Can I back out from Assignment sale?

Question

Hello experts,

So I think I have made a really bad investment. At the height of market frenzy in Ontario, I bought into an assignment sale of a 2bed condo in early 2022. The tentative date of occupancy at that time was June 2022. Now that builder agreement has been signed, 2 things have happened- interest rates have gone up which have probably decreased the market value of this condo from what I paid for it; secondly, we have a labour union strike in Ontario due to which my occupancy date is in spring 2023 now😱.

I don’t seem to have any option but to wait for occupancy by which time my condo will probably be worth $100k less due to rising interest rates.

So my question is - I cannot back out from this builder agreement without losing money, can I? I already paid the deposit to the builder/assignor?

another question- can the builder ask me for more money because their material and labor costs have gone up?

Also, I am already paying 20% for this property (I am a first time home buyer). Would anyone recommend that I pay even more 30% or so to keep my monthly payments less now that interest rates have risen?

For new condos, how long should one keep them before they become less attractive in the market?

Any advice would be greatly appreciated.

Stevo Sun · Answer

That's rough, but I think it comes down to a math question... If you think the property is now worth 100k less than what you are buying it for, is that more than your deposit? If your deposit is a lot less than 100k it might be better to just lose the deposit. I think it also really depends on your financial situation and your goals.

Do you have any conditions on the agreement? Financing or something like that you can use to back out of? I think you have a few options, but none of them are great.

1) lose the deposit if it's a lot less than the property value drop (ie. losing like a 30k deposit vs overpaying for something by 100k, you would still be better off by 70k)

2) if you can afford to stick it out and it's something you like/want to live in then you might consider holding it

3) you can try to drag out the amortization from like 25 to 30yrs to lower your monthly payments

I'm sure there are other solutions out there that people with more experience than me can come up with. Good luck!

Stevo Sun · Answer

Yea investing for appreciation is always risky. It has worked for Ontario for the last while though. Never say never, real estate is forgiving if you can hang on and if your time horizon is long enough.I have heard of builders increasing the cost and asking buyer to pay more at delivery, but it depends on your contract.

Adam Krawec · Answer

Get in touch with a real estate lawyer to best guide you in this situation. All the details will be in the contract as mentioned by @Stevo Sun. The contract is drafted by the builder's lawyer to best protect the builder, not the buyer. Unfortunately investing in new builds for appreciation with the hopes of assigning properties does not work for a first property without great risks involved, it's akin to gambling. The only time I have seen this work well is when used as a diversification strategy for an investor that is always buying property whether the market is moving up or down. An additional option would be to get financing traditional or B Lender, and place a renter in the unit and you pay the shortfall out of pocket, this is a risky option because we do not know when the market will start the rebound but could prevent the loss of your deposit if you can make this work.

Jose Porto · Answer

I would not rush right now into any decision as many other buyers like you may be pondering the same options... you don't know whether the builder will fulfill his part of the deal to actually build the unit, so I would hang on to it if you can.

Else, are you able to assign the contract? maybe that will give you another way out, albeit at a discount most likely... Like others have said, if you can live in the unit, it may give you your best way out.

Also I would caution you about timing the market, it may look obvious to you that you don't want to loose money in the short term, but how would you feel if in 5 years the cost of that unit goes up significantly? I don't think the fundamentals around housing have changed in Ontario - there is simply not enough housing in most areas... good luck with whatever you decide

Sarthak K. · Answer

Hi Kevin,

Thank you for your reply. Yes, my plan is to move in this condo and probably live out the next few years in the hope that prices will appreciate again across Ontario. Great advice regarding checking with the builder if they have a customer in queue. Will do that.

Thank you so much.

Kevin Vanderveen · Answer

Sarthak,

As someone who is familar with the construction industry, it is not uncommon for some builders to ask their clients for more money due to spiking material costs. Since the contract is really the last word on whether they legally can or can not, I'm seeing builders and their vendors scrambling over the last year to amend their client contracts to allow them legally. That being said, I can say that I've been noticing lumber and other material prices dropping rapidly over the month or so. My suspicion is that you've "paid" for any unforeseen labour or material spikes as the builder has worked in a cushion for this in their sale price.

As far as backing out goes, check your contract first, then have a discussion with the builder. They may have a client in the queue that would take it off your hands.

Could you consider living in this condo while things settle down?

Sarthak K. · Answer

Thanks for your reply stevo.

So yes my deposit is close to $100K and so I wouldnt want to lose that. I can see myself in living in the condo but it seems that my best bet would be to hold it for the next few years until the prices appreciate again (if at all) and then I can try selling it.

All the conditions were waived off and so right now I dont have any conditions on the offer. I dont have a financial emergency and but it is just painful to watch myself fail at the first attempt of real estate investing :(

Do you know if builders can ask for more money after the agreement has been signed?

Can I back out from Assignment sale?

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