A recent immigrant who purchased his first property in Canada has seen the dark side of B.C.’s presale market, and what can happen when you purchase a property years before it is built.
Sudip Sehgall, who purchased a townhouse in South Surrey in December, 2021.Kerry Gold/The Globe and Mail
The real estate landscape can change dramatically between the time a buyer pays their deposit and the time the sale completes and they are required to pay the balance of what they owe.
That’s what happened to Sudip Sehgall, who purchased a townhouse in South Surrey in December, 2021, from StreetSide Developments, owned by Qualico, a very large development company that builds master-planned communities in Western Canada.
Like many newcomers to Canada, Mr. Sehgall wanted to get into the housing market, which he saw as more secure than dealing with climbing rents. The purchase price for his townhouse at the Boroughs complex was $819,900 plus GST, with a 10-per-cent deposit. Mr. Sehgall paid the deposit of $81,990 on the home, with an agreed upon completion date of July 31, 2023, at which point he’d owe the balance as well as property transfer tax.
Mr. Sehgall used his savings as well as a loan from his father in India to pay for the deposit. He owned a property in New Delhi, which he planned to sell to pay for the remainder of the townhouse, and he had two years to do it, so he felt confident. He spent a lot of time at the construction site, checking on progress of his townhouse.
“I am not an investor. I am a man of very limited means,” he said in an interview. “It was going to be my house, and everyone in their sales centre on site knew I was hugely attached. I would go there multiple times in a month, every week, because it was being built. I was hugely excited.”
However, once he put his property in New Delhi on the market, it did not sell. New government regulations that changed what could be built on the empty lot made it less desirable to investors, Mr. Sehgall says. He started to panic as the completion date approached and knew he wouldn’t obtain the money in time.
His contract with StreetSide included a provision that he may be allowed to assign the presale contract to another buyer – with the developer’s permission. He focused on the line in the contract that stated, “The vendor will not withhold its consent to an Assignment unreasonably.”
Although he wouldn’t own a home, he consoled himself that he would get back his deposit. He says he found interested parties who wanted to take over the contract. But when he contacted the developer for permission to enter into an assignment sale, to his shock, the answer was no.
He was offered a further extension to find a buyer whose name he could add to the title of the property. The developer’s sales director suggested he find a friend or relative who could help him out. Mr. Sehgall says he doesn’t have relatives in Canada, and he doesn’t know anyone who’d want to share ownership of a property.
Because he could not complete the sale by Aug. 3, Mr. Sehgall received a letter from the developer’s lawyer that he had forfeited his $81,990 deposit. This amounted to all his savings and some money he owed his 88-year-old father, a retired military officer, he says.
Today, Mr. Sehgall says he lives in a basement suite in Surrey on disability after an accident, and he cannot afford the high cost of lawyer fees.
Daljit Rattan said he was interested in purchasing the assignment from Mr. Sehgall several months ago.
“My daughter got married in April and I was looking for something for her. I was going to take over the contract … but nothing extra,” he says.
“So I talked to him, and when I found out he didn’t own it, it was an assignment, I said, ‘I won’t pay a premium or anything, but I want to make sure it’s okay with the other side. Get clearance from the builder.’ ”
But Mr. Sehgall could not get clearance. He showed an e-mail from the sales director that said, “We are not allowing assignments at The Boroughs as we are actively selling and marketing our homes on MLS. You are able to sell the home after possession.”
Sales data on the 127-unit complex at 2070 Oak Meadows Dr. provided by real estate analysts Landcor show that the project is now almost entirely sold out. A comparable unit to Mr. Sehgall’s townhouse sold in April for $813,050. The developer has sales for phase two of the community under way.
When asked to comment, StreetSide Developments director of sales Tara Desmond said they had encouraged Mr. Sehgall to seek legal advice.
“For that reason, it would not be appropriate to comment on the specifics of Mr. Sehgall’s contract,” she said.
Real estate lawyer Kenneth Pazder says people often boast about the money they’ve made buying a presale property in a busy market. But when the market goes south, they discover the contracts are heavily weighted in favour of the developer. Unlike tenant protection laws, there’s little recourse for the buyer, and taking a developer to court can be very costly.
“We’ve done a lot of deals, closed about 30,000 purchases and sales, and of those probably several thousand presales. We’ve seen all these contracts, and it doesn’t matter who the developer is, they all look the same,” Mr. Pazder says.
“They get their lawyers to draft a completely one-sided contract, giving the developer every single avenue in their favour and pretty well nothing for the buyer. The developers can move dates all over the place, move them ahead or move them back or even cancel the project and give the guy his deposit back.
“But if the buyer doesn’t deliver, they could lose their deposit and more.”
If the buyer defaults and the developer finds a new buyer willing to pay more, the developer does not have to repay the original buyer their deposit.
If a buyer defaults on a property that drops in value and the developer has to sell for less, the developer can sue the first buyer for the difference. Mr. Pazder would like to see a standardized contract that mitigates buyer risk.
“That’s why I say it’s so one-sided that it’s almost like an option to sell for the developer – they can pretty much do whatever they want. The worst-case scenario for them is, ‘Here’s your deposit back, get lost,’ ” Mr. Pazder says.
It’s also standard, he says, that the option to assign a presale contract is at the developer’s discretion.
“I’ve had people, they tried to assign a contract and the developer said, ‘no.’ The prices are dropping and each month they drop more, and they won’t let him assign the contract but they can’t close. … Sometimes they say we have units to sell and we don’t want you competing.”
But this side of the presale market is only revealed when the market slows. If the presale property is worth a lot more by the time of completion, it’s an entirely different story.
“If the market has gone up, the developer doesn’t care if you assign it because they have presold everything, so you flip it and make $100,000 or whatever and Bob’s your uncle,” Mr. Pazder says.
There haven’t been many drops in the past 20 years, but they do occur.
Long-time developer John D’Eathe, who’s helped build more than $5 billion in residential properties in Asia and Canada, has seen a few drops in the market.
“The market has definitely changed,” he says. “For most of the builders now, you will find the program they had for the next five years has been reduced, because nobody is quite sure what is going to happen. They haven’t necessarily dropped their projects, but they are delaying them, which makes sense because they can’t get presales now, or they aren’t sure what the market is, and if it will come back.
“There are lots of stories around town of developers struggling to meet this situation.”