Saving the Deal in the Present Market

What's a Co-Buyer — And Do I Need One? | Auto Loans with Co-Signers | GM  Financial

Right now, the market prices are headed down. For how long, we don’t know!

 March 2021, the property was worth $1.5 million. It was then sold in March 2022 for $2 million with a late June closing. The deal included a $100,000 deposit.

The problem is that for this property, the appraisal comes up short. It’s only $1.7 million, meaning that the Buyer will likely have to come up with an additional $300,000. So, this issue needs to be identified as soon as possible.

Inability to Close

If the Buyer defaults on closing, then, they lose their deposit for sure.

Subsequently, the Seller sold the property in August (the bottom of the market) for $1.6 million. In that instance, the Buyer is liable for the $400,000 shortfall, plus additional damages plus costs. That could easily amount to $425,000. And remember, that the real estate commission is still payable, so at 5%, that’s another $100,000.

In our example, this could easily amount to a $525,000 loss, and the Buyer has nothing at all to show for it.

2017 Situation

It does speak to the decision for those who closed in 2017 after paying the high prices. They actually broke even in June 2020, while those who failed to complete have suffered substantial losses, with no property at all to show for it. In some cases, they lost hundreds of thousands of dollars. They are now well ahead of just having their money sit in the bank. The message is clear: if you can close, do so, and hold on, because at some point the market will reward you. Those who closed have now achieved a positive rate of return. Those who failed to close have simply lost all of their money, without anything today to show for it.        

The choice is clear: close and wait!

Options

There are some options available:

  1. Liquidate other assets to raise the shortfall of $300,000,
  2. Mortgage other assets to raise the shortfall,
  3. Approach the Vendor to provide a second, Vendor Take Back mortgage in the amount of $300,000,
  4. Try to extend the closing date, to provide the time to solve these problems,
  5. List the property for sale by Assignment,
  6. Seek a co-purchaser by providing financial incentives,
  7. Use any combination of the above.

When it comes to selling by Assignment, you can do this as long as your own Purchase Agreement does not contain a clause which would prevent you from doing so. These types of clauses usually only appear in Builders’ contracts.

The co-purchaser is another opportunity. The first purchaser has already lost $300,000 and could lose $525,000. So, make an attractive deal based upon the fact that the first purchaser has already lost $300,000. This could be accomplished by both participation in the form of equity and mortgage from the new participant. This could be a very attractive investment deal to a co-purchaser.

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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