There’s a big, big difference, and in fact, one is supposed to be the opposite of the other.
But tell that to the people who owe condo developers tens of thousands of dollars…
What did you do on your Saturday night?
Well, my fiancee was working, so I got WILD!
I ordered a pizza, poured myself a stiff rye & gingerale, watched the Leafs lose 4-1 to Montreal, and then I talked to a condo-buyer on the phone for 45 minutes…
Yeah, I know. Maybe it doesn’t sound wild to you, but it’s what I enjoy, and what I do best!
I received a page from my office around 9pm to call “Vivienne” at a Los Angeles-based phone number.
Vivienne was actually somebody I had talked to about Toronto condominiums about a year ago, but who had now relocated to Los Angeles full time.
She said that she had a condo to sell, but as we got to talking, it seemed that she didn’t really have a condo at all.
Vivienne was in a serious bind, and it’s a bind that I feel many of today’s condo investors may find themselves in as well.
Vivienne had put down a deposit on a pre-construction condominium in the west end, and she was mulling over her options, as they stood.
The project, which shall remain nameless, is a so-so condominium development, near King & Dufferin, where the market is already saturated with condos – both existing, and those “to be built.”
The project in which Vivienne had purchased went on sale last year, and Vivienne put down a little more 5% on a $269,000, 550 square foot unit; $15,000 to be exact.
She told me that “life happened,” and she had moved to Los Angeles to work at her dream job. She sounded happy; delighted, in fact, but she still had this “investment” back home in Toronto that was burning a hole in her brain.
She asked me, first and foremost, “Can you sell this condo for me?”
I think she knew the answer. She’s a smart gal who has been in and out of both ownership and the rental market over the years, and who has invested in multiple projects.
“I can’t sell it for you,” I told her, with the blunt authority that I believe she was hoping for when she had me paged, “Because you don’t have anything to sell.”
“You have a piece of paper,” I continued. “You have a piece of paper that is one of thousands that are floating around the downtown core at the moment, and there’s no market for it.”
I knew the project that she had bought into, and I knew that they were a little more than 70% sold. This meant that any buyer who was interested in purchasing a future condo in this development could walk into the sales centre, and have their choice. So what ‘value’ did her piece of paper have, when a buyer could pick from a few dozen other units, via the developer?
I think that question is rhetorical, but I’ll spell it out for you folks just in case: Z – E – R – O.
Vivienne knew this, but she wanted to hear it from me.
“I’d probably give up half of the fifteen-thousand if somebody were to take it off my hands,” she said.
I told her that it wasn’t worth paying a Realtor 5% to try and sell, and that she could try www.assignit.ca, or maybe list it on Craigslist, Kijiji, or any other medium that would save her a 5% commission. That commission, of course, would wipe out the $15,000 she had into the project, and to be honest, I don’t think anybody would buy her ‘piece of paper’ anyways.
We continued talking, as the Montreal Canadiens continued to beat up the Toronto Maple Leafs, and Vivienne dropped a bombshell: she was contractually obligated to come up with another 20% in January of 2014.
So the problem that Vivienne had wasn’t limited to the $15,000 that she had invested in a condo that might be completed in 2015, but in reality would be done in 2016, when she lived in Los Angeles, and had no interest in seeing this ‘investment’ through to the end.
The problem was that Vivienne needed to come up with another $54,000 in January, as per the Agreement of Purchase & Sale that she had signed last year.
How do developers do it?
How do they get people to commit to putting down 25%, two years before the property is actually built, when any condo buyer in Toronto can purchase an existing resale condo with a minimum of 5% down? CMHC rules ensure that buyers ensure their mortgages when making a down payment of less than 20%, and somehow, developers STILL get buyers to put down 25%?
I don’t understand!
That’s a LOT of money!
And as Vivienne was beginning to realize, whether or not she had the means to come up with $54,000 by next January, she just, plan, didn’t want to.
Think of the guy who sits at the blackjack table, and continues to double his bet with each hand that he loses. His first bet is for $1, and he loses. So he bets $2 the next hand, and loses it as well. Then he bets $4 the next hand, and maybe he wins, or maybe he loses, but regardless, his strategy is to continue to put MORE into the pot than he had previously committed to.
