We previously looked at a very straightforward situation. The husband and wife are trade up Buyers. They wish to sell their $1 million dollar property and buy a $2 million dollar property. Their Seller is going from a $2 million house to a $3 million house.
If everything works perfectly, there are no problems.
But, here’s what happened:
1) The Bank of Canada raised interest rates,
2) The market fell,
3) The Buyers couldn’t sell their house,
4) The Buyers defaulted on their purchase,
5) The Sellers couldn’t close on their deal and defaulted.
The result:
1) Buyers lose their $50,000.00 deposit,
2) Buyers have to make up the difference in sales price to their Sellers (20% drop, think February 2022, or August 2017), namely $400,000.00,
3) Commissions amount to $100,000.00
4) Carrying charges were $50,000.00
5) Total losses: $550,000.00.
That’s a lot of money. If this was a commercial deal, then the losses would have been capped at the deposit or double the deposit.
The sudden and instant 20% drop in the market has occurred on several occasions, most recently, the beginning of 2022 and in the late Spring in 2017. In fact, historically there have been situations with even more disastrous declines (1991 to 1993 at 40%).
Let’s cap the losses.
The Buyer should incorporate a company to proceed with an Offer. The new company has no assets, aside from the $50,000.00 deposit that it paid.
In just about every commercial deal, the developer, no matter how rich they might be, will incorporate a company for their protection should something go wrong.
This means that the losses will be capped at the amount of the deposit, namely $50,000.00, not $550,000.00. What an easy way to limit your losses. It costs about $1,000.00 to incorporate.
So, the safest conclusion:
1) Incorporate a company, and
2) Limit your losses to the amount of the deposit.
This also saves several years in litigation and the consequential legal fees that would be involved.
Brian Madigan LL.B., Broker