Debt Relief Experts
Your pre-construction condo purchase seemed like a great investment when you signed the agreement. But now, as closing approaches, you’re realizing you might not be able to complete the purchase. You’re not alone. Many buyers across Canada including Ontario are facing similar challenges with their pre-construction purchases.
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Why Buyers Struggle with Pre-Construction Closings
The real estate market has changed dramatically over the past few years, creating significant challenges for pre-construction buyers. Here’s what might be making it difficult for you to close:
- Property values can drop significantly between purchase and closing. Some condo prices in major cities like Toronto and Vancouver have dropped by as much as 20-30% below the original purchase price.
- Your mortgage payments may be much higher than expected due to interest rate increases.
- Some buyers are now facing occupancy fees of $5,800 or more monthly – far above what they budgeted for when they signed their purchase agreement.
- Your bank’s appraisal might come in well below your purchase price. For example, if you agreed to pay $900,000 for your unit, but the bank now values it at only $700,000, you’ll need to come up with an extra $200,000 to close.
- Your employment situation might have changed during the construction period, affecting your ability to qualify for the mortgage you need.
- The final closing costs could be higher than you anticipated, requiring additional funds you haven’t saved.
- Construction delays might have pushed your closing date back, affecting your financing arrangements and creating additional challenges with your lender.
What Happens If You Can’t Close?
Understanding the consequences of not closing is crucial. When you signed your purchase agreement, you made a legally binding commitment to complete the purchase. Simply walking away isn’t an option – a breach of contract has serious consequences:
Losing Your Deposit: You’ll forfeit your deposit to the builder. Most pre-construction buyers have substantial deposits at stake – often $50,000 to $100,000 or more. The builder has the right to keep this money if you don’t close.
Builder Lawsuit: Builders can – and do – sue buyers who breach the purchase agreement. If you purchased at $800,000 and the builder can only resell at $600,000 in today’s market, you could be sued for the $200,000 shortfall. The builder can also add their extra carrying costs, legal fees, and real estate commissions to this claim. Courts regularly uphold these lawsuits, requiring buyers to pay hundreds of thousands in damages.
Additional Financial Damages: Beyond the purchase price difference, you’re also legally responsible for the builder’s extra expenses. This includes their carrying costs until they can resell, legal fees for pursuing their claim against you, and real estate commissions for reselling the unit.
Immediate Payment Required: Once a builder obtains a court judgment, they can take immediate steps to collect, including garnishing your wages or putting a lien on other property you own.
Impact on Credit Rating: A builder lawsuit or judgment against you will severely impact your credit rating, making it difficult to obtain future financing. A judgment can show up on your credit report and will remain for 6-7 years.
Options Available When You Can’t Close
Working with Mortgage Lenders
Your first step should be talking to multiple lenders. Different banks have different lending policies, and a mortgage broker can help you explore all your options. While one bank might decline you based on their property appraisal, another might be more flexible. If traditional “A” lenders won’t approve your mortgage, your broker might suggest B lenders who work with more challenging situations, though at higher interest rates.
Finding a Co-Signer
Adding a co-signer to your mortgage application could help you qualify for the financing you need. A co-signer with strong credit and income can significantly improve your application. However, make sure both you and your potential co-signer understand the responsibilities involved – they’re equally responsible for the mortgage if you can’t pay.
Private Mortgage Options
When traditional and B lenders can’t help, private lenders might be your next option. These lenders might be more willing to grant a high-ratio mortgage. While private mortgages come with significantly higher interest rates (often 10-15%) and additional lender fees, they can provide a short-term solution until you can refinance with a traditional lender.
Talk With Your Builder
Some builders understand that current market conditions are creating challenges and may be willing to help. They might offer vendor take-back financing, extended closing dates, or payment plans for deposits. While not all builders provide these options, it’s worth asking – they’d often prefer to work something out rather than deal with a failed closing.
Assignment Sale Solutions
Selling your purchase agreement through an assignment sale might help you avoid closing problems. However, assignments can be complicated. Many builders restrict assignment sales or charge significant fees. You’ll also need to find a buyer willing to take over your contract, which can be challenging in a declining market.
Alternative Funding Options
Explore whether you can liquidate other assets, borrow from family members, or arrange bridge financing by leveraging other assets. While these options might be expensive or uncomfortable, they could help you avoid more serious consequences.
Consumer Proposal Solutions
If you’re facing significant losses and have other debts, a consumer proposal might help. A consumer proposal provides protection from creditors and allows you to keep other assets while allowing you to make arrangements to repay a portion of what you owe. You will still need a stable income to support any proposal payments.
A consumer proposal can only be filed if your total debts are less than $250,000, excluding the mortgage on your principal residence. If this pre-construction condo was intended to be your primary home, you may be able to file a consumer proposal to deal with the builder’s claim and your other debts. However, if this was an investment property, the builder’s claim, combined with your other debts, might exceed the $250,000 limit. In this case, you have another option: a Division 1 Proposal.
Division I Proposal
A Division I Proposal is similar to a consumer proposal but designed for larger debt loads. There’s no debt limit, making it suitable for significant builder claims on investment properties. Like a consumer proposal, it provides protection from creditors and allows you to make a settlement offer to repay a portion of your debts. The main differences are that the process is more complex, and if your creditors reject your Division I proposal, you are automatically bankrupt. This does not happen in a consumer proposal.
Bankruptcy Considerations
While bankruptcy is a last resort, sometimes it’s the most practical solution, especially if you’re facing a large builder lawsuit and have no assets to protect. Bankruptcy can give you a fresh start, though it will have a more severe impact on your credit than a proposal.
Getting Professional Help
Successfully navigating pre-construction closing problems requires professional help.
Real estate lawyers can review your purchase agreement, explain your legal position, and potentially negotiate with the builder.
Real estate agents experienced in assignment sales can help if you decide if selling your contract makes sense.
Mortgage brokers can explore all your financing options and might find solutions with alternative or private lenders.
Licensed Insolvency Trustees can review your overall financial situation and explain how insolvency options like debt proposals or bankruptcy might help if other solutions aren’t workable.
At Hoyes, Michalos & Associates, we offer free consultations to review your situation and explain your options. We’re here to help if you need to explore debt relief options. Contact us today to book your free consultation and understand all your options.
