Wednesday, July 26, 2017

Greed Is Good……Right?


The 1980's were said to be the "Decade of Greed," and if Hollywood's portrayal was any indication, those of us watching now in hindsight would have no reason to believe it was anything to the contrary.

Market regulations, consumer interactions, and the way commerce is transacted may have changed since then, but greed still exists.

The real estate market, as many of you would argue, is ground zero.

Let me tell you a story about greed, that still after having thought about this for weeks, and written the entire blog below, makes absolutely, positively, no sense…


"Greed Is Good"

It makes a great tagline, and looks cool in that quasi-Gothic font next to a young Michael Douglas, who blends into the background darkness in a way that Oliver Stone seems to see the whole world.

Wall Street opened my eyes as a young man, since I actually never watched it until I was in third year university, taking business, dreaming of becoming a caviar-eating, lear-jet flying, financier.

As cool as the movie was, and as great as the one-liners were, I actually found the movie to be quite depressing.

Unlike most people my age, I didn't think Michael Douglas' character was anything to aspire to.

Yes, he was rich and powerful, and if he didn't earn the respect of his peers, he certainly went out and took it.

But like most people who does what he does, he eventually fell hard, as did his protege, Bud Fox, who had to rat out his mentor in order to save his own skin.

Many young people watch Wall Street and say, "That's exactly what I want to do!"

The movie had the exact opposite effect on me.

I feared an existence like that of Bud Fox, who was only with a woman who liked him because he was rich, and scoffed at the idea of "getting by" in something less than a top-end Penthouse apartment.

And by the end of the movie, I began to wonder if the take-away was that hard work alone isn't enough to be successful; you also have to lie, cheat, and steal.

The timing of my first viewing of this film also coincided with the tech-boom of 1999, which led to a spectacular bust.

And I began to sour on the world of high-stakes trading, and look elsewhere as far as school, and career, was concerned.

That one line in the movie though always stuck out at me: Greed Is Good.

I never quite understood it.

I think that most people who play with fire, get burned.

I believe in taking risks, I believe in being different, I believe in thinking outside the box, and I think combined with hard work and sacrifice, success – and wealth, is achieveable.

But at what cost?  That's where every individual has his or her own set of ideas and ideals.

And the whole "Greed is good" mentality never motivated me, because I didn't think it was a means to a successful end.

There's no shortage of greed in the real estate market, as many of you can attest to.

Whether you were on the giving or receiving end of greed, we all know that it happens as often as properties go up for sale.

But there are different measures of greed, and different motivations.

I'm not sure what's worse: greed on a smaller scale, or a larger one.

I have clients who are relocating to Toronto, and they are the very definition of "executives;" a word that gets thrown around a lot.

Executive rentals, executive tenants – what does this all mean?

Well, my clients are actually executives, who have extremely high-paying jobs of great stature, can afford the "luxury rentals" that other people scoff at, and would be the absolute spitting image of a "Triple-A Tenant."

We were looking at two penthouse condos in a luxury condo downtown, but before I took my clients for a viewing, I called the listing agent to clarify something in the broker's remarks of the MLS listing.

The Condo was listed for $8,000 per month, and then decreased in price to $7,125 per month.

However, the following note appeared in the MLS listing:

Tenant Responsible For Base Rent of $7,125 Per Month Plus Condominium Maintenance Fees Of $875 Per Month = $8,000 Per Month.

So first of all, the unit wasn't really decreased in price.  All they did was lower the asking price for the rent, and then build in the maintenance fee.

But more importantly, and as I asked the listing agent, "Who the hell expects a tenant to pay the maintenance fees?"

"I've done a hundred rentals," I told her, "And I've never had a tenant pay for the maintenance fees."

Surprisingly, she said, "I know, neither have I."

So what was the issue here,  I wondered.  It didn't make any sense.

"There's something you have to know about these condos, and the landlords," the listing agent told me.

"They're smarter than you and I."


I knew who the landlords were, since a quick Google search provided ample results.  They were two young guys in their late 30's, early 40's; sons of a very wealthy and prominent Toronto family.

"They're incredible businessmen," the listing agent told me.

"Allow me to explain," she said, as I took a seat in my office chair and got ready for an earful.

"My clients aren't a fan of the maximum 1.5% rent increases, as I would imagine everybody else in the Province aren't either."

"So they're hedging their bet, you see," she explained.

