You’ve Found Your New Home – What Happens if You Can’t Close?
October 9, 2018
The news is out from the Toronto Real Estate Board – and prices in the GTA are up, yet again. The average price of a home in Toronto is $864,275. The average price of a detached home is now $1,342,363 and the average price of a semi-detached home is $995,951, which is scarily close to $1M.
The other figures to note are the number of new listings. There were 15,920 new listings registered with TREB, which is 3% less than last year. What this means is that there still isn’t really enough supply to meet demand and this can be frustrating for home buyers.
At the best of times, a home purchase is an emotional decision but when you’ve lost out on 1, 2, 10, houses, it’s tempting to make an offer that’s your absolute maximum, even when it’s above and beyond what the local comparable sales will say a home worth.
The real danger in doing this comes with the bank’s home appraisal for the mortgage. (if you’re buying a home in Toronto and paying cash, then you can disregard this blog!)
If the winning offer a buyer makes on a home in a competitive bidding situation is for an exceptional price and the appraiser that the bank hires doesn’t see the value in the home, there can be repercussions.
The worst case scenario is when a buyer has put in an offer without a condition of financing and the bank values the house significantly lower than the offer. If that buyer doesn’t have the extra cash on hand to make up for the difference between what they agreed to pay and what the appraiser appraises the property for, it can spell trouble.
They have to either come up with the difference or default on the deal, which means that not only have they lost their deposit (and the typical deposit in Toronto these days is 5%), the buyer can also be responsible for damages, including the difference between what the seller resells the property for and what the original buyer agreed to pay AND any out of pocket costs the seller incurs because the sale didn’t go through such as mortgage payments and property taxes.
Thankfully, this situation rarely happens because people are able to find the money, whether it’s the bank of Mom and Dad or assets they can liquify.
The only safeguard is to make the offer conditional on financing. The problem with this is the majority of people have financing in place before they make an offer. In a multiple offer situation, having that condition basically invalidates their offer.
It’s impossible to predict how much an appraisal will be for – the bank won’t perform the appraisal until there’s an agreement of purchase and sale. The market is changing quickly – the bank doesn’t look at properties sold six months ago, just the recent sales. Because there are so few sales in key neighbourhoods it makes it really difficult.
The other challenge buyers can face when spending their absolute maximum is not leaving any room for renovations.
If you’re in the market for a home that will require some updates, make sure to allow for that in your offer.
Having a good realtor on your side can help you figure out what makes sense. You also want a good real estate lawyer. If you’re in the unfortunate position of having to get out of an agreement, they can help. A realtor can advise people on how to safely enter an agreement, but negotiating the way out is beyond our scope.
If you have any questions about the Toronto Real Estate market, please give me a call!