In the preconstruction real estate industry, a growing concern has emerged as homebuyers face difficulties closing their property transactions, leading some to walk away from substantial deposits, with values as high as $320,000.
This trend is particularly prominent in the lowrise homes of Greater Toronto Area (GTA) suburbs, which experienced rapid price surges during the pandemic, followed by significant declines. As closing dates approach, many buyers find themselves unable to complete their purchases due to issues such as falling appraisals and mortgage qualification challenges.
Recent data from the Toronto Regional Real Estate Board, as reported by the Toronto Star, indicates a 6% drop in unit sales across the GTA in October compared to the previous year. Average prices have also decreased, falling from $1,195,469 in May to $1,125,928 in October.
The buyers who are walking away from their deposits are a mix of end-users and those trying to transfer their rights and obligations through assignment sales, a legal transaction in the preconstruction condo market.
Buyers who purchased lowrise homes in late 2021 or early 2022, during a period of high prices and low interest rates, now face the challenge of closing in an environment with significantly higher interest rates. This shift, coupled with softening home prices, contributes to the increased number of buyers walking away from deposits.
Typically, deposits in the real estate market represent 20% of the final purchase price and are paid to the developer before the project commences. If a buyer fails to close the deal upon completion, the builder has the right to retain the deposit and pursue damages. The builder can also seek compensation if the property is resold for less than the original purchase price.
In the lowrise market, it typically takes six months to a year for homes to be constructed — this explains the surge in deposit forfeitures in this sector compared to condo units, which have longer construction timelines. The trend also appears to be more prevalent in areas located an hour or two outside of Toronto, where property values have seen the steepest decline.
Experts see this phenomenon as an early indicator of potential future issues in the market. While the percentage of buyers walking away from deposits remains relatively low, experts anticipate that this issue may become more widespread in the coming years, posing potential risks to lenders and builders, especially as condos from the pandemic’s peak start entering the market.
Information for this story was found via the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.