Podcast Episode 48: Josh Buys a House | Pt. 2

We didn’t know we’d need a part two on this, but it turns out that buying a house in the current marketplace isn’t as straightforward as a one-episode podcast would have you believe.

Episode Transcript

BARENAKED MONEY PODCAST: EPISODE 48

Josh Buys a House | Pt. 2

Announcer:
You’re about to get lucky with the Barenaked Money podcast, the show that gives you the naked truth about personal finance with your hosts, Josh Sheluk and Colin White, portfolio managers with WLWP Wealth Planners, iA Private Wealth.

Colin White:
Welcome to the next episode of Barenaked Money. We’re going to be coming at you with a part two to a previous podcast that we didn’t know there’d be a part two to, I guess that’s too many twos. Anyway, this is an update to the real estate market. Now, if the audience remembers, we recorded our last podcast in April and Josh was out buying a house. It seemed to be behaving a little bit differently than what the numbers in March and February and January seemed to be. Again, when you’re in the fight, you don’t really know what the battlefield is because, again, these things are defined looking backwards. Josh has told me nothing about his journey other than for two months, I didn’t see him smile and he’s smiling a lot now. I am as fascinated as the rest of the audience to hear, Josh, how did it all turn out?

Josh Sheluk:
Yeah. Well, I figured it was time for an update for everybody, you included, and it’s been a bit of an adventure over the last, I guess, it’s been about two months now since we initially agreed upon the deal. Yeah, adventure awaits, I guess.

Colin White:
It was all locked and loaded, you had an accepted offer, you were preapproved for a mortgage. What could possibly go wrong, Josh? What [inaudible 00:01:50].

Josh Sheluk:
What could possibly go wrong? Well, I’ll just let everybody know right off the bat, it’s all okay. We’re actually closing on the house as of today and it all looks like it’s going to work out okay. Nothing catastrophic actually happened in my situation so in case anybody’s really worried about this being a horrible ending, it’s not a horrible ending, but it has been, like I said, an adventure.

Josh Sheluk:
I’ll just take everybody back a little bit to the point in time where we were discussing our last podcast. I was talking about interest rates, interest rates going up, and we were discussing how that could affect affordability for some people. For some people that were maybe right up against the brink, higher interest rates could push over the brink and that’s not a good thing. Mortgages borrowing for most people looking at real estate is going to be a huge component of what they’re looking at, what they can afford, what they’re going to pay for that piece of real estate.

Josh Sheluk:
What’s really important to keep in mind when you’re looking for a mortgage is the lender for that mortgage is really keen and intent on making sure that they don’t lose money on that mortgage. They don’t want to lose money on the lending. If you’re going to default and not pay your mortgage, they want to make sure a hundred percent that they can recover everything that they loaned to you.

Josh Sheluk:
A big part of how they do that is make sure you have a sufficient down payment in place and what we would call equity, right? They want you to have some skin in the game. They don’t want to be loaning you a hundred percent of the value of your property or anywhere near that, because then there’s no cushion. If they’re lending you a hundred percent of the value of your property, that property goes down 5%, well, you have no incentive to stay in that home anymore because your mortgage is now worth more than the value of your property.

Josh Sheluk:
This is what we saw in 2006, ’07 and ’08 in the US is people just walking away from their homes, because they’re like, “Well, why would I pay a $500,000 mortgage on a $400,000 property? That doesn’t make a whole lot of sense.” Anyway, that’s a bit of a backstory. What’s important in our situation was we had to get our house appraised and the lender, generally speaking, is going to require an appraisal for your property. Doesn’t matter what you agreed to pay for this property, they want to know what is, in their view, the fair market value of your property because that’s what they’re going to lend against.

Josh Sheluk:
Yes, I was preapproved for a mortgage. Yes, we agreed to this deal and we were going to be perfectly fine to cover it all financially. Now, that was predicated on getting a certain level of mortgage. When the appraisal came in about 9% lower than what we had agreed to pay for the property, the lending institution came back to us and said, “I’m not lending you as much money as you want anymore. You’re going to have to come up with a chunk more money for that down payment.” Just to continue with the adventure, hey, now we got to find a whole bunch more money.

Colin White:
Mm-hmm. Well, it’s important, I mean, again, you’re telling the story in this one case, but I mean this is the same story that’s told thousands of times right now in the market and all over Ontario. As we pointed out, and I think this is important for the listeners to remember, when we talk about the housing numbers, we’re talking historically, in the moment the game can change and sometimes it can change materially. Sometimes it can change up to 9% on the price of a home and that’s material, as the accounting world would say. Josh, keep going. I don’t think you got the house. I think you lied to us [inaudible 00:05:32] I think there’s no way you’ve got this house.

