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April 8, 2018 | How it Ends

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.

It was the best of times. It was the worst of times. Cheap funds flowed. FOMO raged. Peak house was with us. Derek looked upon this, and it was good. ‘Let’s do it,’ he said to her. And, lo, they listed.

The quirky McMansion on the northern border of the GTA was typical for the hood. Big lot, big garage and now, big price. It was the spring of 2017, early April, and house prices were running 30% hot year/year. ‘We’re gonna go for the limit,’ the blog dog told me as the big day came. So the ask was $2 million, more than double what they had paid, but not too much for the market to bear.

About the time the sign went into the lawn, the Toronto Real Estate Board published this:

“It has been encouraging to see that policymakers have not implemented any knee-jerk policies regarding the GTA housing market. Different levels of government are holding consultations with market stakeholders and TREB has participated and will continue to participate in these discussions. Policy makers must remember that it is the interplay between the demand for and supply of listings that influences price growth,” said Mr. Cerqua (the board president).

Strong competition between buyers continued to cause high levels of price growth in all major market segments. The MLS® Home Price Index (HPI) Composite Benchmark Price was up by 28.6 % year-over-year. For the TREB market area as a whole, the average selling price was up by 33%.”

There were 18 showings in the space of a few days followed by three competing offers. The highest came from a mortgage broker and her husband who jacked up their bid by $200,000 to come out on top.

“Sold it tonight for 2.25 !!,” Derek wrote me, elated – but also a bit confused. “Hope we did the right thing.” After all, the market was smoking hot. Every listing lured multiple bids. No conditional offers. Each week the value of properties shot higher in what was clearly a classic, emotional, unsustainable bubble. But for every buyer stressed about missing out came a seller stressed they were selling too cheap. As was written here, over and over, this will not end well.

And it didn’t.

Two days after making the offer, and not long before the Ontario government unveiled a market-killing package of reforms, the buyers showed up and begged Derek to get out of their firm deal. He refused. Wisely, he called a lawyer. Within a few days the buyer’s counselor had sent a formal note saying his clients would be aborting the deal.

Then commenced one full year of misery, expenses, stress and experience. The house was listed again, this time at $2.25 million. Crickets. The price was dropped to less than two mill, then down again. Nothing. Lawyers’ letters flew. The buyers stopped communicating, adopting a strategy of obfuscation, delay, dodging and silence. Finally an offer emerged, and Derek grabbed it. The house eventually sold in late summer for $1.7 million, and closed in October.

Thus, the extent of Derek’s damages was finally known – the difference between the original peak house sale price and the post-boom value, or $480,000. And meanwhile the stressed-out seller had forked over almost $100,000 in legal fees. Being a matter of contract law, there was not much the derelict buyers could argue in their defence as the matter moved closer to trial. They alleged Derek had not been quick enough in re-listing the house after they broke the deal – a position the judge would later dismiss.

Finally, the defendants’ delays were defeated. The case ended up before a pre-trial judge, with Derek asking for a summary judgment. He got it last week.

Said his honour:

“The Plaintiffs are entitled to damages based on the difference between the contracted-for sale price between the parties and the ultimate sale price of $1,780,000. The Plaintiffs are also entitled to the special damages claimed.

“The impact of this court’s decision will undoubtedly have a dramatic effect on the Defendants. I have every sympathy for the Defendants. With the changes in the real estate marketplace in the Greater Toronto Area, I have every expectation that there may be more cases where purchasers find they have overextended themselves in a declining market. Purchasers would be well advised to consider making their offers to purchase contingent on financing, and for the sale of their existing home if they have one.”

Well, now Derek has to collect, and is heartened to know the defeated sellers have listed their house. He will be made whole, he believes. The others will be gutted.

On Sunday I asked Derek for this thoughts on the process:

Garth: As you are aware this has been hell for us. We sure have learned a lot about real estate law! It put our lives on complete hold for over a year. It was a very difficult decision for us to even sell our house let alone go through what we did. We had no intention of ever moving from that house, loved it there and put our heart and soul in that place for 20 years. But as it is with most things, everything is for sale at a price.

We were not greedy but opportunistic and saw a chance to have a comfortable retirement. We did not institute a bidding war by pricing low – that happened on its own. We accepted the first offer from the buyers and expected them to honour it as we did.”

In the last few days local media’s been filled with coverage of a group of new-home buyers in Oakville who paid too much for their unbuilt houses in the bubble last spring. The value of those properties has dropped, as have their existing homes. Many claim they now cannot raise the funds to close the deals on places worth less than they paid, and find it unfair. They asked for government support. The politicians, of course, said no. So as his honour stated, there’s more to come.

Much more.

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April 8th, 2018

Posted In: The Greater Fool

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