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August 13, 2017 | The Litigators

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.

 

First a Derek update, then the wider story. Of course, you remember D. He’s the hapless reader who listed at the end of March (peak house), receiving multiple offers on his McMansion listed at $1.9 million. The lucky bidder upped their game from $2 million to $2.25 million and came out the winner. Wohoo. Derek was rich.

Days later, claiming RBC wouldn’t finance the deal, the bidders (one’s a real estate agent) moaned, whimpered and begged out of the deal. By now – as this pathetic blog was reporting – the market was starting to wobble. Weeks later it would crumple like a Donald Trump spokesperson. So D got a lawyer.

He sued for a million. The deadbeat buyers filed a defence claiming Derek was too tardy in re-listing the house (that happened three weeks later), and for the last few months it’s been a standoff. Only the legal guys are happy.

Well, we have news to report in a little drama which is now being played and replayed with astonishing repetition across the region.

First, D got an offer. Two, actually. One was for $1.5 million and the other $1.77 – both conditional upon financing and inspection. He accepted the higher one, the conditions came off over the weekend, with closing in early October.

“All firmed up last night,” he reports. “At that price I think we got the top of market for today.

“Previous number was an anomaly that we will never see in our lives again. Now we go after them for remaining 480, plus expenses. At least we can move on with our lives now – no more staged house and showings.”

So here’s the question for the lawyers: was a house ‘worth’ $2.25 million in April now fairly valued at 21% less? If so, our blog dog has a nipping good chance of going after $480,000 in damages, plus all operating expenses incurred after the original closing date, and costs. A contract was broken. The crash in value is consistent with the current GTA market. If it goes to court, a judgment in D’s favour is reasonable. But a settlement is much more likely.

Meanwhile, the buyers are suing the realtors who represented them in the deal. For a mill.

The allegations include negligence by encouraging the buyers to enter a bidding war, and of breaching the BRA (buyer representation agreement) by failing to analyze other comparables in the area, failing to offer good advice on what D’s house was reasonably worth, recklessly pushing them to increase their offer without data to support it, plus breaching a fiduciary duty to inform, protect and expertly advise their clients.

The outcome is unknown, but it’s a fair bet Derek gets a few hundred grand, lawyers will be enriched and the world will have at least two fewer realtors.

The bigger story is that a similar saga is currently being played out hundreds, if not thousands, of times. It’s also hit the MSM, which just discovered what the real estate board reports as “sales” might turn out to be something entirely different.

This kind of exposure, combined with rising mortgage rates and the coming all-buyer stress test, could be the kiss of death for a market already confused and descending. Recall that when Derek sold his house in April, 90% of listings were being snapped up – most in bidding wars, with 30% year/year price increases. These days over 70% of houses languish without buyers, and values have started a meaningful correction as a result.

Law offices are dealing with failures-to-close, breached contracts and buyers who refuse to consummate their deals without an 11th-hour concession from the sellers, often dropping the real price (not necessarily the reported one) by hundreds of thousands. Agents are taking serious haircuts on their commissions, and every owner who sold months ago and has yet to get the cheque, is freaking.

Devastated, of course, are people who bought a new place before they closed on their existing one – now facing a disintegrating market. And fearing the future are all those who fell for the siren song of the real estate cartel – that houses always go up.

On Sunday I received this note, from Anna:

“First time home buyer and we had a good down payment, but not qualify for funding from the big banks, the mortgage was for $900,000.00  Surprised, when a mortgage broker easily approved it, my understanding is that the mortgage brokers are regulate under federal legislation.

“Since the closing in May, the prices in Richmond Hill are going down. What is very concerning is that we put all of our saving down, no emergency fund. We are not able to save at all. Since 2006 were waiting for a correction, you know the rest. We bought the house because we thought is going to go up or at least stays the same.

“I wish the lender did not approve our mortgage that easily, we never got any red flag. Mr. Turner I know you can’t look in your Chrystal ball, but what do you think the housing is going to be in 3 years?”

Beats me, Anna. But you have no savings, one falling, illiquid asset, a $900,000 debt and nobody to blame but yourself. Well, almost.

Get a lawyer.

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August 13th, 2017

Posted In: The Greater Fool

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