Friday, July 21, 2017

Rationalizing The Rental Market


Nobody ever talks about the rental market, do they?

It's just not as sexy a topic.  Who cares about a $1,900 per month lease when we have stories about houses selling for $500,000 over asking!

Well, I have a feeling you're going to hear a lot about the rental market in the coming weeks, since it is, to be blunt, out of control.

Let me explain where we are, how and why we got here, and give you a few in-the-trenches stories…

A funny thing happened when Kathleen Wynne enacted legislation to try to protect renters: the market became more competitive.

In fact, I might suggest that Wynne's actions created an environment that is the exact opposite of the one she was looking for.

Now, I might also suggest that Wynne wasn't really looking to create an environment; any environment, and that she doesn't really care what happens, and to whom, but rather her policies are completely political in nature, could go any which way, and are all being implemented in attempts to gain favour ahead of a 2018 election that, at one time, seemed like a complete write-off.

But that's a topic for another day, and for my politics blog, which, well, I should really invent…

In the Liberal government's "Ontario Fair Housing Plan," which was aimed at cooling the market, and, not to sound like a broken record – gaining favour with voters, Ms. Wynne and the Liberals (over?)reacted to a lot of media attention surrounding the plight of renters in the city of Toronto, via tales like the "Couch Surfing" article that a CBC reporter put together.

They brought in rent controls, in an overreaction to this bizarre notion that rents were increasing by 150% (See the Couch Surfing story and others), when in reality, that was the landlord's legal means to inspire a tenant to give notice to vacate.  They tightened provisions for "landlord's own use" evictions, and most importantly, included the absolutely insane requirement that a landlord has to financially compensate the tenant for vacating, by providing them with at least one month's rent.

They also, for some reason, tied together elevator service to the ability to increase the rent according to legal guidelines, which opens the door to tenants complaining that the rent shouldn't be legally raised for reasons A, B, and C.

So what was the end result?

Did the market change for the better?

Do tenants have an easier time now in the city of Toronto?


Not even close.

In fact, landlords effectively decided, "If I'm going to be subject all these new rules, regulations, restrictions, penalties, and risks associated with being a landlord, then I'm going to be very careful with respect to whom I rent."

If you asked a landlords if they're willing to discriminate against potential tenants, the political answer would probably be "no."

But they might use the words "distinguish" and "discriminate" interchangeably.

They can "distinguish" between one tenant and another, with one tenant representing a potential (even if the potential is low) problem down the line, whereas the other tenant has virtually no risk associated.

All this, because of the new "fair" housing plan, which scares the pants off landlords, and in turn, has caused them to step back, and weigh their options more heavily than ever before.

Also consider that as the market cooled, many buyers said, "Oh my gosh, prices are dropping, we're going to rent, and wait it out."  This was clearly an unintended consequence of the Liberals' decision, but there are far more renters out there now, than there were in the spring.

The timing of adding more renters to the pool could not possibly have been worse, given that late-June and all of July are when the tens of thousands of students look to tie up rentals for September 1st.

Add it all up, and the rental market has never been crazier.

Crazier is an understatement.

To be blunt, the rental market is in a state of chaos.

Chaos may be an understatement.

However, I don't know what is worse than chaos.

A quick search of synonyms shows a multitude of descriptive words that, on their own, don't beat chaos, but collectively I believe that anarchy, disarray, pandemonium, disorganization, and lawlessness, accurately describe what is going on in the rental market right now.

I don't do a lot of rentals on the buy-side; for my investor-clients, I do, and you've heard some of the stories.  But for the "in the trenches" accounts of what is going on in the market right now, I went to my office's rental expert – a young lady named "Farrah," and I'd like to share some of the horror stories with you.

As Farrah explains, we have three major issues, that are causing the turmoil in the market:

1) Timing.

Demand is so high, and supply is so low, that properties are being leased, often within hours.

It throws the whole market into chaos.

Properties are therefore being leased sight-unseen in many cases.

2) Extras.

Guarantors, co-signers, and months upon months of pre-paid rent!

Tenants are scrambling to "strengthen" their offers, and are getting creative and desperate at the same time.

3) Agents

Jerry Seinfeld famously said, "People…..ugh….they're the worst."

In my office, we have a similar saying, and as you might guess, we just interchange "people" and "agents," and the point is made.

Agents don't, and couldn't possibly, care any less how they go about their business, who and how they hurt people in the process, and the bar for cooperation and professionalism has never been lower.

The problem of course, is that any complaint, either to a colleague, manager, or broker at a listing brokerage, is often met with, "Who cares – it's just a lease."

So without further adieu, let's watch this horror show…

Farrah is my office's rental expert, in that she routinely rattles off 30-40 leases per year, and is currently working with over 20 would-be tenants.  And they would be tenants, if not for the mess that our market is in.

Last Friday night, Farrah went to submit an offer on a 1-bed, 1-bath condo, priced at $1,900 per month.

She called the listing agent, who was also the owner, and said she would be emailing the offer over shortly.

