predictions and forecasts are better left to the storytellers and the experts respectively. Specifically when it comes to important fields such as Real Estate, it would be ideal if media reporting were as objective and as analytical as possible, for the common good. Unfortunately this is not always the case, at least not when it comes to the general media. We would surely expect to see stories about Real Estate featured in the financial press, such as The Wall Street Journal in the U.S.A., the Financial Post in Canada or The Financial Times in the U.K.
On the other hand, when a feature article on the real estate markets appears in general-circulation publications the likes of Time, Newsweek, MacLeans or U.S. News and World Reports we should take note because the story has begun to circulate well beyond the inner core of the usual financial circles. This may indeed reflect the fact that the general public may be about to imitate the ‘experts'. The interesting thing about such stories is that they invariably occur after a substantial price movement has already taken place or a price trend, whether upward or downward, has initiated. The article may explain why prices have increased or decreased so much thereby reflecting conventional wisdom, and hence dispensing onto the general public some powerful reasons as to why they should buy or sell, as the case may be.
When market stories reach the front pages of general-purpose newspapers or the covers of magazines and publications, the implications are far greater than if the stories appear solely in the financial press. Independent studies have revealed, for example, that there is a significant correlation between Time cover stories and major trend reversals in both Real Estate and the Stock Market. According to statistical research, the appearance of the story breaks pretty close to the final peak. In the Stock Market, for example, when a bullish cover is featured the market usually rallies at an annualized rate of about seventeen percent for three months or four before the peak. Conversely, when bearish covers are featured, the decline begins within the subsequent couple of months.
Needless to say, the media has an impact on Real Estate as well, but only at major turns of the market. It would be unrealistic to expect a widely published story to signal a short-term turning point. This is so, because to make the front cover of a publication the article has to reflect news to which more or less everyone can relate.
Cover stories sometimes focus on interest rates. In March 1982, for example, an article entitled ‘Interest Rate Anguish' appeared on the cover of Time featuring Paul Volcker, the then Chairman of the Federal Reserve Bank. Treasury bills were yielding 12.5 percent at the time, but a year later they had fallen to 8.5 percent. And so had mortgage rates. Likewise, cover stories that do not appear to have any direct bearing on Real Estate, but that refer to the general state of the economy can also help discern the markets' mood. For instance, features about the President in the United States or the Prime Minister in Canada can often reveal how we think about ourselves. Covers reflecting upbeat and confident leaders typically reflect a similar mood in the country. The opposite is also true.
But here is where the analogy between Real Estate and the Stock Market diverge. If the nation, whether the United States or Canada, either directly or indirectly through its elected officials is reflected in a cover story as ebullient and confident, then expect the Stock Market to decline and Real Estate to pick up. On the other hand, if the story reflects a lack of national confidence and will tackle its seemingly insoluble problems, then expect Real Estate to decline and the Stock Market to pick up.
It must be said, however, that one should not rely on cover stories with mathematical precision. It is always important to examine the facts and to come up with various alternative forecasts, as cover stories cannot invariably be relied upon as exact timing devices, especially in Real Estate. They do, however, offer general indicators that give a good historical perspective of when an extreme has been reached, whether high or low. When all pieces are more or less consistent, it is possible to come up with credible scenarios and forecasts outlining with reasonable approximation the chances that Real Estate is about to reverse its prevailing trend.
Labels: REAL ESTATE
Sunday, February 04, 2007
Real Estate Investment Trusts
The purpose of a Real Estate Investment Trusts is to reduce or eliminate corporate income taxes. In the United States, where they are generally more widespread as investment vehicles, Real Estate Investment Trusts pay little or no federal income tax but are subject to a number of special requirements set forth in the Internal Revenue Code, one of which is the requirement to distribute annually at least 90 percent of their taxable income in the form of dividends to shareholders.
