Failing to Close on Your Pre-Construction Purchase! What are Your Options?

A pre-construction condo might have looked too good to pass on when you committed to purchasing it a few years ago. But things change. The market fluctuates. Interest rates go up. Your financial situation might not be as strong as it was a few years ago. And now, it has become impossible for you to close on the deal you signed on a few years ago. If you are facing such a possibility of failing to close, you need to immediately contact our litigation lawyer to explore the legal options available to you.

What are some of the reasons for buyers’ failure to close?

Some of the common reasons leading to some buyers’ inability to close or their decision to back out of a pre-construction property are the following.

Market fluctuations:

The real estate market has always remained volatile. In the time period between when the buyer signed the agreement and the date of closing, the value of the property might fall considerably. Obviously, the builder is under no obligation to take these changes into consideration and agree to reduce the purchase price.

Unforeseen increase in mortgage payments:

An unforeseen increase in the interest rate will push up the mortgage payments even higher than what the buyer had planned for. This might render the property unaffordable to the buyer.

The bank’s appraisal falls below the purchase price:

While the buyer might have already agreed to a higher purchase price, their bank might differ from this figure in its appraisal of the property. For example, if the buyer signed the agreement for a purchase price of $1.5 million and the bank’s appraisal of the property comes to the total value of only $1.2 million, then they will have to figure out another way to raise the remaining $300,000.

Project delays derailing your financing plans:

This is always a risk when buying a pre-construction property. The construction delays might push the closing date further and further into the future. The buyer might have secured some financing with a particular closing date in mind. The changes in the closing date might derail some of those financing arrangements, forcing the buyer to look for other funding options.

What are the possible consequences to the buyer?

Many buyers remain confident about closing and fail to pay close attention to the legal consequences mentioned in the contract for any breach of agreement. In most cases, a buyer failing to close might have to face one or all of the following consequences.

Forfeiture of the deposit:

As per the terms of the agreement, the moment the buyer fails to close the transaction, the builder becomes eligible to request the forfeiture of the deposit amount in their favour. There is no need for the builder to even approach the courts for this.

Lawsuit for damages:

Also, the builder has the right to pursue legal action against the buyer for any loss they incurred from their failure to close the transaction, including any difference between the agreed purchase price and the current market price of the property.

Impact of the debt recovery process:

If the buyer fails to pay the damages awarded to the builder, the builder can approach the courts to initiate the debt recovery process against them. The court might issue a wage garnishment order in favour of the builder or put a lien on the buyer’s other properties.

Problems with future financing:

The buyer’s failure to close will adversely affect their credit rating for at least the next few years. They will find it difficult to obtain loans and funding for any other significant financial deals until their credit rating improves.

What are the options available to the buyer?

The first thing to consider in such a situation is to figure out a way to close the real estate transaction by looking for ways to cover the shortfall in the financing. A buyer might explore some of the following options in such a situation.

Approach other banks:

If they cannot secure full funding from one bank, it makes sense to approach other banks to obtain additional funding for the property. This is because the lending policies of another bank are likely to be different, and they might be able to meet the qualification criteria of another bank for the loan.

Negotiations with the builder:

Another option is to renegotiate with the builder on the terms of the agreement. Some builders might prefer to avoid a lengthy and expensive legal process to obtain damages from the buyer. They might be open to extending the closing date or a flexible payment plan to suit the current financial situation of the buyer.

Co-signer:

Another option is to get someone with a good credit rating to co-sign on the buyer’s mortgage. This will help them to easily secure the remaining funding they need for the property. But the co-signer will be taking on themselves the responsibility of repaying the loan if the buyer fails to do so. This often makes it difficult to find someone to co-sign on the mortgage.

Private lenders:

If banks and other traditional lenders are not willing to provide the necessary funding for the property, the buyer can still try approaching private lenders. These are small organizations or individuals providing mortgage loans, typically on a short-term basis. Obviously, their qualification criteria and lending policies vary significantly from those of traditional banks, and the buyer might be able to secure the necessary funding.

Assignment sale:

In an assignment sale, the buyer is selling their rights and obligations under the agreement to a new buyer. The new buyer will take over all the financial obligations from the old buyer, complete the closing formalities, and obtain ownership of the property. However, this requires the necessary approval from the builder.

Seek alternative funding:

If banks and private lenders are not an option, then the buyer might have to consider approaching their friends and family members, who might be willing to help them out financially.

Consumer Proposal:

A consumer proposal offers the buyer protection from creditors while they work on paying back at least a portion of their debts. However, the total debt, excluding the mortgage, must be below $250,000 for them to qualify for this option.

Division I proposal:

Such debt limits do not apply to a Division I proposal. Regardless of the extent of the debt, the buyer may submit their proposal for the payment of at least some portion of the debt. However, if the builder were to reject their Division I proposal, it might trigger bankruptcy proceedings.

Bankruptcy:

For obvious reasons, this is the last resort. If the buyer has exhausted all sources of income and all their assets, then bankruptcy might be the only option left. It will offer them protection from creditors and will also protect their essential assets from any debt recovery process.

How can our real estate lawyer help you in such cases?

• If you had engaged the service of an experienced real estate lawyer early on, they would have advised you on the potential costly pitfalls of any failure to close and helped you with renegotiating the terms of the breach of agreement.
• The same applies if you are considering the option of an assignment sale. Your lawyer will negotiate favourable terms for you with the new buyer, obtain the necessary consent from the builder, and arrange all the necessary documentation.
• When you are dealing with a possible failure to close, contact an experienced litigation lawyer and follow their advice in protecting your financial interests as much as possible from the legal consequences of breaching the agreement.

Read: Legal Disclaimer