The concept of “firsts” has always been interesting to me. As a competitive person, I’ve always strived for first place. Heck, as a real estate professional, I’m not doing my job if I’m not first in an offer night situation or first in the eyes of a prospective seller at a listing presentation. As Will Ferrell in Talladega Nights as Ricky Bobby famously said, “If you’re not first, you’re last.” Lifeguards learn First Aid, and everyone knows that the first man on the moon was Neil Armstrong. What is with our society and its fascination with firsts?
Frankly, I don’t know the answer to that. I’m no philosopher. What I am though, is a Realtor. Given that, there is one thing I can say with certainty: the most difficult transaction one will ever make in the real estate market, is their first purchase.
Much has been made in the media and around the water coolers about the difficulty and/or the unfairness of the current Toronto real estate market. If you read between the lines though, what everyone is really saying is how difficult it is to complete your first transaction. After that significant first transaction, subsequent transactions should be a relative piece of cake.
The latter is the obvious benefit of course, as everything gets easier with experience. After a couple of rides, you stop falling off your bike. The 401 is a lot less scary after the first time you merge at 100 km/hour. Nerves subside, skills get honed, and familiarity and comfort develop.
From a real estate perspective, you’ll have already read and signed the requisite forms, you’ve been through the pre-approval process before, you understand what a “bully offer” is and have probably read through a condominium’s “status certificate.” Hopefully, you have also developed a relationship with a Realtor you trust, and combined, this all helps to make the next transaction more comfortable. While most transactions in real estate will still have some level of stress and discomfort (mostly as a result of the magnitude of the endeavour, and the infrequency one does it in their life), I can tell you from experience that it just gets easier.
It gets easier from a financial perspective as well. Before and during your first foray into real estate, you’re typically chasing the market. That first transaction requires you to save up for the initial 20 percent down payment, and having the earnings at such a young age to qualify for financing, both of which are not that simple. For every subsequent transaction, a buyer is at least afforded the benefit of (likely) buying and selling at the same time in the same market, and deploying the proceeds of the sale of the initial property to fund the purchase of the next. If the market goes up and the next house becomes more affordable, so does your buying power based on the returns on your initial investment. If the market goes down, you’re only losing proportionately to everyone else, and the next purchase becomes “cheaper.”
I recognize this is an oversimplification of the economics of it all, but there’s a reason the concept of the “housing ladder” is so pervasive. It’s real, and it’s spectacular. Historically, the Toronto housing market has only ever gone up and to the left on any number of graphs pertaining to price. While certain subsects of the market will over or underperform in shorter time horizons, it’s an efficient market that travels together over time, particularly when you stay in the same location. It gets complicated when you move in and out of geographic markets, particularly ones like Toronto or Vancouver, but that’s a topic for another day.
Regardless, the finances of the first purchase remain challenging. The cheapest condo I’ve ever sold to a buyer in my career was $548,500. Let’s round that up to $550,000 for simplicity’s sake. That means that a buyer needs a $110,000 down payment if they want to avoid having to pay mortgage insurance. In a city where the cost of living is prohibitively high, and the average salary on an annual basis is probably in the $50,000 range, it doesn’t take a mathematician to deduce that not everybody can make this work. There are ways to compromise of course, whether it’s on location, size or quality of building or unit. But in a city where it’s tough to find a quality, one-bedroom condo for under $600,000, it can be tough to stomach for the most optimistic of young buyers.
So where does that leave most? The next obvious answer I generally see – and the one that seems to be dominating the headlines – is parental financial assistance.
Say what you want about this concept, but I can tell you both anecdotally as well as by referencing countless studies that have already been linked on Toronto Realty Blog, that this strategy is happening, and it’s happening with increasing frequency. It makes sense though, right? Affluent parents accelerate the exchange of part or all of the inheritance they’ve worked so hard to leave their children, and in doing so, get to keep them close and witness them enjoying the fruits of said labour. All the while, they bypass probate and other potential taxable considerations on their death and give their child a boost into Toronto’s real estate market.
If all else fails, I’ll leave you with what I think is the most interesting entry into the Toronto real estate market I’ve dealt with in my career. Two old friends of mine, one of whom I met in JK and the other who I met on my first day of Grade 9, reached out to me in April saying they had an idea. They wanted to pool their income and savings, drive their buying power to heights they wouldn’t have been able to achieve independently and buy a house together. They’d each live in a bedroom, share the common space, and rent out the basement to another friend, or failing that, someone they found on their own.
It might seem crazy, and it’s not something I’d advise for just anyone (something I made clear from the outset to them), but I told them if they trusted they could work together, and they outlined the specifics of their agreement with a lawyer ahead of time, I could help them with their search. As I said, I do know both of these guys very well, and if anyone could pull it off and co-exist, it would be them. They assured me they trusted they could do it, so off the search went.
Lo and behold, from a combination of good timing, hard work and some creativity, we found them a detached home with parking in East York, not ten minutes from where they grew up, that had separate basement access and good bones, that they were excited to call home. We ended up buying it for them for just over $1 million, at a few hundred grand less than what it would have sold for back in February. I was thrilled for them. Working with close friends can be catastrophic, but when it works out, it’s one of the most rewarding feelings. Sure, this property isn’t going to land them on the cover of House & Home, and it’s on a moderately busy street, but it’s exactly what they needed, and we secured it for them at a low price.
For them, putting their resources together allowed them to:
More comfortably enter the market.
Gain access to the “crown jewel” of Toronto Real Estate: a detached home with parking.
Have the resources to act quickly at a time when prices were desirable.
Stretch the purchase beyond what they “needed” to get something with the opportunity to add some rental income to offset their mortgage.
I know what many of you might be thinking: this is destined to fail. Mixing “business” with “pleasure” is never a good idea. Is that basement apartment really legal? How does this end? Could they have waited longer and gotten an even lower price? I suppose I don’t know the answer to any of those. What I do know, however, is that from an investment perspective, they did extremely well given where the market was at the time, and they are beyond thrilled with what they landed. And they did so in a creative, unique way. Most importantly though, and this is for certain, when this does dissolve and the time does come for them to purchase their next home, they are going to be in a much better financial position to do so, and they’ll be able to do so with a wealth of knowledge and experience.
And, they may just have been the first of my friends to own a detached house. In the city of Toronto. At 28. And, via a finite resource: detached homes. I think even the biggest real estate bears would say that’s a solid long-term investment, not to mention the utility they will get out of it in the meantime. They have a lot to look forward to in their second transaction.
Focusing on what’s in front of us, however, they just crushed their first transaction. And they did it in a way that was a first for me.
And you know what they say…
…If you’re not first, you’re last.
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