Josh Sheluk:
Well, just to give people a bit of perspective on what the appraisal process is like, I’m sure everybody’s been through this before that’s bought a home, right? You’ve gone through an appraisal, but you have no recourse over them deciding that your house is worth more or less than you’ve paid. You have no recourse. You can’t really fight it. You can’t go back to them and say, “Well, I want you to reconsider.” They’re going to tell you to like go pound sand. They don’t really care.

Josh Sheluk:
They are trying to get what, in their view, is an objective measure of the property value. In our case, I talked to my agent after and he’s like, “It’s hard to say what they’re really gauging this value off of, because there haven’t been a whole lot of properties that have sold in your area in the last four weeks. What has led to them considering a lower value than you had agreed to pay?” Mississauga as a whole, so the entire city, there’s like a million people in Mississauga, the value of property in Mississauga over that one month period of time was down about 8%.

Josh Sheluk:
His view is, well, I don’t think that the guy even… The appraiser even went to look at the house. What he probably did was finger to the wind, well, market in Mississauga is down 8%. Let’s ascribe an 8% drop to the value of this property. It could be as simple as that, could be as superficial as that. Again, you have no recourse if something happens. We had to come up with… We had to find more money for our down payment. That was what it came down to.

Josh Sheluk:
Now, fortunately, as we’ve been talking about throughout the last couple of years really is there’s some caution warranted with real estate going the way that it has been. We left ourselves enough cushion. We had enough other levers to pull where we came up with the money without too much of an issue, but I would be lying if I told you that I wasn’t super stressed along the path here to get here. We came up with the extra money that we needed for the down payment.

Josh Sheluk:
We got it all squared away and lender said, “Okay, well, I’ll give you this reduced mortgage and you have the additional down payment and away you go.” That’s where we ended up. I don’t know if everybody would’ve been able to do that. I don’t know if everybody’s… I’m not a complete idiot, but I think there’s a lot of people out there that might be pushing themselves a little bit more to that edge that we were talking about and they may not have that lever to pull. Fortunately, we just left ourselves enough cushion that we could make it work.

Colin White:
Well, I think it’s important to understand, again, the appraiser works for the institution and the institution’s worried about the overall health of their books. When you read in the investment side of things about the Canadian banks and the risks they’re taking on, this is one of the ways they mitigate it. They have a third party appraisal, because, again, they don’t want to lend to crazy people.

Colin White:
It doesn’t matter, you’re willing to buy it for a crazy price when they put it on the books, then they have to be able to be comfortable that, yeah, we could offload it to somebody else at a maybe more modest price. They’re going to do that appraisal in their favor. In my entire life’s experience, I’ve never seen a lender backed appraisal come in above with somebody who was willing to pay for a property.

Josh Sheluk:
Yeah. Very unusual. Very unusual.

Colin White:
Yeah. I’ve seen it come under a whole bunch because, again, that’s their role in the game is to wait in the favor of the lender.

Josh Sheluk:
Yeah. Yeah. They want to be risk averse with it, for sure. This was maybe a bit more on the extreme side of things. It’s probably unusual that it would drop that much. The other thing, we had a condition free offer. We didn’t have a condition of financing. In a lot of very competitive markets right now, you’re not going to have a condition on financing. If we weren’t able to come up with that financing or the money that we needed, we got to walk away from the deal.

Josh Sheluk:
Right now, with things as competitive as they are, so this no condition thing is pretty common. You have lots of people going in without any conditions and to protect the sellers, they want a large deposit. They want you to put a large deposit upfront. If you don’t come through with the financing, with the money, when that deal needs to close, they get to walk away with your deposit.

Josh Sheluk:
Here I am thinking, oh man, we’re two weeks out from closing. We need to come up with a whole lot of money in a very short period of time, and we’ve already put a pretty big chunk of money down. Are we potentially going to have to walk away from that money? That would’ve been a punch in the gut to say the least.

Colin White:
You’d probably still not be smiling.

Josh Sheluk:
You might not have even seen me for the last couple of weeks, Colin. I don’t know where I’d be right now, somewhere on an island somewhere just trying not to go crazy or something.

Colin White:
Swearing at the gods. Yeah.

Josh Sheluk:
Yeah. Cursing the gods, damn you for corrupting the real estate market. How dare you?

Colin White:
Well, I mean this is a really great spotlight [inaudible 00:10:41] this is one data point, but it’s a very common thing as the market begins to moderate a little bit, here’s the trouble that you had. Again, you’re, well, don’t take this the wrong way, but you’re exceptional. You really plan shit out and you do [inaudible 00:10:58] and you’re able to roll with this, but there’s going to be a lot of deals out there where people aren’t rolling with it. That’s really going to impair potentially the real estate market for a period of time.

