Achi news desk-
Paradise Developments is one of several new subdivisions being built just off Conlin Rd E and Harmony St N in Oshawa, Ont.Shay Conroy
For many pre-construction real estate buyers, extravagant launch parties in downtown Toronto or bus trips to charming villages in rural Ontario are a distant memory.
Today many new condo towers and subdivisions are near completion and those home buyers and condo units are faced with the challenge of closing on a deal that was signed when the real estate market was on a high octane run and mortgage rates were at record lows historical.
Some are home buyers struggling to arrange the finance they need, while others are investors reluctant to take ownership of a property only to sell it at a significant loss.
Industry players are keeping a close eye on this segment of the overall market.
Mark Morris, a real estate lawyer with LegalClosing.ca, compares the deals to futures contracts as many investors have speculated that real estate prices would continue to rise 10 or 15 per cent a year.
“They were priced at the peak at a significantly higher margin than the actual price of the product.”
However, those initiatives did not pay off, as interest rates climbed and real estate prices across Ontario fell from their 2022 peak.
As a result, turbulence in this part of the market will continue until 2025 or 2026, Mr Morris predicts.
In Toronto, Andre Kutyan, a broker with Harvey Kalles Real Estate, says new condo buildings are nearing completion in neighborhoods from Jarvis and Carlton streets in the core to Lawrence Avenue and Avenue Road in North York.
Some of the original buyers are also finding that appraised values are coming in significantly below the purchase price. That has sent people scrambling to find alternative financing, lease or sell as soon as possible, or seek legal advice on the consequences of walking away.
Although sales of condo units on the resale market have increased in recent weeks, concerns remain for buyers who purchased pre-construction in the busy days between 2020 and 2022.
“This could be the wrench in an otherwise optimistic spring market,” said Mr. Kutyan, who believes that the uncertainty in the segment could shake the confidence of buyers in the resale market.
One small business owner sought Mr. Kutyan’s advice after he paid $565,000 for a pre-construction condo with 370 square feet of living space downtown. The investor, who was approved for financing when mortgage interest rates were around the 2 percent level, provided a deposit of $141,250 at the time.
The big banks, known as “A” lenders, are conservative in their lending these days and would not give him a mortgage for the amount he needs. The alternative lender, or lender “B”, sent an appraiser, who estimated the current value at $450,000, leaving the investor to close the gap between that amount and the original price.
In addition, he faces an additional $80,000 in closing costs and development fees.
In total, he needs to find an additional $141,000 just to keep his original deposit, and then he needs to pay off the mortgage. The investor intends to take out a line of credit on his family home.
“People like this lose their shirts,” said Mr Kutyan, who advised the investor to seek legal and accounting advice. “They’re trying to play real estate mogul when they really shouldn’t.”
Mr. Kutyan says that some investors have been influenced by agents who specialize in the pre-construction segment and receive rich commissions and bonuses. With so many motivations, many are not looking out for the best interest of their clients.
Mr. Kutyan notes that buyers who sign a pre-construction contract in Ontario have a 10-day cooling-off period to reconsider. During that time, they should be asking a lawyer to review the paperwork.
“Usually a lawyer will at least cap the development charges,” he said.
Some original buyers will “assign,” or turn the contract over to another buyer, early in the process. But as a building nears completion, that avenue is closed.
“These are the guys at the finish line.”
Leah Zlatkin, a mortgage broker with Mortgage Outlet, says investors who buy condos with the intention of selling in the assignment market usually make sure there is a clause in the contract that allows them to do so. Many leave before the building is completed.
She is seeing an influx of buyers who intended to live in the unit but now find that the appraised value is falling short.
“The real risk is trying to close,” he said. “The unexpected has arisen – and that is that your property is not worth what you paid for it.”
She recommends that those clients take advantage of savings to provide a larger down payment if they can. If not, he advises them to borrow from a family member. The third option is to try to sell on assignment and the last option is to secure financing from a private lender.
Those loans tend to come with high interest rates and fees, she warns.
