Jun 272016
 

Real Estate Ad Terms

Some folks might think using words like “charming,” or “spacious” in a properly listing is smart and would result in a higher sale price. But in reality the opposite is true. Here are 10 common real estate ad terms. Half of them have strong positive correlations with a higher sale price, and the other half is negatively correlated.

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According to the book Freakonomics by Steven Levitt and Stephen Dubner, the 5 terms correlated to a higher sale price are:

  1. Granite
  2. Maple
  3. Corian
  4. State of the art
  5. Gourmet

And the 5 terms correlated to a lower sale price are:

  1. Fantastic
  2. Charming
  3. Spacious
  4. Great neighborhood
  5. !

Words such as Granite, Maple, and Corian (a countertop brand,) are all definitive physical descriptions of a home. It tells any potential buyer exactly what the property is like. The terms Gourmet and State of the art, also connotes a place that’s ready to move in.

But on the other hand words like Fantastic can be a misleading description, as are other ambiguous terms such as Charming or Spacious. These words aren’t tangible enough to tell the buyer anything specific about the property. Mentioning a “Great neighborhood” might signal that this particular house isn’t that great and may not have any specific attributes worth mentioning, but at least other homes nearby are pretty nice. The last word on the list isn’t really a word; it’s an exclamation point. It feels like a feeble attempt to cover real shortcomings of the home with a false sense of enthusiasm!

The book also broke down the language used in a listing for a real estate agent’s own home. She indeed emphasize adjectives like new, granite, maple, and move-in condition. She avoided empty and interpretive portrayals like wonderful, immaculate, or the overused exclamation point. She used every advantage she had to increase her final sale price, including telling potential buyers that a nearby house recently sold for $50,000 above the asking price. But that doesn’t make her a bad person. Realtors are people too. They’re simply looking for closure.

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Apr 142016
 

To become a successful farmer you have to be outstanding in your field, if you know what I meanBut as most investors know, commodity prices have been in a slump over the past couple of years. This means many grain farmers have to live a very tough life. Perhaps some of them barley survive from wheat to wheat! But things may not be as bad as they seem because crop sales in 2015 were some of the strongest Canadian farmers have ever seen, and was cited as a contributing factor to growing farmland prices.

 Canadian Farmland Values Grow 10.1% in 2015

The national agency, Farm Credit Canada, recently released its annual farmland value report about the previous year’s farming landscape. As it turns out in 2015 the average Canadian farmland price increased 10.1%. This is absolutely incredible! 😀

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Farmland prices are assessed using recent comparable sales. These sales must be arm’s-length transactions. All provinces saw their average farmland values increase and Manitoba experienced the highest increase at 12.4%. The full report is on FCC’s site.

After this year’s adjustment using the 9.4% Saskatchewan increase from the new FCC report my farmland should now be worth $129/acre more than last year. Since I have about 300 acres of Saskatchewan farmland, that’s almost $39,000 of capital appreciation in one year. Whoop Whoop!

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Farmland Historical Performance

Here’s a look at historical farmland values in Canada from 1985 to 2015 according to FCC.

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Feb 112016
 

House it Going in the Real Estate Market?

So this is the kind of house you can expect to buy in Vancouver today for about $1.19 million.

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To put this into context, the same $1.19 million could be used instead to create a dividend growth portfolio that would generate $40,000 each year of tax advantaged income for a lifetime. 🙂 Have homeowners completely lost their noodles in this city?

The economy has stagnated. The U.S. stock market is down about 10% over the last 12 month period. The TSX in Canada has seen worse, falling by 20% since this time last year. Canada lost more jobs than it gained last month, pushing the unemployment rate up to 7.2%. Low oil and commodities prices is costing us a lot of jobs not just in this country but also in emerging markets that export metals and other resources. Negative interest rates are as common as the flu. Asia’s growth is slowing down. U.S. Treasury yields have fallen from 2.0%+ to just 1.6% over the last 6 months. And as Lenore Hawkins, chief economist at Meritas Advisors, says, the slowdown of growth in “global trades is at levels we haven’t seen since around 1958.” It’s almost like the entire world is in recession.