Colin White:
To sit back in one’s comfy chair and say, “Real estate’s always going to go up and transactions are easy. I’m preapproved. This is not a big hassle,” is a gross oversimplification. Again, trends, you’re not going to know what the trend was when you bought your house until a month or two later.

Colin White:
You could be right in the middle of the tide change, which I think looking back is pretty much where you were. You were right as the tide was changing. I think we’ve talked about that, at the time, trying to figure out, hey, is this data point in line with the previous trend or is it a reversal? This seems to have reversed.

Josh Sheluk:
Yeah. Just a bit of a public service announcement for everybody. You mentioned that I was preapproved. I was preapproved. I provided everything to the mortgage broker at the time to get this preapproval in place and had told them exactly what we want for the mortgage, have told them exactly what we thought was going to be our price point for the purchase. Both of these came through pretty much exactly as expected.

Josh Sheluk:
Guess what? The mortgage was a hell of a lot more difficult for me to get than the preapproval had suggested. Again, there was a period of time there where I didn’t think we were going to get the mortgage. Preapprovals, BS. I had somebody say to me, “Well, you sort of just got preapproved.” I said, “Thanks. I did get preapproved.” Yeah, no kidding. I did that, and it’s not a foolproof system. It’s not as bulletproof as some out there will make you think or make you believe.

Colin White:
Yeah. I think they’re more adequately titled a conditional approval, because they’re not actually going to fully underwrite it until you go to pull the trigger. Okay, you need to prove that income or, oh, we didn’t know about that. It can spiral and spiral quickly. I think the benefit for many people when they do a preapproval is that it locks in a rate, so you know what your rate is by having a preapproval. To think that they’re just going to, based on the information you gave them, write a check, no, they’re going to ask you a whole bunch of more questions and potentially even walk away and say, “No, we’re not going to do the deal.”

Josh Sheluk:
Yeah. Yeah. If you’re condition free on an offer, now you’re up a river without a paddle, as they say. That’s a tough one. I think this is how you can see things start to unravel with any type of asset market pretty quickly and real estate’s no exception. If you just play this through and, say, there’s hundreds or thousands of other people in the same boat as I was, as Heather and I were, so, first of all, you can’t close on the property. Now, what happens? Well, you walk away from a whole bunch of money, and that seller now needs to scramble and sell their place in a market where the prices have gone down, because they’ve probably bought as well. They’re moving somewhere.

Josh Sheluk:
Now the seller needs to scramble, sell their place, market’s gone down and they’re under the gun. What are they going to do? Well, they’re going to take the quickest, surest bet that they can possibly get. If this is happening sort of systematically, again, you have hundreds or thousands of people in the same boat, then you could just, wow, now you have the market that’s flooded with properties and everybody’s under the gun. They’re trying to sell this stuff quickly.

Josh Sheluk:
You have banks that are foreclosing on properties potentially and trying to fire sell these properties. This is how things can spiral pretty quickly. You have… Not to say that the Canadian real estate market’s in a bubble, but this is how the bubbles burst with a lot of these things. People get over leverage, they get over their skis, things start going down and then it’s just a snowball and it doesn’t stop for a long time.

Colin White:
I think there’s two key lessons to take out of this little voyage that we’ve gone on with you, Josh. I think that the step one is whatever financial plan you’ve set for yourself, having a buffer, that’s absolutely essential. You don’t know why you’re going to need the buffer, but have a buffer. Never bump up against your theoretical maximum, because then you’ve got no way to deal with changes as they come.

Colin White:
Trends are great until they reverse, and trends are always measured historically. They’re always backward looking. Try to behave as if things that were true in January are true now, you’re setting yourself up for disappointment. Always keep your head on a swivel thinking, oh, is this landscape changing? Because I mean you guys had to walk away from this down payment.

Colin White:
The next time you guys go put an offer in, you’re going to be less likely to want to put a down payment in. Right? Again, there’s all kinds of knock-ons from this kind of activity now. We’re only going to know the net and total effect of all this months from now. There’s nothing in here that we can say, “This is what’s going on right now.”

Colin White:
Now this happened a month ago and it was a special set of circumstances, but it doesn’t line up with the narrative. It’s far less rosy. Keep your head on swivel and don’t assume that things are going along just swimmingly well. There could be a reversal in progress.

Josh Sheluk:
Yeah. Be careful out there, people.

Colin White:
Keep safe.

Announcer:
This information has been prepared by White LeBlanc Wealth Planners, who is a portfolio manager for iA Private Wealth. Opinions expressed in this podcast are those of the portfolio manager only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc operates.

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