The Flip

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**** Reduced price ****
**** Urgent Sale ****
**** Priced approx. 60,000 under market value ****
***** Assessment sale HST included *****
This is Urgent sales. This is an assignment sale . 2+1 Den Bedroom, downtown,  with 1 parking and locker included( valued 35,000 included) . Granite counter tops and 5 stainless steel appliances included. On the 14th floor , unobstructed South West view.

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Every day, in fact every hour, new ads like this one flood into Kijiji and Craigslist. Quiet. You can almost hear the anguish. It’s the sound of a market about to commit suicide. The weapon of choice is the assignment.

For the past two years developers of condo projects in Toronto and Vancouver – but especially Toronto – have told me, when I asked, how many buyers were speckers and flippers. The consistent estimate has been 80% to 90%. The real estate industry, as you might imagine, has made it simple and cheap for almost anyone to become a specuvestor. Units can be secured for just 5% down, with modest additional amounts due over the next year. And once a project’s sales book fills up, investors are often able to purchase assignment clauses which give them the right to flip.

That means they can resell something which hasn’t yet been built, hopefully for a profit, without the hassle and expense of closing the deal and taking possession. No mortgage. No double, insane Toronto land transfer tax. No big lawyer bills. It’s not a real estate transaction, but the sale of a futures contract. If the specker can pull it off, the ROI is impressive. If they’re forced to close, taking on debt and ending up with a condo that can’t be rented for enough to cover costs, a disaster. What they might do to an entire market is even worse.

But the successful flipper is an iconic deity, a role model supreme for the glassy-eyed followers of culty real estate gurus. Check out this article in a porn mag called “Canadian Real Estate Wealth.”

An iffy condo market has many investors abandoning flipping for a buy-and-hold strategy, but that may not be necessary, says one award-winning investor, suggesting there’s still profit to be made in selling up instead of renting out.

“The key is to make it sexier!” says Emil Kiriakos… Even in this market, Kiriakos is still finding success buying and selling condos. He’s buying along the waterfront and in the downtown core of Toronto, a market that has now seen a 30 per cent pullback in investor purchases as concerns about a possible value correction take hold. That speculation hasn’t deterred Kiriakos, who continues to focus on preconstruction buys – at preferred pricing – and flips after a sizable investment in staging.

Isn’t fiction fun?

But how many of these flipper gods are out there? And what damage can they cause to every homeowner?

The official CMHC estimate is that 22% of Toronto condos which are now rental units are investor-owned. Downtown it’s closer to 30%. Both numbers, say industry insiders, are vastly off the mark in a town when as many as nine of every ten new units has been snapped up for pure speculation. In fact, most investors flip, sometimes to other flippers. The only ones who actually close a deal are those who those who think condos will appreciate fast enough over a few years to make up for subsidizing renters. After all, at $700 a square foot nobody can make money being a landlord.

As for damage, flippers have effectively ridden real estate higher, increasing prices through an undocumented yet powerful shadow market that could account for up to 15,000 sales a year in Toronto alone. Their demand has helped ignite the biggest condo orgy in history, with more residential towers rising in Toronto than all other North American cities combined. Now, as supply overwhelms waning demand, flippers stand to pummel valuations as they pack the exits.

This week news hit the MSM that developers had boycotted an industry survey, refusing to disclose how many investors are assigning their units before closing. It’s needed info, to assess the true size of a shadow market that could impact all property owners as the shockwaves spread from the condo sinkhole. Moreover, most flippers are apparently tax evaders, never disclosing capital gains. Add criminality to stupidity.

While you’re at it, add rank speculation to a Canadian real estate market which has been fed by teaser mortgage rates, cash-back down payments, government giveaways, swelling debt and bankers happy to lend to people too undisciplined to save any money. And now, assignment hell.

Close your eyes. This is America, circa 2006.

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avatarGarth Turner - The Greater Fool posted Thursday, November 15th, 2012.

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