Pre-sale condo buyers back out of contracts as market slows in Lower Mainland
Real estate lawyer says contracts are nearly iron-clad once buildings near completion
When the market was hot, people lined up overnight to get their hands on pre-sale condominiums. Now that the housing market in B.C.'s Lower Mainland has cooled, some buyers are trying to back out of their contracts — unable to obtain the financing they need.
A Vancouver lawyer says clients are coming to him several times a week hoping he can help find loopholes to get out of buying units they signed onto several years ago.
Kenneth Pazder says most people are having trouble obtaining mortgages high enough to pay off the developers for units they purchased when the value of the homes were higher.
With pre-sale condos, a buyer puts down a deposit on a unit that has not yet been constructed. Once it's complete, the buyer must pay the developer the entire balance.
The trouble occurs when the buyer goes to a bank to apply for a mortgage. A bank will only provide a mortgage based on the home's current value. Now that housing prices in the Lower Mainland are lower than in recent years, the buyer must now make up the balance to pay off the developer.
"We've had clients approach us and say, can you go through all the paperwork and see if there's some some way that we can legally not close, and it's unlikely," Pazder said.
Ten to 15 per cent drop
"And if you can't come up with the difference then you're not going to be able to close," he says.
Most clients, he says have watched their unit values drop since they agreed to purchase their units, as opposed to appreciate, which has been the case with pre-sale condominiums for the last decade.
For a buyer closing on a home priced at $1 million, it could mean coming up with an additional $150,000 to pay the developer, he says.
When it's compounded with the mortgage stress test, buyers need to come up with even more cash.
"That's quite a bit," Pazder said.
Once buildings are near completion, he says it's nearly impossible to legally back out of a sale.
He says, typically, the only way out is if a developer doesn't get financing or fails to send disclosure statements or building permits in a timely manner.
His advice is to try to complete the deal, otherwise you could lose your deposit and be on the hook if the developer is unable to resell the unit at a price equal to the original price less the deposit.
If you're already locked into a contract, property law professor Ron Usher recommends staying in close contact with the developer to ask when the building is set to complete and to understand your legal options.
"Many of these projects are being delayed right now," Usher said.
Pazder suggests buying from reputable developers with an extended history so they have "deep pockets" to finance their projects even in a slow economy.
He also says to bring in your own real estate agent and lawyer so they act in your best interest rather than using the ones offered by developers.