In Star Trek, few challenges are as daunting and legendary as the Kobayashi Maru. For the uninitiated, the Kobayashi Maru is a Starfleet training exercise, a simulation designed to confront cadets with a seemingly unwinnable situation. It’s not about emerging victorious but rather a test of character, leadership, and decision-making under immense pressure. Can a cadet make the hard calls, even when there’s no clear path to success?

Much like the would-be Starfleet captains, realtors often face their own version of the Kobayashi Maru.

In this new series, “The Kobayashi Maru of Real Estate,” we’ll present you with complex, seemingly impossible real estate scenarios. Seasoned industry veterans will then weigh in on how they would handle them. Offering their insights and strategies. Just as in the Starfleet test, the goal isn’t necessarily to “win” in the traditional sense but to navigate the situation with integrity, expertise, and foresight.

Welcome aboard. It’s time to face the impossible and chart a course through uncharted territories!

The situation 

On a rainy Thursday, you’re contacted by Mr. and Mrs. Simpson, a middle-aged couple seeking to sell their home at 742 Evergreen Terrace. The couple had purchased the house during a peak market period, and now, due to the economic downturn, fluctuating neighbourhood valuations, and a few outstanding loans, the current market value of the house is lower than their outstanding mortgage. They owe the bank $650,000, but recent comps and evaluations suggest the house will likely sell for only $600,000 at best.

To complicate matters further, the Simpsons are relocating for work in two months, and they are desperate to sell the house before they leave. The impending move means they don’t have the funds to cover the deficit on the mortgage, let alone a commission.

With the rise in a client’s variable rate mortgage, they can no longer afford their investment property. They decide they want to sell. The place is tenanted, and they do not want to leave and have signalled they will be uncooperative with the process. How would you handle it?

How would you handle it?

Jordan Boyes 

Broker/owner, Boyes Group Realty Inc.

First, I would arrange a meeting with them to understand their specific circumstances and goals. Listen carefully to their concerns and gather all relevant information about their mortgage, outstanding loans, and the property itself. 

Next, I would conduct a thorough evaluation to determine its accurate market value. Present the couple with their available options, including selling the property at the current market value and covering the mortgage deficit out of their own funds (if they have); negotiating with the bank to explore a short sale or loan modification, given their financial hardship; explore creative selling strategies like rent-to-own agreements, lease options, or seller financing to attract potential buyers who might not qualify for traditional financing given the situation they are in. 

I would then try to set up a meeting with the bank to explore a short sale or loan modification to help them initiate negotiations with the bank. This may require providing financial documentation, a hardship letter, and other relevant paperwork to support their case. 

Then, I would price the property competitively based on the accurate market value and the couple’s urgency to sell (consider slightly underpricing it to generate more interest and multiple offers). I would also recommend legal counsel to ensure that the sales process complies with local laws and regulations, especially if exploring unconventional selling methods, given the current situation with the bank. 

Once a sale is obtained, help the couple develop a financial plan for covering the mortgage deficit, moving expenses, and any outstanding loans they may have. This might include exploring options for debt consolidation or refinancing on other assets they may own. I would then utilize my network of legal experts and financial advisors to provide the couple with the best possible guidance and resources.

Tony Joe 

Broker/owner, Re/Max Island Properties

As we all know, we can’t create values that don’t exist. Promising the Simpsons a sale that can’t be achieved in the present market is not an option.

You’d want to start with an overview of their financial position. You already know they owe at least $50,000 more than the house is worth, but other factors must be considered, including legal fees, mortgage penalties and your commission. For them to achieve their objective of moving, how much will they need to come up with to make it happen?

Those who have been in the business for over 25 years remember that there were long periods when sellers routinely had to bring money to the table in order for their sale to close. It meant coming up with thousands of dollars just to be able to move forward. It also meant at the time that one of the documents we’d have sellers sign was authorization for the bank to release their mortgage balance, enabling us to determine if there was enough equity (or available equity) in order for them to close the sale.

If the Simpsons are not able to or are unwilling to close at a deficit, stop where you are and don’t proceed further; you can’t assist them. Remember — you’re not a genie. You can’t wave a magic wand and miraculously create a unicorn buyer who will pay them what they need to move. Even if you could, would the house appraise?

If they’re willing to discuss further, bring up some other options. Is their company paying for the relocation— are their moving expenses being covered? Could a loss in equity potentially be covered? Have they even asked these questions? Could claiming their moving expenses against their taxes be helpful?

What is their current interest rate and balance? Is their mortgage assumable? It could be a huge selling feature for a buyer to walk in and take advantage of a sub-2.0 per cent interest rate in today’s 7.0 per cent environment. While this won’t make their house worth more money, it could facilitate the sale.

The last option for them is to consider keeping the house and renting it out until they are in a cash-positive position.

But the key here is that you can’t create a value that doesn’t presently exist. You may feel for the Simpsons and try to get their dollar, but deep inside, you know it’s not going to happen, resulting in an expired listing and money and time spent that you can’t recover. It’s a business decision, pure and simple. You can’t save everyone.

GinaRose Cristello

Broker/owner, Solid Rock Realty

Do the Simpsons have a decent relationship with the party/group/person holding their mortgage? If so, they may be able to negotiate a short sale of the property, which would allow them to sell it (and still pay commissions). They could do this in conjunction with requesting assistance from their new employer(s) for moving expenses, etc.

Alternatively, they could look at renting out their property and then renting themselves in their new city. The rental market remains strong throughout much of the country, and they may find that their home can generate enough rental income to cover the majority of the expenses. If there is a small shortfall, hopefully, the job they are relocating for pays well and can help cover those costs. By holding the property and renting it out, they can wait to sell when the market has recovered, and all of their expenses on the property can be written off against the income.

If holding the property is not an option, they could investigate taking out a loan to cover the cost of the shortfall in the sale and the commissions. Ideally, though, keeping the property keeps them in a better financial position down the road. Sometimes, the best advice we can give is not to sell!

James R.G. Cook

Partner, Gardiner Roberts LLP/REM columnist 

The issue with tenants refusing to vacate is subject to applicable landlord/tenant laws which may be different in each province. In Ontario, there is a process that must be followed to obtain an order from the Landlord and Tenant Board to evict an unwilling tenant and it can take many months to obtain a hearing date. One alternative is to try and reach an agreement with the tenant (colloquially known as “cash for keys”) where you essentially bribe them to leave without issue.

 With regard to the need to sell for a price below the value of the mortgage, this isn’t really a legal issue since the mortgage will have to be paid out on closing regardless of what the current market value of the property is. The sellers will likely need to look into finding alternative financing options to assist them.