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Helping your clients understand the legal pitfalls of new builds

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The real estate market has changed, and oftentimes with significant change comes legal issues, like people trying to get out of contracts in order to make more on a sale or avoid closing because an appraisal has come up short. 

I recently spoke with Eli Antel, a real estate lawyer in Ontario, who shared what he sees in the market and what you and your buyers or sellers should be wary of as they enter this new real estate market. 

 

Characteristics of the current market

 

There are a few characteristics of this current market, according to Antel. For one, while prices have definitely dropped, the “big drop” that is constantly discussed hasn’t happened, particularly in high-demand areas. This fear that it is coming any day has locked up sellers, as those who would typically sell are choosing to hold off because of the fear and uncertainty. 

The buyers are similarly shying away from the market because interest rates appear to be so high. Truth be told, however, these rates aren’t as high as the rates mortgage holders had to pay in the 1980s, 1990s and part of the 2000s.

The rates only appear to be “exceptionally high,” as Antel points out because we’ve just come out of an anomalous “free money” period. Nonetheless, buyers are waiting on the sidelines until that much-predicted housing crash occurs. 

Unfortunately, Antel explained, any price drop (which isn’t hitting all markets) is largely offset by mortgage costs, forcing those buyers to continue waiting for their opportunity to buy an affordable home.

 

New builds

 

What about the buyers who bought at the peak and are now forced to get mortgages at rates they didn’t budget for? Well, it is no surprise that many people are trying to get out of those deals, especially in the pre-construction space. 

The problem: while new builds — or pre-construction — are everywhere these days, their contracts are notoriously difficult to get out of, according to Antel. 

Developers can delay the closing of these homes for years without penalty, which means we could cycle through many different markets in that time. Many people trying to get out of new construction deals entered the market in 2021 and are now having issues getting financing as they budgeted for a much different mortgage payment. 

So how can a buyer get out of this situation if they bought a pre-construction home but are just now on the precipice of closing in a much different rate environment? 

 

The challenges facing buyers

 

 “Almost all of the agreements I’ve seen say that a builder has no obligation to agree to an assignment, and even if they do, it would be on the condition that the buyer or assignor pays a fee plus legal costs,” Antel says. “Most agreements also make it clear that a builder won’t even consider an assignment until 90 per cent of units are sold, and even then, there are limits on a buyer’s ability to market the unit they are trying to assign. For example, it can’t be listed on MLS.” 

Antel notes that it is getting incredibly difficult. Even if a buyer is able to sign, the original buyer is likely to lose money because the person taking over the contract won’t be willing to pay what they paid at the time of the agreement.

He added, “In my mind, new-build condos are a very risky investment right now as the market is so volatile, and market declines mean that you don’t know where the market will be when you actually close.” 

 

The “no lose” outcome

 

On rare occasions, some buyers have been able to negotiate with developers by pitching them the “no lose” outcome, according to Antel. Essentially, the buyer is permitted to try to sell it to another buyer, who then closes. 

In this case, the developer gets its fee plus legal costs, and the deal still closes. Or, if the buyer doesn’t sell it, the buyer still has to buy it, and if the buyer defaults, the developer gets the buyer’s deposit and is awarded legal fees, judgment costs, damages, interest etc. (all paid for by the buyer). The developer, in every scenario, wins.

Some buyers are considering suing developers to get out of their deals, but this may be fruitless as developers are rarely the seller. Rather, it’s often just a numbered holding company with no or unknown assets that is the seller, Antel explained. Buyers should be aware of this because, even if successful, collecting on that judgment may leave the buyer even more in the hole. 

 

Helping your buyer protect themselves

 

The number one most important thing that buyers can do to protect themselves, especially in the pre-constriction space, is to speak with a lawyer as soon as possible to review the terms of their contract during the cooling-off period. 

All agreements are open to negotiations, Antel explained. For example, buyers can try to cap levies or make the assignment process easier. It will be too late if you do not negotiate in the first 10 days. 

Another avenue of protection is working with a real estate agent who knows the market and pitfalls of new construction properties and the trends and can help the buyer navigate the challenges they may face as the market continues to march on unpredictably. 

Agents can also educate their buyer clients on the risk of entering into a binding, builder-friendly contract.

 


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