Speculation Can Bite You In The A$$

The Real Estate Espresso Podcast

On today’s show we are talking about the dangers of speculating and making purchases that are significantly above market. Some markets like Vancouver and Seattle have long experienced a significant influx of foreign buyers who have created upward pressure in the market over a sustained period.

Some luxury condo towers in Vancouver were offering pre construction units in luxury buildings at stratospheric prices of $2,600 to $3,000 per square foot at a time when comparable units that were one or two years old across the street were selling for $1,500 per square foot. The condo developers were still able to sell enough units to get their construction financing at these high prices.

Of course nobody can possibly predict the future. The chances of all the planets aligning and delivering the required value increase are so slim that you had better be buying the property all cash. If you’re intending to finance the purchase, chances are high that the property will appraise well below the purchase price when it comes time to close. No lender is going to rate lock and approve a loan that is taking place 3-4 years in the future.

The developer was irresponsible for proposing those high sales prices and the construction lender was irresponsible for lending against a project that had such a high premium to the market.

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