Coffee’s for closers only

Alec Baldwin in "Glengarry Glen Ross"

“Put. That coffee. Down. Coffee’s for closers only.” –Blake, in David Mamet’s Glengarry Glen Ross

If coffee’s for closers only, specuvestors better get used to tea.  Across Metro Vancouver, condo flippers are flipping builders the bird by refusing to complete on their pre-sales.  At least seven would-be buyers have pulled the chute at Surrey’s Morgan Heights, forcing the developer to sue.

In the boom years, condo assignments were the golden ticket.  Rising prices and high demand made reselling pre-sales a breeze.  All it took to buy pre-sale was a small deposit.  Often times buyers would take on pre-sales with no intention of buying the place.  By the time the condo was ready for move-in, their pre-sale contract would’ve been sold, at a profit, to someone else.

The game-changer for flipping is when prices decline.  This scenario requires the flipper to do the unthinkable — they actually have to buy their condo.  In a choice between closing the deal and walking away, many buyers are hitting the bricks.

Morgan Heights is just the beginning.  Expect 2009 to be the Year of the Pre-Sale Deadbeat.  And the best will come last:  Woodwards is scheduled to complete in December.  Lawyers, be ready.

34 Responses to “Coffee’s for closers only”

  1. blueskies Says:

    R.I.S.K. the new Exlax

  2. markx Says:

    Woodwards can be another major headache for our elected officials. If enough flippers walk away from assignment, I can see the developer running into major financial problems and put all the social housing, SFH campus, and other public venues in jeopady. It would be very interesting to see how the public-private partnership is structure in Woodward’s case.

  3. The Urban Dweller Says:

    I think that most in Woodwards will keep the unit and rent it out if need be. You can pay the mortgage in Downtown Van by renting (if you put enough money down). Also Woodwards was presold in early 2006, I believe most forumers believe that prices will get back down to 2005 levels. So at most you are down 10% plus holding costs and opp costs of course.

    The developer is reputable and won’t run into major financial problems. Remember there is a retail portion that has been sold and leased as well. It fetched top dollar. Thats my take at least.

    And what is wrong with tea, I drink it exclusively. Blenz has the best Matcha (green tea I’ve ever had).

  4. vancityguy Says:

    2005 levels is comparable to around 11,500 on the DOW in mid-2008. There’s still plenty of room left on the downside. It’s supply. Vancouver has an over abundance. And as far as retail goes, this recession is going to be particularly rough on start-ups and new outlets with not established clientele.

    All I’m saying is that it is going to be a struggle for any retailer coming into this market given consumer confidence at generational lows. The real-estate market (and the greater economy) I feel, have to (and have begun) to reflect the nightmare that razed credit and financial markets in 2008. And if the effects on real-estate and the real economy are to be as drastic as they were in financial markets, it will be equally as ugly.

  5. General Zod Says:

    The area around Woodwards hasn’t improved one bit. Some would say it’s worse. I doubt no one who could afford the condos there will actually “be bold” enough to actually live there. The idea was back in 2006 that the area would be cleaned up by 2009 in prep for the olympics. No such luck. If anyone thinks rent in that area will pay for the mortgage, they are smoking crack..or selling it.

  6. VHB Says:

    Ah, woodwards. I’m afraid I just can’t get enough of the quote from our old friend Bobbie R:

    “If the blogger is right [about Woodwards], then 1,000 people are wrong.”

    Rennie should be sentenced to wear a tshirt with those words for the rest of his time on earth.

  7. HouseHuntVictoria Says:

    I wonder how many of the pre-sales are second hand? That is, people who bought contracts from people who bought pre-sales thinking they’d hit the second hand jackpot. It’s kinda like scalpers who know someone else who knows someone else with the tickets, everyone’s got to get paid, until the show gets cancelled and it wasn’t your visa that was charged for the ticket.

  8. Malcolm Says:

    Impossible to know how often presale contracts switch hands. They aren’t technically RE transactions. There’s no regulation or record-keeping.

  9. patriotz Says:

    You can pay the mortgage in Downtown Van by renting (if you put enough money down).

