The Increasing Challenge of Defaulting on New Builds: A Look into the Real Estate Market Toronto

The trend of defaulting on newly built properties is on the rise, closely tied to predictions about the real estate market Toronto. TD Bank forecasted a 10% drop in housing prices for 2024, which has proven accurate. The segment hardest hit by this downturn is the new-built condominium market.

The Dilemma of Buying Pre-Constructed Condos

Purchasing a pre-sale or pre-constructed condominium involves placing a deposit and signing a contract to pay the remaining balance upon completion. However, declining condo values and high interest rates have created significant obstacles for buyers in securing financing and closing deals.

The Impact of Low Appraisal Values

One major issue buyers face is low appraisal values from banks. Banks base their loan amounts on the current value of a property. With home prices dropping by 6.5%, appraisal values often fall below the purchase price. Consequently, buyers receive less mortgage funding than needed for the down payment, leading to failed closings.

Consequences of Failing to Close

Defaulting on a purchase contract has serious legal and financial consequences:

• Contract Breach: Buyers who breach a purchase contract are liable for all damages suffered by the builder during resale, minus the original deposit, which is forfeited.
• Damages: Recent case law suggests that almost all costs incurred by the vendor in reselling the property should be included. The goal is to place the seller in the position they would have been in had the buyer completed the transaction.

Potential Solutions for Real Estate Market Toronto

Given the rigidity of contract laws, it is imperative for buyers to make every effort to close the deal. Possible solutions include:

• Private Mortgages: These can offer a path to closing but come with higher interest rates, shorter loan terms, and less regulation, leading to fewer consumer protections and higher fees.
• Last Resort: Filing for bankruptcy may be the final option, resulting in the loss of the deposit and the necessity to start afresh.

Conclusion

The current housing market Canada, particularly for new-built condominiums, poses significant challenges for buyers. Declining property values and stringent financing conditions are leading to an increase in defaults. Understanding the implications and exploring all possible solutions is crucial for buyers to navigate these turbulent times. It’s always advisable to seek legal and financial advice to mitigate risks and make informed decisions.