Real estate investor Sahil Jaggi in front of condominium buildings at 2200 Lakeshore Blvd. W., in Etobicoke, on April 21.Duane Cole/The Globe and Mail
For many real estate buyers who lined up to sip a cocktail and purchase a condo unit at a high-profile launch party, the euphoria is a distant memory.
The sales centres have long since been torn down and the photorealistic images have been turned into real buildings.
The dilemma confronting many of those buyers now is that their units – in projects nearing completion – are not worth what they agreed to pay at the time.
Sahil Jaggi, broker with Re/Max Realtron Realty, recalls the heady days of project launches in Toronto in recent years. He believes many buyers are not sufficiently aware of the risks of buying a unit preconstruction.
“A lot of people who purchased at premium prices were overly optimistic when the market was doing well,” he says. “People are scared because the valuations have dropped. I see a lot of panicking happening.”
Mr. Jaggi recalls the sales centre frenzies which reached a crescendo in 2021. More than 30,000 units were sold in preconstruction that year.
“They just stand in the line and buy. They don’t even know what floor plan they’re buying.”
As projects approach completion, some of those buyers are lining up financing from lenders who require an appraisal. In many cases, the appraised value is less than the buyer agreed to pay at the time the agreement was signed.
“They were over-priced to begin with,” Mr. Jaggi says of contracts which reached $2,000-per-square foot for a condo unit.
The problem extends to single-family homes as well in new developments outside of Toronto.
The buyers may try to flip the contract in the murky, unregulated market of assignment sales if the builder consents. But buyers in that segment are looking for blood in the water, Mr. Jaggi says.
He currently has a listing in the assignment market for a four-bedroom in East Gwillimbury, Ont., with a planned completion date in 2024.
Mr. Jaggi says his client agreed to pay $1.8-million for the large, detached house.
He has set the asking price at $1.5-million, Mr. Jaggi says, because the clock is running. Within 120 days of completion, the builder won’t allow assignment sales.
“No one is willing to pay,” he says. “All assignment buyers are looking for sharky deals.”
If Mr. Jaggi’s client fails to sell the house and can’t obtain a mortgage, the builder will have the right to keep his 20-per-cent deposit and sell the house. If the builder fetches less than the original $1.8-million, he may sue the client for the difference.
More generally, Mr. Jaggi is concerned for buyers who are not savvy to the risks of buying preconstruction. Developers have strong contracts which allow them to shift timelines and cancel projects outright.
“The only one who hedges their risk is the builder. The buyers are the ones who suffer.”
Mr. Jaggi adds that builders offer large incentives and commission to agents who represent them. Units are sold for a price-per-square-foot that represents where the market may be when the project is finished. As part of their sales pitch, some agents present the view that the market can only continue to rise, he says.
“If the market continues to go up forever, preconstruction is a great buy,” he says. “But it’s so speculative. I’ve seen people lose their entire life savings.”
Lenders who provide financing to the developer for construction do typically require that they ensure buyers will have the ability to close. It’s no secret among industry insiders that the practices can be lax.
Mr. Jaggi is more scathing than that.
“It’s a joke. It’s a complete joke. People are getting these letters from their friends. Half of those preapproval letters are not authentic,” he says.
Even in the legitimate 50 per cent, many evaluations are unreliable, he points out. Buyers with a good income at the time of purchase may have lost their job four years later, for example.
Market tightens for Toronto condos
No database exists to keep track of the number of assignment sales in Ontario, but industry experts estimate that between 5 and 10 per cent of units sold are flipped.
British Columbia introduced the Condo and Strata Assignment Integrity Register (CSAIR) in 2019 with the aim of closing tax loopholes and improving transparency around such transactions.
Developers are required to report all assignments of purchase agreements to the province.
The Ministry of Finance reports that from CSAIR’s launch on Jan. 1, 2019, until early December of last year, 15,446 assignments were reported.
The registry gives tax authorities the information they need to prevent tax evasion, a ministry spokeswoman says.
The federal government has recently introduced anti-flipping legislation which includes taxing the gain from an assignment sale as business income.
Anna Wong, real estate agent at Strata.ca in Toronto, says the downturn in the broader real estate market has exposed the risks of betting too heavily on future prices.
“This market actually teaches people a lesson on preconstruction,” she says. “People, sadly, are being burned by it.”
Paradoxically, rising inflation and interest rates are sometimes working in favour of those purchasers who don’t have sufficient finances to finalize the deal, she says. Hefty construction costs are leading developers to delay occupancy at some projects scheduled for completion this year.
“Usually you want it done as soon as possible,” she says of buyers. But today a delay relieves some of the pressure.
In extreme cases, builders cancel a project all together or raise the price for buyers who have already signed a contract.
The delays are also keeping the assignment market from becoming swamped with listings, she adds. As a result, prices are holding steady.
But Ms. Wong says some sellers of assignments are still trying to avoid selling at a loss.
In one case, the original buyer of a one-bedroom, 648-square-foot unit at 88 Queen Condos paid $810,000 a couple of years ago. The buyer tried to sell the contract in the assignment market for $909,000, then recently dropped the price to $860,000 after 86 days on the market.
But Ms. Wong points out that a buyer can purchase a unit of a similar size in the resale market for about $700,000.
“They push preconstruction out like crazy,” Ms. Wong says. “There’s so much hype. It’s a great investment – only if the market is with you.”
Ms. Wong says a handful of projects in Toronto will be ready for occupancy in June, with another batch coming up in October.
Many of the people trying to sell assignments are investors, she says, who could only qualify for a mortgage when interest rates were 1.8 per cent.
Some are first-time buyers with no back-up plan now that the Bank of Canada’s benchmark rate is 4.5 per cent.
“They squeezed everything to get in,” she says.
Some buyers do inquire about assignment sales she says, but most are still holding out for a deal.
And when Ms. Wong shows clients that a condo for sale in the assignment market for $750,000 can be had for $650,000 in the resale market – and they can move in or rent it out right away – most prefer that option, she says.
In Kitchener-Waterloo, Ont., many new sub-division homes have been rising around the region west of Toronto, says Faisal Susiwala, broker at Re/Max Twin City.
During recent years, some builders saw the bidding wars in the resale market and borrowed some of the same tactics, Mr. Susiwala says. They slowly released a few properties at a time in preconstruction and gave buyers the opportunity to increase their offers in successive rounds of bidding.
That competition caused a rapid escalation in prices.
Then, as interest rates rose, resale prices tumbled to below the amount some buyers paid in the pre-construction market a few years ago.
Some projects were paused in that region as well as developers faced steep costs to build.
When builders did complete homes, appraised values began coming in below what the buyer had agreed to pay in some cases. Buyers who were able to qualify for financing when mortgage rates were around 2.8 per cent were facing rates of 5.8 per cent.
Faced with a crunch at closing, some buyers have approached the builder to ask for a deal. Some have offered to let the builder keep the deposit in return for letting the buyer walk away from the contract.
Mr. Susiwala says some smaller builders can’t afford to go that route. They have refused to negotiate and are taking legal action instead.
Some builders have offered vendor take-back mortgages, and at least one large developer in the area tried to find a compromise by asking buyers to increase their deposit now in return for an equal reduction in the final price.
Now that prices are firming up in the broader market, some developers are selling the new houses that the original buyers walked away from.
“People paid way too much,” Mr. Susiwala says of those who got swept up in the mania. “There was a lot of froth in the market.”