Due to the coronavirus pandemic and the subsequent lockdown since mid-March, home sales stats seem to indicate that the Toronto real estate market is taking a breather. Home sales are down a sharp 69% year-over-year in the first 17 days of April.
Meanwhile, home prices are down a modest 1.5% compared to the same period last year. This trend is not limited to Toronto either. It’s a similar story for real estate in cities across Canada.
With the Canadian real estate market slowing down and the uncertainty surrounding the COVID-19 crisis, it’s become more common for buyers to change their minds in the midst of closing a deal.
For example, let’s say you bought a home at the beginning of March and soon after found yourself laid off from work as a result of COVID-19. Due to these unforeseen circumstances, you may contemplate your home buying decision and consider turning down the deal. But before you decide to walk away, experts advise considering the consequences.
The consequences of backing out of a purchase offer
As a buyer, it’s imperative to remember that an offer is a legal contract. By walking away from it, you’re leaving yourself open to numerous consequences, including losing your initial down payment deposit and even being sued.
If a buyer is unable to complete the transaction after putting in an offer, they may be liable for much more than their deposit. Here is a scenario: Buyer A puts in an offer for $500,000 and signs a contract, but the deal does not close. The homeowner sells to another purchaser for less than the original purchase price ($450,000). The seller is within their rights to sue Buyer A for the difference in the value of the two deals. Buyer A may be on the hook for the $50,000 difference on top of the initial down payment.
“What happens here is the ‘domino effect,’ whereby, you breaching the agreement by not closing on time triggers a series of events where multiple parties then end up having to breach their other obligations,” warns Nabeel Naqvi, a real estate lawyer at Naqvi Law in Toronto. “Legally, you may be on the hook for all of these ‘damages’ or extra costs suffered by all parties as a result of your actions.”
Naqvi adds that the purchaser “may also be responsible for any legal fees, mortgage carrying costs, lost deposits, decreases in sale price if the property is re-listed and sells for less, and any other actual loss suffered by the parties.”
If the seller of a home is not able to carry out the purchase of their next home as a result of their purchaser’s inability to close, the purchaser of their current home may be liable for losses from that transaction as well.
It’s a difficult decision to make, but if you’re considering walking away from an offer, bear in mind there are options to avoid getting sued into the stone age.
How to protect yourself against a low appraisal value
What happens if you put in an offer on a home, but your lender’s appraisal value on your current home comes in lower than you expected?
“This mainly affects those putting the minimum five per cent down for an insured mortgage and twenty per cent down for a conventional mortgage,” says D’Arcy Henneberry, president of MortgagePal. “The purchaser would have to increase their down payment to cover the shortfall.”
Henneberry recommends making an offer conditional on financing and, if needed, asking for an extension on the condition of financing. It’s a good idea to wait until the appraisal has taken place and has been signed off by the lender before waiving this condition. Otherwise, purchasers can also try to negotiate with the seller.
“In the case where the parties agree to a ‘mutual release’ or some other type of mutual agreement, you must ask, what is going to happen to the deposit? Will it be split, returned, or forfeited,” says Naqvi. “In situations where the other party in your transaction is attempting to or indicating that they may not be able to close on time, continue to assert that ‘time is of the essence’ so that the timeframes in the agreement continue to govern the transaction and that your rights are protected. All of this should be confirmed in writing.”
As a last resort, you can try to negotiate a lower purchase price with the sellers.
How to protect yourself if you lose your job due to COVID-19
If you have enough money to make the mortgage payments until you get your job back, you may be fine.
“The majority of lenders require all income documentation upfront. If you make an offer on a property, you start your application process right away, and you are currently employed, income will be signed off immediately before you receive your mortgage approval. If you then are laid off, the lender will still fund that mortgage in the majority of cases. They won’t review income again most of the time,” says Henneberry.
Hopefully, you get your job back before your property closes, but what if you don’t? If you have a sizeable emergency fund and are receiving the Canada Emergency Response Benefit, you may be able to handle your payments for a while.
However, if you’re not sure when you’ll get your job back, that’s when you’ll want to speak with your realtor, real estate lawyer and mortgage broker to look at your options. Not closing on a purchase because you lost your job due to COVID-19 is not a valid excuse in most cases.
How to protect yourself if your property sells for less
It’s common to purchase a new house before selling your existing property. But what if you bought a home before COVID-19 and you’re having difficulty selling your current property during the lockdown?
One way to handle this type of situation is through bridge financing, but you can only do this if you have a firm sale on your current property. Another possible solution to having two properties would be to turn one into a rental unit.
“Rather than selling that property, you could convert it into a rental property. You could then do a rental refinance so that you can access up to 80% of the current market value and then use that equity to help you with your down payment on the new purchase,” says Henneberry.
Private financing solutions are available as a last resort, but this will depend on your ability to support this debt. Henneberry says it’s also possible to do what is called an inter alia (blanket) mortgage on the current home and new home to access equity. You could use that money as the down payment for the new home until you’re able to sell your current property.
The housing market can be a hard thing to predict. But if you’ve found yourself in a predicament that requires you to withdraw your offer, it’s best to consider all your options before making a final decision.
Speak to a mortgage broker to avoid problems that could carry on a lot longer than you expected.