Or, consider the guy who plays the stock market, and decides to “dollar cost average” as his stock decreases in value. He buys stock at $10/share, and when it goes down to $8/share, instead of selling and taking his $2 loss, he buys MORE of the stock, and thus his average commitment is $9/share, overall.
I’m drawing an inexact parallell here, and I’m not saying the condo market is dropping. But I am saying that Vivienne had money in this “game,” and she didn’t want to put any more into it. But the only way that she could avoid losing her $15,000 was by putting in $54,000 more, and this is where our conversation got interesting.
I had told Vivienne that nobody was going to buy her piece of paper for $15,000, and then I told her the brutally honest truth: you’d have a hard time finding somebody to buy your piece of paper for free.
The way I see it, with 30% of units in this project still unsold, the developer will eventually start to offer some perks, incentives, or simple price breaks. The pricing structure hasn’t changed since Vivienne purchased last year, and I don’t see anybody buying her Agreement of Purchase & Sale when they can walk into the sales centre and, maybe, get a better deal.
So what to do?
Well, that’s what was interesting.
I told Vivienne that the first step was to have her lawyer draft a letter to the developer’s letter, and ask for a Mutual Release, with deposit monies returned, minus interest. This is essentially asking for a refund, which the developer would likely never agree to.
I then told Vivienne that if that request was denied, to consider the worst-case-scenario: forfitting her deposit.
What? Walk away from $15,000? That’s CRAZY!
But is it?
For somebody now building a life in Los Angeles, who doesn’t know how to come up with $54,000 by next January, and who would be in breach of contract if she failed to do so, maybe it’s something worth considering.
As I explained to Vivienne, “You don’t have an asset here. You have a liability.”
By standard definition, I suppose some of you could argue that Vivienne’s Agreement of Purchase & Sale is, in fact, an asset.
But I see this as a liability to pay $54,000 by January of 2014, and even though that money forms part of the down payment on a condo that will be built, it’s still an obligation.
I already know what my opponents will say.
“David, what do you call a mortgage on your home? That’s a liability!”
Maybe you’ve been seeing too many billboards for Scotiabank: “Own a Home, not a Mortgage.”
Well, I do see a difference.
You all know that I don’t like the pre-construction condo “game,” as it pertains to investing (or anything, really), and with all the risks and all the downside, I see a $15,000 “investment” with a promise to pay a further $54,000 in a year, for a project that might be delayed 2-3 years, which will undoubtedly have deficiencies and material changes, in a saturated location – a LIABILITY.
So, I told Vivienne that if she really didn’t want to pay that $54,000 in eight months, and if she was willing to lose her $15,000 deposit, then maybe she could have her lawyer ask the developer’s lawyer for a Mutual Release, minus the deposit. The developer would be nuts not to take the $15K.
Of course, she would also expose herself to litigation, but I told Vivienne (after my disclaimer that I’m NOT in any position to give legal advice), that the developer would probably send several letters threatening litigation, and perhaps even start the ball rolling, but they’d eventually give up. They can’t resell the unit until either: a) the deposit is released, b) a mutual release forfeiting the deposit is signed. They wouldn’t spend 2-3 years chasing a $15K deposit through the courts, especially when the buyer has relocated to the United States and has no plans to return.
Maybe you think I’m insane for suggesting that Vivienne forefit her deposit.
But if she really, truly didn’t want to come up with $54,000 next January, and had absolutely no intention of doing so, then it might be her only option.
“It might be the best $15,000 you ever spent,” I told her. “Lessons in investing are expensive, and one day you might look back on this as a lesson learned, and paid for.”
Or, maybe that $269,000 condo is worth $300,000 when it’s finished and the building is registered, in 3-4 years. But with Realtor fees, land transfer tax, occupancy fees through the developer, legal fees, and utilities, Vivienne would barely break even.
“Life happens” she told me at the beginning of our conversation.
Yes, it does.
And sometimes, it can be very expensive…