Real Estate Investment Trusts are, therefore, a special type of royalty trust. They specialize in real property, anything from office buildings to long-term care facilities. For illiquid assets like real estate, closed-end funds of this type make good sense. Open-end or ‘mutual' real estate funds are subject to new money and redemption problems, entirely absent in closed-end trusts. The first Real Estate Investment Trust was introduced in the United States in 1960. The vehicle was designed to facilitate investments in large-scale income-producing real estate by smaller investors. The US model was simple, enabling small investors to acquire equity interests in vehicles holding large-scale commercial property.
But the birth of Real Estate Investments Trusts as a mass investment vehicle can be traced directly to the liquidity crisis encountered by open-end real estate mutual funds all the way back to 1991-92, during the slowdown of real estate that characterized those years. Faced with redemption demands on the part of unit-holders, real estate mutual funds were presented with the unpalatable option of selling valuable real properties into a distressed market to raise cash. Many of them, therefore, chose to close off redemptions and converted into Real Estate Investment Trusts, since then most commonly known as REIT's. Only a few open-end real estate mutual funds continue to own real estate directly. Most now invest in shares of real estate-related companies.
The typical REIT usually distributes about 85 to 95 percent of its income (rental income from properties) to the shareholders, usually on a quarterly basis. This income gets a special tax break, because REIT's shareholders are entitled to a deduction for the pro-rata share of capital cost allowance (depreciation on the real properties). As a result, a high percentage of the distributions are normally tax-deferred. However, the amount will vary from year to year and will differ depending on the particular REIT.
As with royalty trust, the value of tax-deferred income will reduce the adjusted cost base of the shares owned. For example, if an investor purchases 1,000 units at $15.50 per unit, receives $3,000 ($3.00 per share) in aggregate tax-deferred distribution over time, and the sells the shares for $17.50 each, the capital gain will be calculated as follows:
[1,000 x ($17.50 - $15.50 + $3.00)] = $5,000 before adjustments for commissions. In Canada, this gain will be subjected to capital gains treatment, so only 50 percent or $2,500 will be included in income and taxed accordingly. In fact, Canada allows preferential tax treatment to REIT's by making them RRSP-eligible and by not considering them foreign property (which would be taxed at a higher rate), so long as the real estate portfolio does not contain non-Canadian property in excess of the allowable limit.
REIT's yields and the market price of units tend to be strongly influenced by interest rates movements. As rates drop, prices of REIT's rise thus causing yields to drop. On the other hand, when interest rates rise, prices of REIT's drop thus causing yields to rise.
For example, when interest rates were pushed up by both the Federal Reserve Board and the Bank of Canada all the way back in 2000, the typical REIT was yielding close to 14 percent as prices per share fell. When interest rates subsequently dropped, yields fell to less than 10 percent as demand for REIT's increased thus pushing share prices higher.
This is a very important consideration to be kept in mind when investing or otherwise trading units involving this type of trusts. If interest rates appear to be poised to rise, investors may want to defer purchases, and those who own this type of shares already may consider reducing their exposure by selling and take in some profit.
There are typically two catches with REIT's. The first is that since investors are ‘unit-holders' rather than shareholders, they are potentially jointly and severally liable together with all other unit-holders (plus the trust itself) in the eventuality of insolvency. Instead of limited liability, investors rely on the REIT's management to have property, casualty and liability insurance, prudent lending policies and other reasonable safeguards in place. Nevertheless there is always the possibility of a problem - say a catastrophic fire or a building collapse - that is not covered by insurance. This may have seemed like a very small matter prior to the attacks on the World Trade Center in 2001. Since then, however, it is something that has to be taken seriously.
The second problem with REIT's is less transparent. All real estate properties depreciate in value over time (not the land, only the buildings). Depreciation can be somewhat slowed down by earmarking at times significant amounts of money for maintenance and renewal of facilities. Since most of the REIT's income is being distributed and the capital cost allowance is being allocated to investors, investors are factually getting their own capital back over time. As such, the book value of the underlying real properties will be steadily depleting.
Obviously, if real estate markets are on the upswing the depreciation factor will not be overly important, since it will be offset by the appreciation of the underlying assets. But in essence, the point is that the long-term income stream is quite variable, certainly more variable than some managers would have investors believe.
