Is it a good idea to just walk away from your deposit?

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If you find yourself in a financial bind after signing up for that dream new model home, you're not alone. As house prices fluctuate across Canada, many buyers are finding themselves in a difficult situation where they are contemplating walking away from their deposits on their pre construction property.   

What is causing this trend? When it comes to purchasing a new construction home or condo, the purchaser typically signs a contract, and pays down a series of deposits in installments,  all the while, their new property may take years or months to build.  If you signed a contract to purchase a property at the peak of the market, given the current market conditions, your property may not be worth as much as you agreed to pay for it.   Therefore, many buyers are finding themselves in a sticky situation where they may have to pay their builder more than the property is currently worth in order to close their transaction.

Aside from the classic buyer's remorse, many sellers find themselves facing unexpected challenges when financing their new construction property.  That’s because most banks require the property to be appraised prior to closing in order to offer financing. For example, if you purchased an $800K property and your plan was to put down a downpayment 20%, you likely budgeted to have $160K to use as a downpayment. Now let's assume the bank sends an appraiser, which comes back and says the property is now only worth $700K. This means that the bank, who previously agreed to finance 80% of your property, will only allow you to borrow a maximum of $560K.

This means that you are now short $80K for your down payment. This leaves most buyers in a lurch, having to come up with significantly more cash to close your purchase, or result to alternative financing such as private mortgages to close the gap.

Do I just walk away from the deposit?

It is common to be in a situation where your purchased property has lost value or appraised much lower.  Let’s assume your deposit was $50K and you are okay with losing that deposit because the property you purchased is now worth $200K less.   Does it not make sense to just “walk away” from the deposit and potentially save the $150k that would be required to close?  

Unfortunately, it doesn’t really work that way. 

One common misconception is that breaching a contract only results in losing the initial deposit. However, that’s just the beginning.  By breaching your contract, you may also be liable for additional damages and legal fees to the developer. 

If we use the example above, say you walked away from a $50K deposit because you were under the impression that the property was now worth $200K less.  The developer now re-lists the property for sale and (due to the market conditions), has to sell the property at a $250K loss.  Odds are that the developer, who has now taken a loss that they otherwise would not have incurred if you did not breach your contract, will sue you for their loss plus legal fees.   Suddenly what seemed like a wise decision to walk away from a $50K deposit, can now cost the buyer $300K, assuming the developer wins in court.

Put simply, it is not a simple decision to breach a purchase contract and there may be severe repercussions.   This is the part where consulting a qualified Real Estate Lawyer makes a lot of sense and may save you from being in an undesirable situation.

If I can’t walk away, what are my other options?

If faced with difficulties, you may have the option to assign your contract to someone else. Assigning the contract may come with a fee, typically ranging from $5,000 to $15,000, but seeking professional assistance can help navigate complex terms and conditions.  If you feel that walking away from the deposit is your only option, consult a real estate lawyer to understand your options. There may still be an amicable settlement opportunity with your developer instead of breaching the contract.

In the ever-changing real estate market, communication is key. If your financial situation shifts, promptly reach out to the other party involved to discuss potential solutions.

Remember, like any investment, the value of your home can fluctuate. By staying informed, communicating openly, and seeking professional advice, you can navigate challenges in new construction home purchases more effectively.

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