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June 8, 2017 | The Gamble

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.



Remember Derek? The poor blog dog went from euphoria to apoplexy in the space of three days. On April 2nd he and his squeeze sold their north GTA McMansion for a whopping $2,250,000, broke into the drawer with the special underwear and table-danced til dawn (this is common in Toronto).

But on the 5th the buyers said they’d changed their minds, would not be putting down the second installment of the deposit and had no intention of closing. Spitting words were exchanged, lawyers engaged but the buyers (she’s a realtor) were unmoved. No deal.

Dejected Derek had no choice but to list again after negotiations failed and the buyers didn’t even respond to the lawyer’s demand letter. So, a month after the big celebration, the For Sale sign went up again. Since then, crickets.

The market is dead. Kaput. Silent. Deceased. Comatose. Pooched. Virtually no showings. Certainly no offers. And the latest missive from Derek’s lawyer to their lawyer is clear:

Our clients are taking reasonable steps to mitigate their damages but, as you appreciate, the market has changed significantly since the date of your client’s breach. Consequently, it appears that our clients will sustain significant damages. If we obtain judgment against your clients, there will be no upside moving forward and every dollars spent on litigation is a dollar lost forever.

We are offering your clients an opportunity to trade the dead-end avenue they are traveling for a route that will bring an upside, as they will own an asset rather than a judgment. Our clients are prepared to revive the agreement, permit your clients to pay the second deposit, and complete the agreement in accordance with its original terms. Our clients will forego any claims to costs thrown away and other damages. Our with-prejudice offer is open until June 9th. If it is not accepted we intend to issue an action on June 12th.

“So, we’re moving forward with assuming property is sold,” says Derek, bucking up the courage. “We have found awesome rental and hope to take possession on Aug 1. The market has certainly changed. We got the top, but not the right buyers.”

What next? We’ll let you know, but odds are a judgment will be sought and received. When the house eventually sells for less, the case will move ahead. Damages claimed will be the difference between $2.25 million and the final selling price (maybe $1.8 million?), plus legal expenses and stress money. The delinquent buyers may bob and duck, but it’s tough to escape a judgment on a clear breach-of-contract matter when you’re a registered professional. So by not closing it’s conceivable the scared purchaser could end up paying half a million with nothing to show for it. In which case Derek’s lawyer may be spot on – at least they could end up with an asset.

This is just one house, of course. One couple selling and one buying. Derek hustled and got on the market knowing full well he was hitting the moment of peak house (he read it here, after all), and the result was exactly as he wished. The property went, literally in hours – no conditions – for full price. The buyers within 48 hours were consumed with remorse. And now the lawyers feast.

This scenario is playing out right across the region. Law offices are seeing deals break down by the hundreds in certain areas, somewhat reflected in the deluge of listings which continues. In the last seven days, another 10,000 properties hit the market in the Greater Golden Horsehoe region.

That market, as the Bank of Canada shouted out again on Thursday, is “unbalanced” and increasingly dangerous when combined with the staggering debt households carry (see the yesterday’s pathetic post).

Said the beleaguered bank boss, Stephen Poloz: “The two most important vulnerabilities for Canada’s financial system — the elevated level of household indebtedness and imbalances in the Canadian housing market — have moved higher over the past six months.” You bet. Borrowing was out of control until about four weeks ago, when lenders everywhere saw the tap turn off. But the damage, says the central bank, has already been done.

The majority of people taking mortgages in the GTA over the past year have debt now equal to 450% or more of their incomes. And a whack of them are subprimes, at rates which top 7%.

Says the bank’s latest financial conditions report: “Where house prices have grown at a faster pace than can be readily explained by fundamentals — such as in the Toronto and Vancouver areas — there is an increased likelihood of a price correction that could lead to financial stress.”

Right. Stress. Derek knows all about that. So do the deadbeat buyers. For months to come they’ll be in a costly, adversarial, bitter fight. In the end, lots of money will change hands. A few tears will be shed. Maybe some lessons will be learned. The fool who follows is the greater fool.

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June 8th, 2017

Posted In: The Greater Fool

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