As stated above, the inverse relationship between interest rates and prices of REIT's shares plays an important role. On average, it is safe to assume that interest rate increases are likely to be met by REIT's price declines in the Stock Exchange, because increasing rates correspond to a slowdown in the economic growth and less demand. But out of the context of the frantic buy and sell of Wall Street, even a slowdown in the market for single-family houses can actually benefit REIT's. This is so, because even though real property prices are in decline, it is still cheaper to rent than to own, especially during a period of rising interest rates. And REIT's thrive on rentals. In fact, no city is a better environment for REIT's to operate in than New York City, where some 70 percent of residents rent.
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE
Wednesday, January 31, 2007
The Dangers Of Overvaluing Real Estate
When short of listings, the Realtor goes out and ‘buys' one. The process of buying a listing is as old as Real Estate itself. The agent shows up at someone's doorsteps and inflates the value of the property by more than $30,000, $40,000 or even $50,000 over and above the actual market value. I know of agents who have actually listed properties for $200,000 more than what those properties were in fact worth. The owner happily signs the listing agreement with those dollar signs sparking right in the eyes, and the Realtor happily sticks up a sign right in the front lawn. Of course the house subsequently does not sell because it is overpriced, but it doesn't really matter.
Or does it?
All the way back in 1988, in a legal case entitled Basic Inc. v. Levinson, the United States Supreme Court endorsed a theory known as ‘fraud on the market', which in turn relies on another theory known in Economics as the Efficient Market Hypothesis. The Efficient Market Hypothesis postulates that prices of traded assets like stocks, bonds, or real property, already reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about the value of the underlying asset and enable investors, therefore, to assess future prospects.
In essence the Efficient Market Hypothesis, which was developed in the 1950's and 1960's, states that subject to certain conditions the market price of a traded asset fully and accurately reflects all the available information relevant to its value. Under this Hypothesis, in an efficient market the only reason as to why a price changes is that new information comes to light.
Because market prices reflect all available information about an asset, reasoned the Supreme Court, misleading statements as to the integrity of price will affect and negatively impact the decision-making process of investors, who rely on those statements as the primary guide to finalize a purchase. Which is tantamount to ‘intentional deceit', more vulgarly known as ... fraud.
That ruling has proven a goldmine for American trial lawyers, who have won fortunes by suing firms for damages when new financial information, often in practice a restatement of their balance sheets, is followed by a sharp fall in stock prices of the same firms. The fall is treated as proof of overvaluation due to the initial, wrong statements.
This decision of America's highest Court has now crossed the border with Canada and has spilled into Real Estate. A case involving a Seller, a Buyer and a Real Estate Agent acting in a position of dual agency is now pending in front of the Supreme Court of Ontario. The Agent first grossly overvalued the subject property at the time he took the listing, then actually found a Purchaser ready, willing and able to buy at a price close the grossly inflated asking price. As the transaction was being financed through an institutional lender, the underlying case initially also involved an appraisal firm, which subsequently has settled out of Court with the disgruntled Purchaser.
The decision of the Supreme Court will have an enormous impact on how real estate is practiced in Ontario and possibly throughout the whole country, and it will be interesting to see what the outcome will be. The Buyer bases his case on the Efficient Market Hypothesis arguing that he reached the decision to purchase on the integrity of the asking price and claims, furthermore, that the dual Agent knew or should have know that the asking price was grossly over and above the market value of the subject property. The Buyer is claiming damages both as against the Agent and the Seller.
The line of defence is that the true meaningful value of an interest in land is given by its ‘objective value', defined as the price that the property will fetch in an open and fair market, given sufficient time to find a Purchaser, the amount of advertising involved in the marketing of the property, the relationship between the parties and the terms of financing. The additional argument of the defence is that the truthfulness of the Efficient Market Hypothesis is actually being disputed by Economists even in its original field of application: the Stock Market. More specifically, the defence argues that even highly developed financial markets such as the New York Stock Exchange are not efficient enough to allow Courts to calculate the financial damages caused by fraud, and that estimates of damages based on the Hypothesis will be necessarily overstated.
