Sales stats over the last few months may indicate that the Toronto real estate market is taking a breather. The average price of a home in Toronto has fallen 19 percent since peaking in April, before the announcement of Ontario’s Housing Plan. Since then, many homebuyers have chosen to sit on the sidelines – similar to the reaction Vancouver’s market experienced when its provincial government first introduced a foreign buyers tax back in 2016.
And with the real estate market slowing down in the GTA, it’s become a lot more common for buyers to change their minds in the midst of closing a deal. For example, let’s say you bought at the peak of the market in April, but the appraisal value from your lender came in lower than expected. You now may not have the funds to close and as a result, consider turning down the deal.
But before you decide to walk away, experts advise considering the consequences. One B.C. couple recently learned the penalties of walking away the hard way – in this case, the sellers sued the buyers for $360,000 and won.
The consequences of backing out of your 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. In the instance that the deal does not close and the home sells to another purchaser for less than the original purchase price, the seller is within their rights to sue the original purchaser for the difference in the sale prices of the two deals.
For example, if you agreed to purchase a home for $500,000 but backed out of the deal before closing, and the seller ended up getting another buyer to close for $450,000, you may be on the hook for the $50,000 difference, on top of your down payment.
“The purchaser is also responsible for any other losses or damages incurred by the seller as a result of the deal, not closing,” warns Shannon Durno, a real estate lawyer at Durno & Shea. “What’s even more alarming is that a purchaser’s inability to close their transaction can cause a chain reaction that can spill over into other real estate deals.”
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 if your lender gave you a low appraisal value
Situation: you put in an offer on a home, but your lender’s appraisal value on your current home comes in lower than you expected and you don’t have the extra funds to carry out your offer.
“The purchaser in these cases will have to make up the shortfall out of pocket, which of course can be problematic,” says Durno.
Durno recommends making offers conditional on financing, though, in most cases, appraisals are completed long after the financing condition has been waived. Otherwise, purchasers can also try to negotiate with the seller.
“The purchaser can try to negotiate a release of all or part of their deposit in exchange for a full and final mutual release to avoid being sued,” says Durno. “Often times, a purchaser will also make a request to the seller to extend the timeline of their deal to allow them to arrange for alternative financing options, possibly from a private lender. Private lenders will charge much higher interest rates than a bank but this is often times much less expensive than being sued for the deal not closing. However, in granting an extension the seller will often require a further deposit and their costs covered for the delay.”
Durno also mentions that “Vendor Take-Back” mortgages are also making a comeback. So if you’re a buyer, it doesn’t hurt to ask. Under this arrangement, the sellers would lend you the funds to help facilitate the purchase of the property in the event that you can’t afford it yourself.
As a last resort, you can try to negotiate a lower purchase price with the sellers. Durno has seen a few instances over the past few months where buyers have successfully negotiated lower prices.
How to protect yourself if your property sells for less
It’s common to purchase prior to selling your existing property, but if it sells for less than anticipated or even worse, not at all, you can find yourself in a predicament.
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, and this can lead to other issues.
“Often times, clients that expected to have a 20 percent down payment from their own home sale, now require an insured mortgage,” says Fred Babbie, a mortgage broker at Safebridge Financial Group.
Homebuyers who put less than 20 percent down usually require mortgage insurance. Their loan would also be subjected to qualification rules based on the higher-posted rate, which could make getting qualified for a mortgage harder for some.
Another solution to having two properties on your hands would be to turn one into a rental property. In this scenario, you could refinance your current property to obtain down payment funds for the new purchase. However, this is really just an option if you have the capacity to carry both properties.
Finally, private financing solutions are available as a last resort, but this will depend on your ability to support this debt.
About the Author
Sean Cooper is the author of the new book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker.