Friday, August 18, 2017

Escalation Clause? What Is That?

Have you heard the term escalation clause?  Chances are you haven’t unless you’ve been involved in a bidding war as either a buyer or seller in the last few years.  Today we are going to discuss the controversial subject of escalation clauses and what you should know.

What Is An Escalation Clause?
An escalation clause is a clause in the schedule of an offer which is designed to defeat competing offers by automatically increasing the Buyer’s purchase price by a pre-set amount over the highest offer.  Usually there will be some sort of cap placed on the escalation clause where the buyer won’t go over that amount should the best offer exceed it.

When Would An Escalation Clause Be Used?
An escalation clause would be used in a multiple offer situation (bidding war), where the buyer wanted to ensure they have the highest offer price.

How Would An Escalation Clause Work?
An escalation clause would state that the buyer agrees to pay a certain increment over the highest offer received.  For example, say there were 5 offers on a listing and one of them had an escalation clause, stating that they would pay $5,000 more than the highest offer received.  Suppose then that the highest offer was $500,000.  The buyer with the escalation clause would then agree to increase their offer to $505,000.  The logistics of how to accept the escalated offer vary, but the most common way would include the seller countering the buyer’s offer at $505,000 and having the buyer accept.

Why Is This Subject Controversial?
There are a few inherent conflicts with the inclusion of escalation clauses in bidding wars:

  1. It hurts the confidence of buyers when submitting an offer.  Feeling that dealing with this sort offer is unfair, buyers may decide not to participate in these competitive situations.  That could affect the confidence of the market overall.  Some of these bidding war practices already have buyers feeling discouraged, so it feels like piling on.
  2. There is a privacy issue.  The only people in a multiple offer situation who are supposed to see the contents of buyer’s offers are the listing agent and the seller.  In an escalation clause situation, inherently the price of the highest offer is disclosed to the buyer with the escalation clause – this really cant be avoided.  And this contradicts many RECO rules.

What Is Happening In The Market Because of Escalation Clauses?
Although not illegal, the escalation clause use has been frowned upon in the market in our experience.  Generally, we are seeing listing agents and sellers deciding not to deal with offers that include these clauses, and stating so right in the listing.  This eliminates the potential unfairness to prospective bidders and increases the confidence in the offer process.

What Do We Think Will Ultimately Happen To Escalation Clauses?
We think they will eventually be banned by the governing bodies.  The cons seem to far outweigh the pros in the market.  And real estate professionals have been banning them from their listings for a while now.

So there you have it readers.  Do you or anyone you know have any experience with escalation clauses?

Thursday, August 3, 2017

Real Estate Insider: August 2017 News Report

Thanks for joining us for another edition of the Real Estate Insider! We've come across so many topics we know you won't want to pass up. So kick back with a coffee and browse through our collection of findings.

Controversy over the Escalation Clause! A clause designed to automatically defeat competing purchase offers, it sometimes unintentionally discloses the price and contents of competing offers. Should they be banned all together? Most realtors think so. >>


Nationalism at its finest! Meridian shows its pride for Canada’s 150th birthday by offering a 15 month fixed mortgage rate at 1.5% to help people live the Canadian dream. >>

‘Flipping Crazy’ Canadian TV series aimed to give viewers a first hand interaction with the step by step process of house flipping set to debut on Amazon later this fall. >>


Whose side are you on? Ontario may be forcing Realtors to choose by banning the ability to represent both the Buyer and the Seller in a deal, fearing it could create unethical behavior. >>

Communicate value, not statistics! With vast information available to everyone at the click of a button, it’s how you interpret the information that makes you valuable as an agent. Learn how to translate information rather than regurgitate it to prove your worth as an agent. >>


Location, Location… Location? Is living in Toronto or Vancouver really worth 70-80% of your total income? If you want to live there you better believe so! With housing affordability deteriorating across Canada, a rate hike is causing fears that some people in these highly sought after areas might run out of money for necessities. >>


Canada’s banks are on the ball! Less than 24 hours after the BoC announced they would raise its rate 25 basis points, banks such as RBC wasted no time raising its rate 0.25% with hopes that this raise will be a positive development in the housing market. >>


Getting back under control. The measures taken by policy makers to try and cool down the rapidly inflating housing market seem to be taking effect, as June home sales experienced the biggest decline since 2010. >>


Are self driving mobile homes the “starter home” of the future? With the ability to commute while you sleep, eat, work, etc. The synergistic relationship that this vehicle offers could be very appealing in the near future! >>


Windsor’s hot selling market is showing its effect on the rental market, with rent increasing by 2% from last month. >>


Don’t go with your gut! This company is taking the guesswork out of potential tenant screenings, giving you the data necessary to make an informed decision, instead of relying on a simple interview or credit report. >>


Condo owners get ready! New rules and regulations protecting condo owners are taking place this fall. >>

That's a wrap for this edition. Have a real estate topic you think we should cover? We want to hear from you! Send us your comments and your suggestion could be our next blog topic. Happy reading and enjoy the rest of summer!

