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June 5, 2018 | Choices

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.

Poor Abram. I read his note and felt the panic.

I recently deposited 5% for a town house ($860,000) at the end of April. Stupid, I didn’t have subject to selling my condo first. I have until Aug 14, 2018 for closing date. I wasn’t looking to flip or anything just having a baby being born soon will make a family of 5 in a 2 bed, 2 bath 747 sq ft a bit tough. Hence I deposited on the future home to grow the family in. Unfortunately now it has turned into sleepless nights and endless worries right before the new born baby is born that we cannot afford. Condo has not sold. No buyers.

My question is: Is it possible to back out and just lose deposit or will the owners sue us for the difference of what they sell for if we do back out? Or is all terms and conditions of backing out dependent on seller? Most worried.

Well, Abram, life’s about choices. Getting married. Three kids. Choosing a condo to buy when you could have rented. Now purchasing what you cannot afford. It may not seem like it, but we control a huge amount in our lives, and now you have to a situation that could spiral into ruin.

In short, no, you cannot just walk away from the $43,000 you deposited on the town house. This is going to cost you a lot more between now and August, and possibly well beyond. The important contract is your APS – agreement of purchase and sale – which, if drafted on the standard realtor form, is ironclad and unequivocal. Unless you made the offer conditional upon certain events happening (a successful home inspection, financing approval or the sale of your condo, for example) you have no option to terminate it without the mutual consent of the seller.

So that’s the first place to start. The seller. You need to know if he will sign that consent in return for the payment of more money, or pity. But be careful how you phrase things. A clear statement you cannot or will not close is actionable on the seller’s part and will result in a claim. So, you need a lawyer to act on your behalf, opening up the negotiations. The retainer for a litigation dude is normally about $10,000 – which will cover the initial flurry of correspondence.

In reality, the seller holds all the cards. His lawyer will make it clear you’re expected to close. If the property is re-listed and subsequently sold, you will not only lose your deposit but also be responsible for the difference between the amount you offered and the market value, as established by the subsequent sale. Plus legals, of course. In this case if the unit fetches $800,000 in a declining market, your out-of-pocket cost will be somewhere around $120,000, for which you have nothing to show. The question then: would you not be better closing the deal (if you can swing bridge financing) and aggressively marketing your own condo? The losses overall might be less.

As readers will remember, our blog dog colleague Derek sold his property at peak house last spring, only to have the buyers freak and flee. He eventually sold for less, successfully sued and obtained a judgment of $450,000. That made national headlines, shocking a lot of people who (like you, Abram) believe the worst that can happen when you get cold feet is to lose the deposit that accompanied an accepted offer.

By the way, Derek’s deadbeat buyers – despite owning at least two other houses and having professional jobs in the industry – filed for bankruptcy to escape the judgment against them. That battle continues, as Derek picks through the detritus of their financial lives to see what flesh may be left on the cadaver. Of course, bankruptcy is no option for young working couples with dependent children, mortgages, employers and the need to maintain good credit.

The conclusion is obvious. Don’t offer to buy a property without conditions unless you have the cash in the bank, the mortgage arranged and your affairs totally in order. These days, with sales eroding in many areas and sellers willing to give hugs, you can easily include a condition requiring a satisfactory home inspection or financing approval. Don’t expect the same leniency if you try to make the offer conditional upon the sale of an existing property – since you’ll be tying up the home for a few months with no guarantee to the sellers. Also expect to pay more in return for that flexibility. So, sell first, then shop.

Abram is probably screwed, by the way. Choices.

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June 5th, 2018

Posted In: The Greater Fool

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