    You can pay the mortgage on any property by renting, if you put enough money down.

    Holy truism Batman.

  10. Morgan Says:

    I understand that some Morgan owners who have defaulted may be off the hook for further damages and the return of their deposits if it can be proven Amacon did not file their disclosure statements properly and on time.In another suit before the courts now the plaintiff who walked from a development is arguing that because the developer refused his request to assign his unit early in the game, they lost the right to any damages and are entitled to his deposit only. These two cases may set a precedent and bear watching. ( No pun intended).

  11. Noz Says:

    As far as I’m concerned, those buyers should burn. They knew what they were doing. And the builder just sold to them at an overpriced amount. I hope the builder does sue and the flippers get screwed.

  12. holdem Says:

    VHB – I vaguely remember the context of the quote at the time but can you refresh me? Exactly what did you say about Woodwards that Rennie responded to this way? I’m guessing it was something along the lines of the units being overpriced and not supported by fundamentals…

  13. Rumorhasit Says:

    Rumor in the pre-sale condo development world (which means it hasn’t hit the press yet) is that 60% of buyer in the Woodwards project walked away from providing second deposits when they were due sometime in the fall of ’08.

    Providing the component of social housing being offered/promised by the city at this landmark, I would have to presume Vancouver tax payers will be on the hook yet again to complete a condo development gone sideways.

    This could get ugly.

  14. VancityAllie Says:

    I was excited by the prospect of the Woodward’s building, but now I feel pretty jaded.

    In other news, seeing all the buyers jump on the 25% off buildings is really sad. Have these people already forgotten what just happened?!

  15. john Says:

    There is nothing to worry about in the Vancouver condo market. I’m still buying especially with the lower rates and discounted prices. I’m investing for the long haul.

  16. patriotz Says:

    Woodwards is way past the point of no return. In other words the cost of completion is less than the market value of the property, even given the current bust. It is now in the interest of the banks providing financing to complete the project to preserve the value their collateral, such as it is.

    The CoV is not going to touch this one. They have no obligation towards completion of the project and they are certainly not going to assume one just to guarantee that some social housing units get built. If the project completes, which I have no doubt it will for the reasons stated above, they get them anyway.

  17. bums up2 Says:

    The funny thing about the whole thing is these people would never have made the ‘risky’ use of leverage in the stock market. But their eyes turned to daollar signs when they realized they could ‘buy’ a condo and flip it with just a small deposit.

    Greed: the new great social equalizer. (formerly it was ‘eye boogers’)

  18. sluggo Says:

    John,
    Nothing wrong with balls, but sometimes it pays to use your head.

  19. VHB Says:

    Hi Urban Dweller,

    Yes, W was presold in 2006–but prices were higher than 2006 prevailing prices, since they ‘baked in’ appreciation between 2006 and 2009. That’s how presales were priced in the boom years. You could have bought brand new (2006 delivery) Coal Harbour for the price paid for 2009 W delivery.

    Prices were around $800/sf. Check out this thread to see some details.

    Yeah, people could rent it out. But what are they going to get? A 600K 2BR even with a ‘huge’ 10% dp would end up with a monthly nut of 3500-4000, including insurance, prop taxes and strata. D’ya really think you could rent out that 2br for any more than 2K per month?

    Who in their right mind would complete their presale only to bleed 1500-2K a month?

  20. VHB Says:

    Holdem: Here is the quote from Vancouver Magazine, June 2006.

    “Adds condo marketing guru Bob Rennie, when asked about Vance’s highly critical comments on pricing at Rennie’s Woodward’s development: “If the blogger is right, then 1,000 people are wrong.”

    Some other fun bits from the article:

    “Vance is cautious in predicting when the bubble will burst . . . it’s all about psychology and emotion.”

    That sounds about right.

    Here’s Rob Chipman:

    “Chipman asserts that the arguments advanced in the bubblesphere are ‘very undefined’. . . But you have to ask, What rae the fundamentals? And what is affordable? We’re selling a record number of units. You find me somebody who can’t buy a house.”