Thursday, July 20, 2017

Review: Bank of Canada Raises Interest Rates

Unless you were on vacation last week, you probably saw the news that the Bank of Canada increased interest rates.  A lot of commentary has followed the move with everyone sharing their opinion on the matter and what it means for the real estate market.  Today we are going to share our take

What should I know about what the Bank of Canada did last week?
The Bank of Canada raised its overnight lending rate from 0.5% to 0.75% last week.  This overnight rate determines the rate at which banks lend money to each other on a regular basis.  This affects the bank’s cost of funds and since the banks lend to consumers based on a spread, this would lead to increased borrowing costs.  This is the first interest rate increase in seven years.

Why did the Bank of Canada raise interest rates?
The bank has 2 mandates:

1. To ensure the economy is operating as close as possible to full employment.
2. To ensure inflation is operating within an acceptable range (generally 1-3% annually).

The bank cited a strengthening economy and expectations for higher inflation as two primary reasons for the increase.  Another reason is that the Bank of Canada acts mindfully based on how the U.S. Federal Reserve acts. The U.S. has increased interest rates three times already this year!  Lastly, the Bank of Canada is concerned about runaway house prices in large markets such as Toronto and Vancouver; they want to reign in speculation and increased borrowing.

What does the interest rate increase mean for me?
The Big Banks in Canada set a prime lending rate based on their cost of funds.  For the last few years, this rate has been set at 2.7%.  Lots of borrowing products, including variable rate mortgages and home equity lines of credit, are based on a discount or premium based on the prime rate (ie. prime -0.50%).  Therefore, rates on variable rate mortgages and other products tied to prime rates will increase as a result.  In fact, the big banks had all increased their prime rate from 2.7% to 2.95% within 24 hours of Bank of Canada decision.  Fixed rate mortgages or loans (being fixed) will not see a change.

How will this interest rate increase affect the real estate market?
When looking at the big picture, this interest rate increase is very small.  Lets use an example to illustrate:

  • The current average home price in Canada is approximately $500,000
  • Suppose your mortgage is based on 80% loan to value or $400,000
  • Let's say your variable mortgage is based on the previous prime rate of 2.7%
  • Now your prime rate is set to increase to 2.95%
  • The amortization period is 25 years
  • Your previous payment was $1831.95/mth.  Your new payment is $1882.73/mth.  An increase of approximately $50/mth.

While $50 extra isn’t fun, we don’t see it breaking the bank in the big picture.  When people think about interest rate increases, they think about rates rising to historical averages of 7-10%.  We are nowhere near this.  It would take a long succession of interest rate increases for interest rates to really affect the market.

Before the rate increase, sales in markets like Toronto were pulling back on the heels of a proposed 15% foreign buyers tax.  Add chatter of increasing rates and all of the sudden people are sitting on the sidelines.  This seems to be more of a perception issue with people reading the headline news.  Prices were already sky high and speculators are pulling back.  It's doubtful that the extra 0.25% on borrowing costs is suddenly making it unaffordable for qualified buyers who were in the market looking already.

In our home market of Windsor, Ontario, with an average price of $267,000, the affordability is very good and therefore this interest rate increase shouldn’t affect demand too much.  Using the same example above, adjusted for our lower prices, we are talking about an increased payment of $27/mth.  Interest rates are still bouncing off a historical bottom and have a long way to go before affecting affordability.

What are your thoughts on this interest rate increase?

Tuesday, July 11, 2017

REVIEW: Ontario Proposing Ban Of Real Estate Agents “Double Ending” Transactions

Over the last few blog posts, we have discussed the Liberal government’s 16-point housing plan they released in the spring.  The centrepiece of it? A 15 percent foreign buyers tax and expanded rent controls.  Another plank was reviewing the rules for real estate agents to ensure consumers are fairly represented.

