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June 12, 2010

Buying a House not for the Reckless

CANADA - And definitely not for people who are uninformed. The Canadian housing market is red hot right now. Interest rates are still at record lows, the economy is booming and if you wanted to buy a house with a low interest rate now is a good time because the Bank of Canada is expected to raise interest rates again sometime in the next 6 months as the economy continues to heat up.

But if you're looking to buy a home or sell your existing house there is a lot of options out there and there is an increasing number of "opportunistic villains" who are poaching on uninformed first time home buyers / sellers.

Lets say you're looking for a realtor. Do you go to one of the traditional big companies (ie. Royal LePage, ReMax, etc) or do you hire a smaller, younger company which professes to be cheaper, but might be ripping you off and taking advantage of your naivete?

For example a lot of these young companies have gimmicks to encourage you to work with them instead of their competitors. One real estate might offer to post your home on multiple online listings. Another says its cheaper to use lawyers instead of realtors (you will need a lawyer anyway). Another suggests bidding on their services.

Since 2009 over seven new real estate companies have appeared in the wake of a federal Competition Bureau decision in an effort to cutback on the monopolies the older companies seem to have. Its hardly a monopoly in my opinion. People simply gravitate towards brand name products/services the same way they choose their cola. Coca-Cola or Pepsi are the brand names and any idiot can tell you RC Cola or President's Choice Cola simply don't have the taste people have come to expect when they buy cola.

The point I am getting at is when you go to a brand name company you can expect better quality service. This still post your house online in multiple directories and while the agent does take a commission its probably less risky than hiring a lawyer who is an expert on documenting the sale, not on sealing the sale or making sure the house is actually safe to buy (ie. the lawyer doesn't know if the house has termites or something equally bad).

When it comes to something as big and important as buying a house most people prefer not to be reckless. They want someone with experience, knows what they're doing and is reputable.

The one thing that is good about the 2009 decision is that house prices have come down a little, because its forced real estate agents to become more competitive. They've become more dynamic and creative in an effort to get the attention of potential buyers.

For example there is savetherealtorfees.com which offers to list your house on multiple databases for 1 penny. Technically not true however. The price is actually $600. Its only reduced to 1 penny if the house sells within the first 10 days, after which he refunds you $599.99... and of course gets a commission off the sale.

You see what I mean? Granted, a lot of other companies offer the same multi-listing service for roughly the same price, but none of them offer a $599.99 refund if you sell within the first 10 days. You're basically paying to advertise your house, a process which is often lengthy.

And it may get worse before it gets better. More government regulations are coming but while they're debated the housing market will temporarily be a "wild west shootout" as would be upstarts try to make a name for themselves (and ironically try to become a brand name). The Canadian Real Estate Association is challenging these new regulations and it may be a year or more before anything comes into effect.

“During the early years you’ll see an awful lot of these fledgling companies fail to get off the ground, but some may prove to be truly innovative,” said John Andrew, director of executive seminars on corporate and investment real estate at Queen’s University.

The industry, it has pointed out many times, hasn't really changed much over the years.

“It’s crazy that most real estate marketing is mired in the 1970s with bus shelter ads and flyers,” said realtor Ajay Jain who owns ibidbroker.com, a site which allows realtors to bid on customers (although frankly I am dubious about any realtor who offers to sell your house super cheap). Advertising your house is free, but realtors have to pay $30 just to submit a bid to become your agent. The good news is that it charges the realtors, not the home seller... and basically reduces the process of finding a realtor to a bit more like an online dating service.

Such innovation isn't a bad thing. The danger is when your realtor is inexperienced and you run into problems sealing the deal because they're inept, incompetent or just make the occasional mistake.

propertyshop.ca argues people shouldn't even get a realtor. It argues its cheaper to just have a lawyer sign the appropriate papers and not worry about the other things like whether the seller is committing identity fraud, has neglected to mention there is a lean on the house, termites, structural damage, a leaky roof or a pending lawsuit.

In such scenarios its buyer beware. True, you have the legal security of the lawyers involved... but liars lawyers aren't exactly known as "the salt of the earth" either. The lawyer is still charging a 1% commission (on top of legal fees), which is less than the 2.5% commission usually charged by realtors... but frankly a realtor is more likely to get a better sale price.

Sometimes it is better to have a middleman.

The question however is how many middlemen are involved... realtors, lawyers, advertising, website and directory listings. If its all rolled into one reasonable fee I'd say it doesn't matter. If they all start asking for a share and competing with each other then woe be to the consumers looking to sell their old home and find a new one.

Food for thought.

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