With house prices falling, buyers are dropping deals

With house prices falling, buyers are dropping deals

In early February, a three-bedroom home in Clarington, Ontario — a city in the easternmost suburbs of the GTA that, on a good day, an hour’s trip to downtown Toronto — sold for $1,035,000. It was only on the market for four days.

Three months later, that same home, located at 22 Parklawn Drive, was back on the market where it stayed for 10 days before selling for just $850,000.

It’s no secret that housing prices in the GTA are declining, with the outer suburbs experiencing the bulk of this decline. Although this news is likely to raise alarm bells for potential sellers hoping to cash out their homes in a red-hot market, they are not the only ones facing a bleak financial outlook.

GTA real estate professionals across the board report significantly higher rates than buyers who back out of deals months after accepting their offers and making deposits. Sellers, not leaving a buyer, are forced to re-list in a considerably cooler market where their homes will inevitably fetch a lower price.

“It’s a pretty big plus,” Toronto-based mortgage broker Ron Butler said of bargain buyers. “He’s been climbing for the past four weeks.”

Reviews are useless

Realtor and real estate analyst Daniel Fuchs has made similar observations in recent weeks, noting that the deals that are currently faltering relate to homes that were sold when prices peaked earlier this year. The main issue, he says, is that during a typical 60-day closing period, buyers are not funded as lenders look at similar homes and appraise less than the buyer offered to pay just a month or two before.

“In January and February, prices accelerated so quickly, similar to 2017, there is no way the valuations can continue because there are now no closings to prove values,” Foch said.

When the lender’s valuation comes below the sale price, the borrower is responsible for paying the difference between the valuation and the sale price up front – an option available only to those who have the cash available to do so.

“People usually buy with the maximum of their purchasing power, so in these cases, they usually choose to forfeit their deposit and walk away from the deal,” Foch said. “For buyers who buy between $800,000 and $1.2 million, they often don’t have the means. They are not middle-market buyers who have cash around the corner.”

But funding failure is not the only factor. Butler notes that the sudden shift in the market has left some homeowners who bought another home during peak prices before selling their old home in a difficult financial position. Because their old home is in less demand and worth less than they thought when they made an offer for the new home, they were left with no means to proceed with the purchase.

“If you buy a house and have to sell your old house, that’s a very bad problem,” Butler said. “Now you can go make a night [on your home] There are no offers.

After the Bank of Canada introduced new rate hikes in recent months, and several more are expected throughout the year, some sellers are likely to assess whether higher mortgage payments will be met in the future, along with lower rates Homes, are big enough deterrents to back out of a deal and leave their deposit on the table.

“Someone, if it doesn’t fix and it has a variable rate, might just say, ‘Oh, damn it, it might be cheaper for me to just get out of the deal and out of my deposit,’” Foch said. “People have no incentive to close a deal they have negative equity in. “

In Ontario, there is no legally required amount to deposit, but the industry standard is usually 5% of the bid price. If an offer is accepted, the deposit goes towards the down payment.

However, the decision to walk away is by no means easy. Aspiring homeowners often panic, and try to put money together to make the purchase happen—something Butler says everyone should empathize with a lot.

“A lot of times people like to talk about, ‘Oh, they were greedy,'” Butler said, “or ‘Oh, they should have known,’ but that’s not true.” “These are just normal people who buy and sell homes. They have day jobs…these people aren’t caught up in the real estate market. They don’t look at Twitter for two hours a day. They don’t Google for property reviews twice a day. We should feel bad. This is a very severe financial problem for these people because this is a financial and nerve-wracking problem for them.”

Suburban markets were the hardest

The latest data from the Toronto Regional Real Estate Council revealed a decline in both the number of sales that occurred in April – down 41.2% year over year – and the sale price. Detached homes in 905 districts in particular saw a significant decline, with median prices down more than $200,000 from February’s numbers. Semi-detached homes are down $172,244, townhouses are down $121,610, and condos are down $33,545. So it is no surprise that buyers who are holding back deals are largely concentrated in these overseas markets.

“I think we see it in the suburban markets where the price hike has been really strong,” Foch said. “Toronto seems very isolated from it.”