    One last bit from VHB:

    “the ‘go to’ guys for local media are typically industry insiders with vested interests,” says Vance. “They are not objective but are quoted as though they are. Whether bankers, real estate agents, builders, or whoever–they all benefit from the boom continuing.”

    I think these quotes have grown more interesting with time . . .

  21. condohype Says:

    There’s so much trouble coming for Woodwards and it has nothing to do with the neighbourhood. It’s the prices. The prices aren’t just insane they’re SCARY insane. Even wealthy investors will have difficulty eating the difference between the cash flow and cost of ownership. We’re talking about a *monthly* net loss in the $2,000 range. It’s staggering.

  22. VHB Says:

    Don’t worry CH. The appreciation will make up for the 2K monthly loss. What’s that? There’s no appreciation anymore. Oh. Well, nevermind then.

  23. markx Says:

    Woodwards was presold in 2006, but it commanded a HUGE premium over market price at time time. I would put Woodwards pre-sale price at at least THE PEAK market price, if not more. Given the relatively high strata cost and the relatively low market rent in that area, I wonder how net rent an investor can get? The huge portion of social housing doesn’t help, either. Social housing generally have a lot worse bedbugs problem, as transient tenants are difficult to kick out.

  24. markx Says:

    Can anyone remind me what the deposit installment scheme was like? Is it 10%, 15%, or 20% by now? I can’t see many buyers putting another installment down at today’s market.

  25. markx Says:

    patriotz: No, you can’t cashflow on a property if strata fee is more than what you can collect in rent. That’s when abandonments happen. I don’t see Woodwards going that way, but I can see its gross price/rent ratio to be much lower than rest of lower mainland because of its extremely high holding cost and relatively low market rent.

  26. bearette Says:

    VHB:

    You should print up those T-shirts and sell’em on cafe press.
    But then, I could only wear mine around the house or I’d be liable to be beaten by roaming gangs of broke specuvestors…

  27. bearette Says:

    P.S. Woodward’s is going to be a catastrophe. Can’t wait. I saw that 2006 pre-sale crew. All stary-eyed 24-year olds living in gastown and working as waiters; Surrey boy-men all gangstered up and living in mom’s basement buying “investments.” Maybe one in 20 were older asians with real estate agents in tow. Looked like the only ones with a hope of making those downpayments. Most had not a clue, not a plan. All blind with mania

    Oh the humanity!

  28. Caludia Herbst Says:

    What if required is to be included in a disclosure statement and from presale to closure how does the seller have to present any changes to the building.

    How does seller have to notify buyer of changes.

    If material changes take place ie changes to appliances is there chance to back out of the deal

    How about size of apartment?

    How about fixtures, Moen vs China Inc.

  29. patriotz Says:

    The presale contracts are written so that the developer can change just about everything short of the number of rooms. I think they can fudge on the size to some degree.

    Really people are only going to get out of the presales if the developer has failed to follow some legally required procedures, not on material changes.

  30. TaxHaven Says:

    I cannot believe this flipping of presales could ever have been really common…you’re sensationalizing surely. NO ONE could be so stupid as to try this with a 200, 300, $400,000 condo. Anyone wishing to attempt it would look for a nice, affordable rural HOUSE, not an overpriced urban concrete box in the most bubbly city in the world…

    Or am I just a dinosaur from the past?

  31. VHB Says:

    “No ONE could be so stupid as to try this with a 200, 300, $400,000 condo.”

    Correct. They didn’t buy ‘a’ condo. They bought three. And they put the dp on their HELOC, secured by the bloated valuation on their suburban bungalow. Repeat 5000 times, wait 2 years, and see what comes out of the oven.

  32. blueskies Says:

    in an article in the Province Rennie sez:

    ” The financial and corporate blowouts will be done by next September, he predicted, “

    http://tinyurl.com/bv87zd

    so is he writing off the spring RE market completely?

    is this an admission of failure for selling in early ’09?

  33. macchiato Says:

    “I cannot believe this flipping of presales could ever have been really common…you’re sensationalizing surely.”

    Rennie has about 50 W assignments on his site.

  34. Mudoff Says:

    Isn’t that right?

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