Some industry players say some of the more established builders are quietly offering seller take-back mortgages (VTB) to original buyers to help them bridge the gap at closing. Those arrangements tend to be backroom deals that are not widely available.
Mr Morris says that a number of builders are trying to help people close with VTB for a period of a year or two. Buyers who bought property for their family home are more likely to be exposed to those measures, he said.
But the vast majority of people who walk away are investors. They simply count their losses and figure that they are better off breaking the contract – even with the knowledge that the builder could sue them in the future.
“A lot of people who do the math and are risk-averse say, ‘I’m going to take the lawsuit option.'”
Mr Morris says builders have two years from discovery of the breach to pursue the original buyer in court. During that time, they will resell the product and – if they sell for less than the price the original buyer agreed to – they can sue them for the difference.
So far Mr. Morris has seen many legal actions from builders but that may follow.
“They are biding their time until they have sold, and their losses are crystallizing.”
Even builders who sue usually do not claim land transfer tax, adjustment costs and other fees that buyers face if they complete the transaction, he adds.
The real problem, says Mr Morris, is the fact that prices have stagnated.
“If the property was worth twice what they paid, I guarantee you they would find a way to close,” he said of the investors.
Mr Kutyan is concerned that builders may be forced to take back units and resell them, which will add to the inventory.
“This could bring a flood of supply,” he said.
If the sellers get desperate and start offering fire sale prices, the overflow could destabilize the resale market, he adds.
Outside of the Greater Toronto Area, real estate agents are seeing people grapple with the difficulty of closing in small markets. If they decide to sell, there is a very limited pool of buyers with the potential to step up.
Faisal Susiwala, broker at Re/Max Twin City Faisal Susiwala Realty, does much of his business in Kitchener-Waterloo and Cambridge, Ont. He remembers the large coaches that transported agents and potential buyers through the area to the smaller communities where farm fields were quickly being turned into building lots.
At the height of the market, Mr. Susiwala said, high demand from buyers and small inventory in Cambridge, Guelph and Kitchener-Waterloo prompted people to broaden their search. Agents from Brampton, Mississauga and Milton led the bus tours to small towns such as Ayr, New Hamburg, Baden and Woodstock.
In many cases, buyers purchased pre-construction homes with the intention of changing the contract before construction was completed in what is known as an assignment sale.
“Realtors were so motivated to shove those deals down the throats of buyers who all thought they were going to assign,” he said. “Investors jumped on these coaches.”
Investors in Perth County were told they would be able to make money by selling the properties or renting them out.
There was never a place to be able to do that, says Mr Susiwala, because there is no industry in the rural area and therefore few workers are looking for homes.
“There are no buyers. There are no renters. “
To make matters worse, some less responsible mortgage brokers at the time signed off on a buyer’s mortgage pre-approval with little evidence that the buyer would have the means to pay – especially in a higher interest rate environment.
As interest rates rose in 2022 and 2023, real estate prices began to fall.
Demand eased in Cambridge and Guelph and other cities that saw prices climb during the pandemic. With extensive inventory in the fall of 2023, prices dropped by 30 percent in some areas.
Investors who paid $1,400 per square foot for a detached house found they were trying to sell in an environment where a house could be bought on the resale market for $1,100 per square foot.
In some cases, the original buyer is willing to walk away from a deposit, he said, and builders then try to find a new buyer. Mr Susiwala has received a flood of emails from builders offering to sell for less than the contract price.
Mr. Susiwala has seen demand rebound in the resale market now that the Bank of Canada has kept its key rate steady and many economists predict cuts will come within a few months.
He expects many buyers from the Toronto area this spring as some people move to a smaller, higher priced home. They often have enough cash from the sale to buy in Guelph or Cambridge without worrying about mortgage rates.
Three- or four-bedroom detached homes that sold for $1.3 million at the market’s peak in February, 2022 dropped to as low as $900,000 in the recent fall. Investors and builders trying to sell their new properties for a profit are unable to compete.
“It is not attractive enough to a potential buyer.”
Ad blocking test (Why?)
Source link
Related