The Realtor in particular contends, furthermore, that at no time the thought of earning a double commission ever crossed his innocent mind (he was walking the dog one day and ...).
All of which goes to prove once again the point I have been making for years - that is sellers, buyers, realtors, lawyers and judges invariably make an explosive mix.
Luigi Frascati
Labels: REAL ESTATE
Friday, January 26, 2007
Soft But Not Dead
Housing markets do not look nearly as bad as anticipated by some.
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Looking back to these past few months we get a general picture of falling housing prices, suggesting once more that Newton's Law of Universal Gravitation, encapsulated in the dictum "Everything that goes up must come down" is absolutely true and that, furthermore, it applies even to Real Estate. But when it comes to housing prices the real question becomes:"Come down from where?"
According to the Office of Federal Housing Enterprise Oversight (http://www.ofheo.gov/) the average price of a house rose by only 1.2 percent in the Third Quarter, the smallest gain since 1999 - but a gain nonetheless. OFHEO reports, furthermore, that the past year has seen the sharpest slowdown in the rate of growth since the Office began to keep track of the housing price index all the way back in 1975. Even so, average prices are still up by 10.1 percent compared to a year ago.
This is much stronger than the index published by the National Association of Realtors (http://www.realtor.org/), which showed a rise of only 0.9 percent in the year to September. Economic analysts generally speaking prefer the OFHEO index, since it is thought to be more reliable because it tracks price changes in successive sales of the same houses over time and therefore, unlike the NAR index, is not distorted by a shift in the mix of sales to cheaper homes.
All of which, then, brings up to mind the fact that it is not only the foresaid Newton's Law that applies to Real Estate, but also another very important scientific theory as well - Einstein's Theory of General Relativity, which can be encapsulated in the dictum "Everything is relative".
‘Stickiness' is a noun used in Economics to describe a situation in which a variable is resistant to change. Price stickiness, therefore, reflects the fact that asking prices of interests in land remain high and even increase at a time when demand lowers. For example, nominal asking prices are often said to be sticky. Market forces may reduce the real value of interests in land, but prices will tend to remain at previous levels. Stickiness normally applies in one direction, which means that a variable that is "sticky downward" will be reluctant to drop even if market conditions dictate that it should.
Price stickiness, in any market, is responsible for and reflects some confusion that exists between nominal and real values and gives rise, moreover, to a particular phenomenon known as the ‘Money Illusion'. Money illusion refers to the tendency of people to think of prices in nominal, rather than real, terms. The term was coined by John Maynard Keynes in the early Twentieth century.
Money illusion does influence people perceptions of outcomes. Experiments have shown that people generally perceive a 2 percent cut in nominal income as unfair, but see a 2 percent rise in nominal income where there is 4 percent inflation as fair, despite the fact that the two situations are almost rational equivalents. The same happens in Real Estate, where the trend is for asking prices to remain high or even increase when selling prices are dropping.
Furthermore, money illusion means nominal changes in price can influence demand even if real prices have remained constant, thus causing what it is normally referred to as ‘market disequilibrium'. Adam Smith maintained that the free market would tend towards economic equilibrium through the price mechanism, that is any excess inventory will lead to price cuts which will decrease the quantity supplied and increase the quantity demanded.
There are, however, exceptions to the rule. One such exception is the situation wherein market participants are always trying to take advantage of the pricing system, thus infusing some dynamism in the market. This situation arises in markets that are ‘imperfect', such as Real Estate, where information about goods is not shared equally and evenly by market participants.
This explains, therefore, the OFHEO price index as above and its increase of 10.1 percent compared to one year ago, which increase is by no means unique to the United States. A similar study conducted by the Office of Federal Housing Enterprise Oversight to compare markets outside the United States with the domestic ones has found that prices in Canada are up 10.8 percent to a year ago. Denmark tops the list with a staggering 23.6 percent increase, while the lowest index goes to Japan, where housing prices have actually decreased to the tune of - 3.9 percent over the last twelve months.
Luigi Frascati
Real Estate Chronicle
Labels: REAL ESTATE