"If they were to only raise the rent 1.5%, that's a pittance on $7,000."

"But if the condo maintenance fees went up significantly, say, 6% next year, and the tenants are paying for that, then my guys are getting a 1.5% increase on $7,125, but they're not having to pay the 6% increase on the $875 per month."

"Genius," she told me, as I could feel her pride through the phone.

"I don't understand," I told her.

She began to explain it to me again, and I stopped her: "No, no, no, I mean I understand the math, that's not my problem.  I mean I don't understand the purpose," I told her.

She began to explain, the same thing, again, and I said, "Do you mind if I put you on hold for just one second?"

She said it wasn't a problem.

So I got out my trust calculator – same CASIO that I've had since Grade 9, and did some really complex calculations.

If the unit rented for a flat $8,000 per month, and landlords raised the rent of the $8,000 per month condo by 1.5%, that would be $120, and thus a new rent of $8,120.  With the landlords paying the $875 per month maintenance fees, the net rent would be $7,245.

If the landlords rented the unit for $7,125 per month, and the tenants paid the maintenance fees, the 1.5% increase on the rent applied would be $7,232.

However, let's say the maintenance fees went up 6% in the first scenario – from $875 per month to $927.50.

That means the $8,120 per month rent, minus the $927.50, would result in a net rent of $7,192.50.

And that is what the landlords are trying to guard against, you see!

You can play with those numbers all you like.  If fees went up, say, 10% in a year, then the net rent would only be $7,157.50.

So if you're like me, right now, you're thinking, "Who the F&$K cares?"

Why in the world are these jackasses monkeying around for $48 per month?

I came back on the phone and told the agent, "If I'm doing this correctly, it seems your 'genius' clients are looking to take on a downside risk of $13 per month, in the event that fees don't increase, but an upside risk that is…………..infinite."

That was sarcasm, in case you weren't playing along.

But the agent was!  She said, "EXACTLY!"

"So if maintenance fees went up, like, ten percent in the first year of the lease, your clients stand to gain a net of $87.50 per month."

"Right on," she said.

"Can I ask you an honest question," I asked her.

"Sure," she said.

"How fucking bored are your clients?"

There was silence on the other end of the phone, and eventually she said, "Come again?"

"Your clients' family probably has a net worth in the $50 – $60 Million range.  Your clients could stop working today and live off the interest of their sizeable net worths.  So why in the world are they messing around over twenty-five goddam dollars per month?"

"Because," she told me, "They're genius businessmen!"

I don't think she and I were on the same page.

"These guys are really tough negotiators," she told me.  "This is the way they do all their business deals."

It made no sense to me.

And it was the greatest combination of greed and stupidity that I had seen in such a long time.

These guys, with their two penthouse condos, looking for $8,000 per month tenants, were getting creative with all their big-deal-business-acumen, trying to squeeze out an extra $10, $20, $30 per month in rent, which would represent a gain of less than one-half of one-percent.

If there's one thing I've learned in this business, it's that people don't like working with assholes, and don't – when they can avoid it.

I told my clients the story, gave them the lowdown on how the rent would break down, and threw them an ever-so-gentle opinion of mine, based on what I've said above.

We went and saw the unit, and it was fantastic.

But in the end, nothing would be worth dealing with those two knuckleheads as landlords.

And I'm not judging a book by its cover here; that one situation with how they want to deal with the rent, is chapter and verse of what to expect moving forward.

If this was my condo, I'd be looking for Triple-A tenants who would be easy to manage, quiet, respectful, low-key, and who would stay for another year, and another after that.

If this was my condo, I'd do everything possible to ensure I didn't have a month's vacancy, since losing $8,000 in rent would blow my entire return.

But it's not my condo.  It's a condo that belongs to somebody that is either really bored, and needs a hobby, or somebody that would cut off his nose to spite his face.

These guys have more money than the know what to do with, and thus maybe they're okay losing $8,000 per month, to get a "victory" in having a tenant agree to their "genius" idea, that showed what a "tough negotiator" they could be.

But you know what?  I don't think it's the latter.

I think that greed can get in the way of smart decision-making; not often, but often enough.

And this is a case where these guys, despite all their wealth, and all their business acumen, aren't thinking about the long-game.  They're letting greed, and ego, get in the way, and massively inflating their downside, all in search of a limited upside.

Greed is good, right?

Not in this case.  Not a chance…

The post Greed Is Good……Right? appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.

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