The government has now published several proposals for changes to real estate agent rules and penalties and is seeking public consultation on them.  One of the proposals is to ban — with some limited exceptions — salespeople from representing both the buyer and seller or more than one potential buyer in a trade.  Today we are going to discuss what you need to know about double ending and how banning it will affect your future real estate transactions.

What is Double Ending?
Double ending is a term used to describe when the Listing Agent for a property represents both the Seller and the Buyer in a transaction.

What should I know about Double Ending?
Double ending usually occurs when a Buyer doesn’t work with an agent and searches for properties on their own.  Once they find a property, they deal directly with the Listing Agent.

In the above situation, the seller is being represented by the listing agent by their listing agreement.  They would call this an agency relationship.  The buyer is only dealing with this agent because it is his listing.  In this instance, the relationship is called Buyer Customer Service.  It would be considered agency if the Buyer had enlisted the same Agent to find them a property, and most likely signed a buyer representation agreement.

Most of the time, these double ending situations arise from the former, where a Buyer without an Agent deals directly the Listing Agent.  The later example would be rare.  

Why is the government concerned about Double Ending?
This is a pretty straightforward one.  They are taking the position that it is pretty hard to work in both the Seller’s and Buyer’s best interests, at the same time, given that their interests are directly opposed.  It’s more difficult to maintain confidentiality as well when representing both parties.  Its easy to see how this could be abused in the wrong hands.

What does this mean for me on my next real estate transaction?
If this proposal is passed, when buying your next listed property, you would be required to hire your own realtor, more than likely under a buyer representation agreement.  This would mean there would be agency relationships on both sides of the transaction and in theory both parties interests should be protected.  Our guess is that there will be some exceptions to the rules but we will have to see how it plays out.

What are your thoughts on double ending?  Have you had a double ending experience in your real estate travels?

Wednesday, July 5, 2017

Real Estate Insider: 2017 Summer Report

Welcome back, real estate readers! We are going to be adding a new monthly series to our blog. In addition to interesting real estate blogs, we'll be including helpful articles and subjects we think you'll benefit from reading. Last month, we found a treasure trove of insider info we just can't help but share.

Worrying about your credit score? Make it a thing of the past! CIBC is set to launch an easy-access platform for all clients to check their credit scores whenever they want, indicating the importance of everyone being comfortable and up to date with their financial situation. >>
How much do you know about your condominium’s governance? After investigating some questionable practices in downtown Toronto, this article gives tips on what you should be doing to ensure that your condo is well-managed. >>
Are we digging ourselves into a deeper hole with the Foreign Buyers Tax? The Montreal Economic Institute says that public decision makers are “missing the mark” and that this tax will do the opposite of what it was imposed to do. >>
Trying to halt the train! Chief economist at the Canadian Real Estate Association says Torontonians should prepare for a possible tax on speculative home purchases to try and stop outrageous house prices, but will it work? >>
What goes up, must come down. Home sales dropped 6.2% from April to May 2017, signifying the largest drop since August 2012. This could possibly mean the market is beginning to balance itself out once again. >>
Is your house under seven years old? Make sure you know about the new home warranty program in Ontario and the changes coming! >>
Could the legalization of cannabis affect the real estate business? Who should be responsible for all the costs and risks associated with growing marijuana plants? This commentary discusses some of the legal implications that could come with the industry. >>
Risk big, win big. With interest rates set to rise, are variable rate mortgages worth the risk? Locking in your mortgage rate now might be the way to go for the more cautious homeowner. >>
Canada has a historically moderate financial situation. In the wake of the recent housing boom, learn how the economy is protected with policies like the Foreign Buyers Tax to ensure Canada’s economy is safe now and in the future. >>

We hope you enjoy our findings -- happy summer and happy reading!

Friday, June 16, 2017

Ontario Fair Housing Plan – Takeaways For Windsor-Essex Real Estate Market

The Ontario Fair Housing Plan has now been around for almost 2 months.  The effects are starting to show in the GTA with month over month sales dropping 25%+.  In our last blog we reviewed the highlights of the plan and what you needed to know.  This post we are going to be discussing those highlights and specifically how they affect our home market of Windsor-Essex.

