A recent study elucidated how badly homeowners got burned when Toronto’s housing market plunged about a year ago.
The report, published by Move Smartly, determined that hundreds of homeowners lost an average of $140,000 because of closing defaults, and according to John Pasalis of Realosophy, that totaled $121mln in lost market value.
“It tells you how rapid the decline was,” Pasalis told the Globe and Mail. “It tells you how quickly markets turn.”
Closing defaults often result in litigation, but that becomes even trickier when the purchaser who reneges on the transaction lives in another country.
“One client sold to a buyer from Iran, who was buying as a non-resident, and decided he’s not closing on the deal, and then what’s the recourse of the client—you’re going to sue someone in Iran?” said Mortgage Outlet’s Principal Broker Shawn Stillman. “Some people will simply not close because they don’t want to buy something that’s worth $200,000.”
On preconstruction purchases, Stillman recommends to all his clients that they take the on-site mortgage broker’s preapproval. While the terms might not be favourable, it mitigates the chances of defaulting on closing.
“One thing we always recommend people do is the builders always offer a preapproval for a set amount of time and we tell them to take it,” he said. “It’s something we can’t offer in the mortgage world. There’s always a mortgage broker from a major bank on site that usually does financing that will preapprove you for a few years. It’s a terrible rate but I always tell clients, ‘You don’t know what the future holds,’ and to always take that preapproval because that would be the worst case scenario.”
Unfortunately, through no fault of their own, sellers end up being the real losers. Because they sell their home on condition and buy another to move into only for their buyer to back out, they’re stuck between a rock and a hard place.
“Unfortunately, it’s not anybody else’s responsibility to help [the defaulting buyer] get out of that hole,” said Stillman. “When things went up in value, builders weren’t saying ‘You have to pay me 20% more, or a $100,000 more.’ Same thing when prices go down. It’s nobody’s responsibility but theirs to close the deal.”