But despite all the negative news and market volatility out there, local real estate as a whole has remained stubbornly bullish for the last 4 decades.

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Jan 072016
 

Learning About Incentives From The Big Short

An incentive is something that motivates us to do something. The study of incentive structures can help determine economic activities. If our goal is to have money then we are motivated to work and get paid. 🙂

Understanding how incentives and disincentives work is important to analyzing the financial markets. The subprime mortgage crisis of 2007 in the U.S. was largely predictable for anyone who understands the incentive structures in the world of high finance. 🙂 In the early 2000s the banks started to securitize riskier and riskier mortgages. They sold these mortgages to other investors and claimed the loans were safe when in fact they were filled with toxic and sub-prime mortgages. Sub-prime refers to a borrower with poor credit history and has a relatively high probability of not paying back their mortgage. Around 2007 the entire house of cards collapsed which lead to a global financial crisis. All of this happened because of incentives.

  • Bank executives made a lot of money by underwriting risky mortgages. They lacked the incentive to guard against such risks because they were protected from the negative consequences thanks to insurance and the high probability of government bail outs.
  • Mortgage brokers earned higher compensation from selling variable rate loans than fixed rate loans, even though floating rate loans were more risky.
  • Potential homeowners were motivated to apply for variable rate mortgages because the introductory rates were lower than fixed rate loans.
  • People who didn’t even have jobs or steady incomes still received home loans because some mortgages offered a delayed payments program.
  • The credit rating agencies who were suppose to assess the financial risk of these mortgages gave these funds triple “A” ratings despite the high probability of default because rating agencies are funded by the banks who put together the mortgage funds. That’s like if a health inspection agency was paid by a restaurant to conduct a health and safety inspection on that same restaurant. What are the chances the health inspector is going to write up a negative report? lol. If a credit rating agency such as Moody’s decided to not comply with the bank’s self interest, then the bank will just pay some other agency such as Standard & Poors to rate their mortgage funds instead and Moody’s will lose out on that paycheque.

So in every part of the system people were motivated to take unsubstantiated risks due to the incentive programs that were in place. There’s a book called The Big Short written by Michael Lewis which explains how the sub-prime mortgage crisis unfolded. Lewis says that people see what they’re incentivized to see. If you pay someone not to see the truth, they will believe your lie. Wall Street is organized in a way where sometimes people will pay to see something other than the truth.

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The handful of individuals who understood how financial incentives work were able to predict the great recession. In 2006 a trader from Deutsche Bank paid $11 million to insure against $4 billion of triple A rated bonds from a U.S. bank. About 11 months later his bet paid off to the tune of a mind-blowing $3.7 billion! Holy ham sandwich! That’s an annualized return of more than 30,000%.

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Sep 242015
 

A Smart REIT for Retirement

To be successful at investing we have to think like burglars and always be on the lookout for windows of opportunity. One such opportunity comes in the form of buying real estate. Owning a rental property is a great way to earn some extra income. But a more stable and passive way to invest in property is to own REITs, which are companies that hold many different properties and typically pay monthly distributions to their unit holders. One of these companies is called Smart REIT. And last week I contributed $3,000 to my RRSP and purchased 111 units of SmartREIT at $29 each + $9.99 for commission. 😀 It currently pays a fetching 5.5% annual dividend, and I plan to hold this name indefinitely for my retirement income needs.

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SmartREIT (SRU.UN) used to be called Calloway REIT, but earlier this year it acquired SmartCentres in a $1.16 billion deal and changed its name. The take-over was to acquire 24 shopping centres, mainly in Ontario and Quebec, making the new company one of the largest REITs in the country with 149 properties under management and $8.3 billion of total assets.

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A large part of a successful real estate business is finding high quality tenants. A quick look at the top 10 tenants for this company, based on gross rental revenues, shows that Smart REIT is working with some excellent renters with very traditional business models and high profitability.

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