After years of an ever-rising real estate market, we recently experienced a taste of what the market used to be like. That is, a market where it can take a long time to find a buyer, and where values may go down as well as up. While the market is still very strong, it is a good idea to review some legal points that may have been forgotten by many buyers and sellers, and by many realtors, in the ever-rising market we have experienced until recently.
Conditions are important!
In the incredibly strong seller’s market we have experienced, many agents recommend that buyers submit offers without conditions. This is based on the assumption that sellers will only entertain “clean” offers. However, putting in an offer without conditions can leave a buyer totally exposed to claims for damages. Some of the important conditions a buyer should consider:
- You may have been “preapproved” for a mortgage, but the house you are trying to buy will not have been. If the lender’s appraisal shows a lower value than you expect, the amount you can borrow will be lower, and you may not be able to fund the shortfall.
- Sale of your current home. If you have not sold your current home, and will need the money from the sale to buy your new home. You need to make sure you are only locked in to buy after you have a firm deal to sell. If you don’t, you may be in trouble if you can’t sell your house, or you may have to take a lower price than you’d hoped.
- Most of us are not qualified to accurately spot the problems with a house. If there is no inspection and you miss a problem, it could cost a lot. It could also mean a lower appraisal, and could mean that your lender declines to approve the house.
Consider a Bridge Loan
Years ago, most people bought and sold their homes on the same day. Many people now get a “bridge loan”. This is a short term loan from a mortgage lender. It allows you to borrow on the equity in your existing home, so you can buy your new home before the sale of your existing home is closed. This normally does not cost a lot. It allows you to move into your new house a few days or weeks before existing house sells, and provides some breathing room.
It also protects your purchase if, for some reason, the sale of your own house does not close as expected, because the buyer has a problem. If the deals were to close on the same day, with no bridge loan, you could end up unable to complete your purchase. It is usually better to have two houses, for a short while, than to get sued for failure to complete the purchase.
Your Liability may exceed the Deposit.
Many people believe that if they can’t close their purchase, their liability is limited to the deposit, and they can just walk away. In most cases, this is not true. If your failure to close a purchase results in a whole chain of deals failing to close. You could be responsible for everyone’s damages, and your exposure is virtually unlimited. This is particularly a problem in a falling market. If a deal falls through and a seller puts it back on the market, the next buyer may offer a lower price, and the defaulting buyer will be on the hook for the difference, among other costs.
Dave Thomas is a senior partner at Lancaster Brooks & Welch LLP and may be contacted for legal advice in corporate and commercial law as well as residential and commercial real estate.
Dave is located in our St Catharines office, 905-641-1551.