He said that his wife was "on a boat" (presumably not THIS one…), and that he wasn't able to work with the offer right away.  He asked that Farrah submit the offer the next morning, and said not to worry, that there were no offers on the table.

The next morning at 9:00am sharp, Farrah emailed the offer to the listing agent, and followed up with a phone call.

To her surprise, the agent said, "Thanks for the offer, but I accepted an offer last night."

Farrah was shocked.

The agent added, "I ended up with eleven offers by midnight, and I panicked!  I was completely overwhelmed, I didn't know what to do, and I accepted the highest offer."

She asked why he didn't feel the need to call her, or contact her in any way, shape or form, to let her know that there was a registered offer, let alone eleven, and he was just a stuttering mess.  "I panicked, you see?  I literally was not expecting this, and I had no idea what to do."

The worst part is – Farrah had called the listing brokerage and specifically told the front desk that she wanted to be paged if there were any registered offers on the property.

So combine this agent being a novice, having "no idea what do do," and his brokerage being completely inept, and you get a disaster if you're a leasing agent.

You might suggest that Farrah would have, could have submitted the offer the night before, but when an agent tells you not to do something, in a competitive market, quite often you try to gain favour by adhering to their wishes.  It's a classic case of, "You're damned if you do, damned if you don't."

For another client, Farrah had submitted an offer on a 1-bed-plus-den, 1-bath unit, listed at $2,100, and up against "only" one other offer, she was told by the listing agent that they were accepting another offer.

The next day, the listing agent for that property called Farrah and said, "As it turns out, we'd love to work with your offer."

Farrah asked what had happened, and why the other deal fell through.

The listing agent replied, "We were waiting for the deposit cheque, and the tenant never brought it.  His agent said that he had found another place – it turns out, he had made offers on two properties, and they were both subsequently accepted, but he chose to go with the other one."

Farrah told me this story, and we had a conversation about how two wrongs are all of a sudden making a right in today's rental market.

This tenant had legally committed to leasing two properties, with the intention, clearly, of only residing in one.

He made the two offers, probably in the interest of time, as well as playing the odds in this market, with the knowledge that it would be possible for him to legally bind himself twice.

One might look at this situation and call this person smart.

But if that's the case, then it's the very definition of two wrongs making a a right.

For a condo at 8 The Esplanade, listed at $1,999, Farrah showed the property and had an offer ready to go, in-hand.

Within mere hours of the property hitting the market, Farrah had an offer submitted for the full list price, with a credit check, employment letter, pay stub, rental application – all the goodies, from very well-qualified tenants.

Nothing is easy in this market.

Right when you think you've seen it all, something new presents itself.

The listing agent called Farrah back, not this time to tell her that he had received other offers, but rather to say, "I'm increasing the list price on MLS – $2,100 now."

He'd had so many showings booked in such a short period of time, and so many agents buzzing about with talk of offers, that he read the tea leaves, and realized he could be opportunistic.

But the "best" story, in my opinion, has to do with something I never thought I'd see: offer dates on rentals.

Did you ever think you'd see this?


That's right, folks – we're now officially setting "offer dates" for rentals.

But here's the kicker – Farrah submitted a "bully offer" on a rental, that had an offer date.

Just when you thought you'd seen everything…

Last, but certainly not least, and for all my new readers who found my blog via my "Rental Discrimination" post last month, who really, really don't like what I write, try this one for size…

Farrah has been asked on many occasions, "How many months' rent is your client able to provide up front?"

Now, we know that asking for more than two month's rent up front is illegal, but thanks to a commenter on last month's blog, we also know that accepting more than two month's rent up front is illegal.

As somebody pointed out, it's also illegal to drive 101 KM/H on Highway 401, and yet 99% of the drivers are doing it.

Farrah was asked my one listing agent last week, "Can your client provide six to twelve months' rent with the offer?"

Farrah said, "No," but only in that case.

Because to be quite honest, folks, Farrah has clients that not only are willing to do so, but are asking Farrah for the option to do so, in order to strengthen their offers.

Farrah, like me, thinks that this comes with considerable risk.  But there are tenants out there that have money, want a rental, and know that they have to swing for the fences in order to hit a homerun.

So what's the take-away here?

Is there any light at the end of the tunnel?

Well first of all, part of the chaos has to do with where we are in the market.  July is always a crazy month for renters, as all the students search at the same time, and you can't really tie up a condo in May for September.

But cycle aside, it seems as though generally accepted practices in the rental market, are moving further and further away from what is rational, as well as what is legal.

I'll be honest – I've told a tenant to provide multiple months of rent up front before, but nothing like what we're seeing right now.

And before one of my readers asks the question, I'll answer it: yes, most of the people putting 12 months up front are, well, not from Toronto…

The landlords are asking for a lot, the tenants are offering a lot, and the listing agents are doing whatever they like – often listing a property on Friday, with "no showings until Monday," to what end, I don't know.

Maybe this is a sour blog to end the week, but if you're a prospective renter out there, better to know what you're getting into beforehand, than to be devastated by the market conditions once your search begins…

The post Rationalizing The Rental Market appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.

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