Despite the loss of sizable down payments, and potentially other consequences, more people are walking away from pre-sale home purchase agreements in recent months.
It’s a growing trend predominantly seen in the Toronto area, but Guelph and Wellington County aren’t immune.
“I'm not getting just calls from Guelph … but in all of the communities that surround us,” said Mike McCluskey, a litigation lawyer for McKenzie Lake Lawyers LLP and a member of the Guelph & District Home Builders Association (GDHBA) board of directors.
“And a lot of times those claims are dictated by what may be happening in the market, within the community at any given time. Certainly, this has been a massive side effect of the COVID surge in real estate pricing.”
McCluskey couldn’t comment on the specific quantity of people abandoning purchase agreements locally in recent months, as he only becomes aware of deals after they’ve “gone south,” but said it’s happening often enough to impact the way his practice operates.
“During COVID, there was an absolute feeding frenzy for home purchases. And the market was incredibly competitive to the point that if you didn't make an offer that was without conditions, your offer wasn't even going to be viewed as serious,” he explained, noting new home sales – when purchase agreements were signed before the house is built – have been particularly impacted.
There can be a two-year wait between the time an agreement is reached and when the home is ready to be occupied and the deal finalized.
“It's a lot easier to get money when (interest) rates are low, it's a lot more difficult when rates increase, and the rate in which the rates increased completely blindsided purchasers,” said McCluskey.
“When you waive (financing conditions), you're saying’ I'm confident I can get the money.’ Well, that confidence may have been well founded at the time you made the offer … (but by the time the deal closes) the entire market has changed with respect to the cost of money, and how difficult it is to obtain financing.”
Between March of 2022 and now, the Bank of Canada has increased the prime lending rate to its highest since 2001.
Prior to the pandemic, McCluskey said deposits often ranged between $20,000 and $25,000. However, as a way to make their offer more enticing to sellers, many deposits reached closer to the $100,000 mark.
Looking at the sale of pre-existing homes, people walking away from purchase agreements remains a rare occasion locally, said Michael Bennett, Guelph realtor and fellow member of the GDHBA board of directors.
“I don't want to say it's a huge tsunami or things like that, but it is definitely becoming a more frequent thing (in the Greater Toronto Area). Hopefully it doesn't catch on here,” said Bennett. “A lot of times we get caught up in what happens in the GTA but a lot of your smaller communities around the GTA can be a little bit insulated from a lot of that stuff.”
Homebuyers risk more than their deposit if they decide to walk away from a deal, McCluskey noted.
“You're also on the hook for all of the carrying costs that the builder or property seller is forced to incur while they wait to sell the property. And then when they do eventually sell the property, you're on the hook for the difference,” the litigation lawyer explained.
“It's not the most difficult claim to make out,” McCluskey added. “The case law is pretty standard because at the end of the day, the law is structured in such a way that they want the seller to be in the same position they otherwise would be in had the sale gone through.”