A 15% Foreign Buyers Tax In The GTA
This tax doesn’t apply to our market and only applies to the GTA area.  A large percentage of these foreign buyers were investors and this additional cost will make investing in the GTA less attractive.  With sales down since being introduced, it’s obvious these investors are pulling back.  This should lead to investors looking away from the GTA, naturally coming south where the tax doesn’t apply and their dollar goes much further.  These additional investors will only add fuel to the fire for local investment property demand and could push cap rates even lower.  Residential demand should also get an added boost.

Expanding Rent Controls
With a vacancy rate below 3% in the area, there has been upward pressure on market rents.  These rent controls will affect the functioning of this market and should ultimately lead to a lower supply of rental units pushing down the vacancy rate.  This effect will be seen in all markets in Ontario.

Changes To The Landlord Tenant Act
These tenant-friendly changes should also lead tenants to stay longer in their units when combined with the expanded rent controls.  Turnover should be lower for landlords.  This would tend to lower vacancy rates as well.  These effects will also be seen across Ontario.

Vacant Home Tax
We don’t see much evidence of vacant homes being bought by foreigners in our market.  This is more of a Toronto/Vancouver problem that shouldn’t have much effect in our area. We don’t see The City Of Windsor legislating something like this at the present time.

Levelling Property Tax Levels For New Multi-Residential Buildings
This should help the economics of building rental units, but combined with enhanced rent controls this might be nullified.  The low vacancy rate is supportive but further incentives from the City might be needed to encourage these new rental units.

Those are our local takeaways from the Ontario Fair Housing Plan.  What are yours?

Monday, May 29, 2017

REVIEW: Ontario Fair Housing Plan – What You Need To Know

Housing is all the rage in our province these days.  Everyone is talking about it.  Markets are at all-time highs and there seems to be no end in sight.  It has also become extremely unaffordable in markets like the Greater Toronto Area (GTA).  Naturally, the governing Liberal party has decided to do something about it.  Last month they introduced a comprehensive package of measures to stabilize the market called the Ontario Fair Housing Plan.  Today, we are going to review some these measures.

A 15% Foreign Buyers Tax In The GTA
This is the big one you probably saw in all the headlines.  Essentially, they are imposing a 15% non-resident speculation tax on the price of homes in the Greater Golden Horseshoe Area of Ontario.  The tax will apply to individuals who are not citizens or permanent residents of Canada and foreign corporations.  This will only apply to single family homes (or condominiums), and not to multifamily, agricultural land, or commercial/industrial property.  It will also not apply to the rest of Ontario (including our hometown of Windsor).

Expanding Rent Controls
Previously, rent control only applied to rental units built before 1991 in Ontario, but this will no longer be the case.  The allowable rent increases will be at the rate posted in annual provincial rent increase guidelines and run in-line with the Consumer Price Index (CPI) rate (also referred to as inflation).  These increases will also be capped at 2.5% per year.  For example, if you had a rental unit that was tenanted, when you come up to the 1 year anniversary date from your lease, you will only be allowed to increase the rent by this provincial guideline rate (say 2%).  So if you charged $1000/month, you could increase the rent to a maximum of $1020/month.

Changes To The Landlord Tenant Act
The Landlord Tenant Act is the legislation that governs the relationship between Landlords and Tenants in Ontario.  These changes to the Act will include developing a standard lease in multiple languages, tightening provisions for “Landlord’s own use” evictions, ensuring tenants are adequately compensated if asked to vacate under this rule, and technical changes at the Landlord-Tenant Board.  Landlords will no longer be able to use their own leases with their own clauses and will need to use this standard lease that is being introduced.  The tightening of "Landlord's own use" evictions will make it more difficult for Landlords to evict Tenants when they claim to need the unit for themselves or an immediate family member.  This has been used in the past in questionable manners at times to get around rent controls.

Vacant Home Tax
Introducing legislation that would empower municipalities to impose a tax on vacant homes to encourage property owners to sell or rent unoccupied units.  This is pretty self-explanatory with the hopes of stopping speculation and to increase supply of properties for sale and for rent.

Levelling Property Tax Levels For New Multi-Residential Buildings
Ensuring that property tax for new multi-residential apartment buildings is charged at a rate similar to residential properties.  High property taxes on apartment buildings lead to higher rents for tenants and also make it less economical for developers to build new rental supply.  This measure hopes to encourage more rental unit developments.

Those are the big measures to take away from the Ontario Fair Housing Plan.  Next week, we are going to talk about some of the takeaways from these measures as they affect our local market.  What are your thoughts on these measures?