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Online Auction luxury real estate aim to shake up sales

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An online auction for a luxury home in Abbotsford, B.C., is drawing attention for its novel approach, which some observers say has potential to inspire new sales even if it doesn’t have any notable impact on the housing landscape.

Bidding opens Tuesday on the 12-bedroom, 10-bath restored train power station known as the “Sumas Powerhouse,” which was previously listed for $5 million and has an assessed value of $2.2 million on B.C. Assessment.

It’s one of three properties in Canada listed on global firm Concierge Auction’s website. A news release says it’s targeting Chinese buyers and will be sold in co-operation with Re/Max.

Scott Pate, a project sales manager with Concierge, said luxury real estate has been a buyers’ market for quite some time in both the United States and Canada and auctions are a way to give sellers more certainty.

“We’ll bring the market to this sale instead of the normal way of selling real estate, which is putting it on the market and waiting for an offer, which could take years and years,” he said.

“The market is motivated because there’s a fear of missing out. This auction is going to end on a certain day … so it creates a lot of interest.”

Real-estate auctions are typical in Australia and New Zealand, but the model is less common in Canada.

A real-estate agent in Victoria tried the in-person auction approach in 2016 with a property in the city’s upscale Rockland neighbourhood, holding a public auction featuring a pianist playing a grand piano in the ballroom at the event.

But local media reported that although 60 people filled the room, only one was an interested buyer so the auction was cancelled. In 2017, the B.C. Supreme Court accepted a $1.8-million offer for the historic mansion in foreclosure.

Tom Davidoff, director of the University of British Columbia’s Centre for Urban Economics and Real Estate, said online auctions aren’t all that different from the way we buy and sell homes traditionally in Canada, especially in cases where there are multiple interested buyers and a bidding war.

That could make it comfortable for Canadian buyers to transition to the model.

“It certainly could be a direction the market could go. In segments where the market is slow today, people will try different approaches to move product, so it’s certainly possible,” he said.

But beyond creating another way for potential buyers to bid, he said he doesn’t believe there will be an impact on the market in terms of housing prices or competition.

“This will have no impact on the market overall,” Davidoff said.

In Toronto, On the Block sells real estate both the traditional way and through its online auction platform but doesn’t focus on luxury sales.

Co-founder Daniel Steinfeld said online auctions offer a way around some of the frustrations that come with silent bidding wars under the traditional system.

As part of the company’s model, buyers must sign agreements to make the value of their bids public while their identities remain protected. Real estate board regulations otherwise prohibit real-estate agents from disclosing the substance of competing bids.

“Buyers, especially in the Toronto and Vancouver markets, have grown pretty frustrated with the blind bidding approach,” he said.

The platform also allows the company to post more information than might be available through MLS listings, like copies of home inspections and agreements of purchase and sale, which makes it less likely for a sale to fall through.

The most important factor in a successful real estate auction is the starting price, which can inspire competitive bids, Steinfeld said. So when identifying potential properties for auction, the company interviews the sellers to determine their objectives and market expectations.

If the seller has unreasonable expectations about the market value of their property, it’s probably not the right fit for auction.
Market conditions matter less, he said.

“We have seen in both good and bad market conditions that it can work, it really just comes down to the appropriate pricing strategy,” Steinfeld said.

Auction properties are typically first-time listings and the company sets a reserve price, which represents the minimum value at which the seller is obligated to sell.

“Once bidding reaches that number, everyone knows for sure that property will sell,” he said.

“Then everyone starts to bid quite a bit more because they know at that point that if they win, it’s theirs.”

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Home Sales Climbed Higher In July

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Canadian home sale rose in July in broad gains as markets start to recover from the stress test tightening last year, though economists say global concerns raise some uncertainties for the future.

The Canadian Real Estate Association reported last week that home sales rose 12.6 per cent in July from a year earlier, and were up 3.5 per cent seasonally adjusted from June.

“Sales are starting to rebound in places where they dropped when the mortgage stress test took effect at the beginning of 2018, but activity there remains well below levels recorded prior to its introduction,” said CREA president Jason Stephen in the report.

“Sales activity is strong in New Brunswick where I do business, but it’s a very different story in B.C., Alberta and Saskatchewan. All real estate is local. Nobody knows that better than a professional [realtor], who is your best source for information and guidance when negotiating the sale or purchase of a home,” said Stephen.

The increase came as sales were up in markets like Moncton, B.C.’s Lower Mainland, Calgary, Edmonton, Greater Toronto Area, Hamilton−Burlington, Ottawa and Montreal. Sales were down in Regina, Saskatoon, and Windsor−Essex.

The broad rise in sales put them at their best level since the stress tests kicked on at the start of last year, said BMO chief economist Douglas Porter in a note.

“After a challenging 18 months, the Canadian housing market is showing widespread signs of, not just stabilizing, but firming again.”

The federal government updated mortgage qualification rules at the start of last year to require more would−be borrowers to prove they could manage if interest rates rose.

The national sales−to−new listings ratio tightened to 59.8 per cent last month from 57.6 per cent recorded in June to the upper end of what’s considered a balanced market, he said.

The rise in sales, which came as the number of newly listed homes edged back by 0.4 per cent in July, put some pressure on prices, said Porter.

“With sales regaining some momentum broadly, and the market tightening in many regions, it’s little surprise that prices are starting to turn the corner again.”