In fact, relatively speaking, Toronto detached home prices fell by a more modest $126,000 between February and April. Meanwhile, the median price of semi-detached homes has fallen by less than $5,000, and the price of condos, which make up the vast majority of sales in Toronto, have fallen by just $1,255.

“I think a lot of that is due to what we call demand reorganization,” Foch said. “As the city starts to open up again, a lot of people are coming back to downtown, so this is kind of a suburban relaxation. Newmarket and Georgina have been hit hard.”

Butler agreed, saying that while Area 416 “isn’t completely fortified, it’s certainly not the obvious effect we’re seeing in some other areas.”

Some resort to burnt sellers

Sellers who feel that they have been left reeling after a buyer’s retreat is not without a right of recourse. But it is not a perfect system.

The first and most obvious step would be to keep the buyer’s deposit, but even that can involve several steps. As Toronto-based real estate attorney Mark Morris explains, the Real Estate Brokers and Business Act sets out specific terms under which money can be released from the trust brokerage account where the deposit is kept: either upon completion of a court order or upon mutual release.

Mutual release – a document signed by both parties agreeing to release the deposit to the seller – although easier, it comes with its own set of drawbacks, especially if the seller now has to re-list the home at a much lower price.

“Most of the exchanged statements that real estate agents provide are complete reciprocal data, which means that they absolve all parties of any liability,” Morris said. “Obviously this is not recommended if the damages you get are higher than the deposit…thus, people end up being sued until they preserve their rights to sue for additional damages.”

But as real estate attorney Daniel La Gamba explains, deciding to sue an apostate buyer is often a complex one with many factors to consider other than the initial fact that they lost money.

“You always have to consider if it is really worth the extra effort to pursue litigation because it will cost you a lot of money up front, you will have to hire a litigation attorney, pay a huge power of attorney, and it will go on,” La Gamba said. “I always tell clients that they have to prepare for a very long battle,” La Gamba said. Is it really worth it to continue after paying all the legal fees and taking time off work?

La Gamba and Morris say legal fees for this type of case can be as high as $100,000. Morris also noted that the identity of the buyer will influence the decision of whether the seller should take them to court.

“No attorney will go this route unless the buyers appear to own the assets,” Morris said. “There is no way to enforce the law if someone has a job like $30,000 a year with no assets we can take over.”

Even with significant losses, enough time and money to go to court, and a buyer worth suing, sellers have to put in a great deal of work to mitigate their losses and keep records of their doing so.

“You have an obligation as a seller who has experienced a loss to try to minimize your loss,” La Gamba said. “You cannot increase this loss due to your negligence.”

This means demonstrating that you have made a reasonable effort to re-list your home in a timely manner and to sell it at the highest possible price. But for sellers who take their case to court, Morris, who has seen a massive increase in these types of cases recently, says the court rules overwhelmingly in the seller’s favour.

Change is on the horizon

Although there isn’t much that can be done for homeowners already dealing with buyers who are backing off deals, there is some hope for sellers in the future: The pullback is likely to be a temporary phenomenon. Foch and Butler are expecting a major return to SSA finances – something that has virtually disappeared from GTA over the last period. In fact, Foch has already seen an increase in the number of upcoming sales contracts that say the buyer has a set number of days after accepting the offer to secure financing.

In many suburban areas, bidding wars are already under way, with some listings not receiving even a single bid. While this may sound like bad news for sellers, it does mean that the likelihood of pushing the price beyond what the lender will value is much lower.

“Offers will be issued at lower prices and eventually the market will settle itself by the fall,” Butler said. “We will not have catastrophic valuation failures and instability. People will add financing terms to their offers. We will eventually see an old clause in the offer that says I need to sell my own house first, or I can leave this deal if I don’t sell my house.”

This type of escape clause, although a standard option available to all landlords drafting contracts, has not come across as a butler office in many years.

Although the changing market has inevitably caused financial headaches and struggles for buyers and sellers alike, Foch says it’s a sign of good things to come.

“Going back to a healthy market, the challenge is, in order to get into this healthy balanced market, there has to be some pain on the way down,” he said. “In my view, now, more than ever, it’s important to get good advice, to be careful and to be really patient.”

2022-05-12 15:16:09

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