Several months have passed since Toronto boasted seller’s market status, but some homes purchased at its peak remain in transactional limbo.
There have been increasing reports of problematic closings, particularly for expensive detached houses, many of which sold for amounts inflated high over asking. Now, the victors of those bidding wars are facing a sobering reality: as the average Toronto home price has fallen 19 per cent since April’s Fair Housing Plan announcement, buyers may have lost value before they even receive the keys.
When the Mortgage Numbers Don’t Add Up
In some cases, the losses are large enough that buyers are opting to forgo the purchase deposit and abandon closing. In others, they’re hamstringed by a lack of financing, as appraisers and lenders are no longer willing to mortgage the full purchase price.
It’s an unfortunate scenario that results from buying during a market shift, according to real estate lawyer Singa Bui, Partner at Cartel & Bui LLP. She says her firm has dealt with a number of issues, especially from those who purchased new homes after selling their old ones, dependent on the profits they’d receive from the sale – a strategy most sellers took in the hot early spring market.
“A lot of times, people would purchase a house and then do bridge financing in hopes it would sell and then, in the downturn, they’ve run into financial issues. Now they have this back and forth of carrying both houses,” she says.
“Then there are a lot of purchasers in situations where there are issues with valuation. The appraisal is coming in well under what they purchased, for example, $100,000 under what they’re asking for. How do you come up with your 20 per cent down payment plus an extra $100,000? It’s really difficult and unfortunately your solutions are limited,” she says.
“Either you come up with the extra money, go to a lender who can offer you up to 95 per cent (if paying more than the minimum down payment). Or, if you don’t have the credit for additional financing, you can get someone else to assist and co-sign.” She adds that as most houses in Toronto sell for over a million dollars and require a minimum 20 per cent down, asking for more financing is often not an option.
What to Do If You’re the Seller
A panicked buyer who cuts and runs often sets off a chain reaction, threatening their own closing, that of their seller’s new home, those sellers, and so forth. It’s an uncomfortable growing pain of a market finding new balance after an astronomical rise.
While the seller is legally most entitled to the agreed-upon deal – especially if the buyer’s offer was firm and without conditions – it’s generally in your best interest to work things out with your existing purchaser says Bui, who points out that litigation is always extremely expensive.
Rather than walk away from closing altogether, she says a distressed buyer will most likely ask for an extension as they try to hustle together the missing funds. Being accommodative in this instance can go a long way.
“Vendors (home sellers) are never required to accept an extension, but should they got to court over the transaction, the court will look at how reasonable they’ve been,” she says. “For example, if the vendor says, ‘No, I won’t give you one’ when the buyer says ‘Look, I just need two weeks to close, and I’m willing to waive any extension fees and any cost you bear by continuing to carry the house,’ and you are made whole again with no loss, the court will point out that there were things you could have done to mitigate your loss and chose not to.”
Ask for Extra Reassurance
She adds that sellers can create terms for an extension, such as additional deposits from the purchaser, and an agreement to cover ongoing costs they’ll incur by continuing to carry their house, such as mortgage payments, bridge financing, and additional fees they’ll pay their lawyer (an extension usually costs around $500).
“You have to walk through the numbers with your lawyer. And you don’t want to gouge the person – you just want to be made whole,” Bui says.
Should the purchaser want to exit the deal altogether, the seller is typically entitled to keep the deposit – but it’s not that easy. The deposit funds, which are kept in a trust by the seller’s brokerage, can only be released if both sides sign a mutual release form, which essentially renders the deal null and void. This is why it’s easier for most sellers to play ball, says Bui.
“There are consequences of breaching a contract. If there’s no mutual release, you’re (the buyer) open to being sued,” she says. “The upside is most vendors will say, ‘What’s the point? It’s still expensive.’ If you go over $25,000, then you’re no longer in small claims court, you’re in superior court, and then fees can cost up to $60,000, and that’s if you go straight to trial. You have to weigh if it’s worth it.”
What to Do If You Can’t Close Your Home Sale
Needing to extend or cancel your closing is an unenviable situation, and you are open to being sued. That’s why it’s important to thoroughly weigh all of your financial options, says Bui.
She reiterates that the first call buyers should make is to their mortgage lender to discuss further financing options, as well as exploring personal loans or financial gifts.
Look Into Existing Equity: If you an unlucky seller sandwiched between two closings, you may have the option of borrowing against your existing house, though you’ll need to prove to the lender that it still has equity and will sell.
Ask the Seller for a Take-Back Mortgage: A vendor take-back mortgage, where the seller agrees to lend the necessary funds to help the buyer complete the sale, are an option, but a rarity, says Bui, unless the seller really has the means.
Plead for a price reduction: Bui says that in some extreme cases, buyers can also plead for the sellers to take a reduced sale price – but not to hold their breath.
“We’ve had situations where the vendors played hardball and said ‘no, we’re not giving you a price reduction’ – we’re seeing that a lot. An agreement is an agreement, and if you present a term to do a price reduction, they don’t need to agree to it, and you have no recourse. It’s not a right, it has to be agreed upon by the vendor,” she says.
“The market is really difficult for people right now. If they do find they’re in financial hardship and they don’t have options – for example, they can’t borrow, they can’t get a co-signer, they can’t finance their existing property, then – other than a real estate lawyer, she should speak to someone and ask if it’s better to walk away from their deposit rather than breach their contract. No one wants to walk away from that much money, and usually people walk when their deposit is very small – but unless they sign a mutual release form, they are not protected.”