The national average price of a home sold in July was just under $499,000, up 3.9 per cent from the same month last year and a seasonally adjusted 2.6 per cent from June.

Double−digit price gains in several Ontario communities including Ottawa and Kitchener−Waterloo helped drive up the overall average, while cities in Western Canada generally saw prices drop.

Porter said global uncertainties are already driving borrowing costs lower, which could further boost the Canadian market, but if economic declines prove serious then interest rates will be secondary.

“The downside is that if “global uncertainties” morph into something much more serious for the domestic economy, interest rates will be playing a second fiddle.”

TD senior economist James Marple said the housing market looked robust for the month, supported by strong population growth, solid job growth and lower mortgage rates.

“This can only be described as a solid month for the Canadian housing market…with most markets in balanced territory or better, the immediate downside risk to home prices have diminished considerably.”

He said there is some uncertainty as to where rates will go, since domestically the economy looks strong while there are considerable international challenges as global economic growth looks even softer than previously thought.

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Why you need to be on top of real estate Tax rules

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Advisors have been urged to brush up on their real estate tax knowledge, with the CRA throwing more auditors at the issue.

Mistakes in tax returns appear to have left millions of dollars out there and, with many transactions of this nature of high value, the agency is redoubling its efforts to recoup money.

Mariska Loeppky, director, tax and estate planning for IG Wealth Management, believes investors are often making innocent errors because of the relatively new adminstrative change to reporting your principal residence exemption disposition.

From the 2016 tax year, residents are required to report basic information, like date of acquisition, proceeds of disposition and description of the property, on income tax and benefit returns, when they sell their principal residence residence.

An example, explained Loeppky, could be when someone owns land and a few years later builds a house on it. She added: “You can’t claim a principal residence exemption for that property while it’s just land until you live in that home.

“So, when you go and report that disposition, you probably think, ‘that’s always been my house or I have always lived in that house’. But really, you owned that property for a few years before you could claim it as your principal residence.

“People don’t understand how that calculation works, and how that exemption works. Another example is that people are flipping properties and they’ve taken the position that they can claim their principal residence exemption.

“But the CRA says, ‘hey, you’ve actually sold quite a few homes in the last little while so you are in the business of flipping homes’. They would treat that as business income, not a capital gain.”

Some advisors, she added, have been caught out by clients gifting properties at less than the fair market value. You are, in fact, deemed to disposition the property at fair market value rather than gift it to avoid tax or probate fees upon death. Renting is another example and represents a change of use for the property, which should be reported to the CRA.

Loeppky said: “Advisors must make sure they know what the reporting obligations are. If you are in doubt, hire a professional accountant to help you with your tax return. Most of the tax preparers that I see packages from, they’re asking the questions: did you sell your home? Did you start renting it out?

“These could have tax implications. Just knowing that, while the principal residence exemption is there to protect you, you have to report it and there are significant penalties for not doing so. If you forget to disclose that you sold your home on your tax return, it’s a penalty of $100 a month, up to a maximum of $8,000.

“Even though you’ve got a tax free transaction, or what you think is a tax free transaction, not reporting it in theory could land you with an $8,000 penalty, which is pretty steep.”

There is also the issue of foreign property, with Canadians required to report their worldwide income, which includes gains on these sales. The CRA will likely find out where the proceeds are – and they need to be disclosed – whether they are sitting in a foreign bank account or a Canadian one.

She said: “There’s lots of ways for the CRA to find out that you sold something, so it’s a case of knowing that a transaction has to be reported. Renting out a foreign property also has to be reported on your Canadian return – and then knowing that you can claim a foreign tax credit to offset the double tax that you paid to the other country. These are things you need to navigate.”

Buying property from a non-resident raises the requirement of holding 25% of the proceeds unless there is documentation from the seller that this has been waived. If it’s not, it’s up to the non-resident to file a tax return to get some of that back.

Loeppky added: “Advisors should be aware of the rules when it comes to real estate transactions and knowing the principal residence exemption, how it works, and when you can claim it. It’s also about helping the client realize that you need to take advantage of that principal residence exemption to the best of their ability.

“Normally, they’d want to shelter that gain so helping clients make that determination is really important when they have a choice between two different properties that they could claim as a principal residence exemption.”

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Appeal court withdraws real estate decision

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Justice Richard Lococo’s decision in the Superior Court case, Hilson v. 1336365 Alberta Ltd., 2018 ONSC 1836, was appealed. But, a May 27 judgment on the appeal was released “in error,” the court now says.

After considering written submissions, Associate Chief Justice Alexandra Hoy and Justices Kathryn Feldman and Grant Huscroft wrote on Aug. 13 that a previously released May 27 decision” is not a judgment of the court” and “is of no force or effect.”

“One of the members of the panel that heard the appeal, Justice [Grant] Huscroft, was not provided with either the draft judgment for review or the final judgment for signature. The judgment was signed, in error, by another justice who was not a member of the panel that heard the appeal,” the judges wrote in Hilson v. 1336365 Alberta Ltd., 2019 ONCA 653, released Aug. 13.

Hoy, Feldman and Huscroft rejected a proposal that Huscroft review the May 27 judgment “and either assent to or dissent from a judgment that he had no role in making.”

“The panel of judges that rendered judgment was not the same panel that heard the appeal…. This cannot now be corrected,” they wrote. “The decision-making process has been compromised and this panel cannot render a judgment.”

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