Asset Or Liability?

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, 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.


Just, um…

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…


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  1. Sayf says:

    In the interest of full disclosure, I’m a developer. Yes, evil personified. Thought I’d point out some oddities in the Vivienne anecdote.

    1) I don’t know of any developer requiring a 25% depsoit in the downtown pre-con market. It’s generally between 5%-20& depending upon the stage of construction. The earlier the purchase, the higher the percentage. Construction lenders are looking for a minimum of 15% down and that’s what most developers look to obtain for the first 65-70% of sales.

    2) It’s odd that her deposit structure was 5% off the bat and a full 20% due on Jan 2014, almost 2 years before occupancy. The deposit payments are always structured into smaller payments – generally 5% in 30, 5% in 180, 5% in 270 and a final 5% on occupancy. Or some variation thereof. I’ve never heard of a lump sum of 20% being due in its entirety(and prior to occupancy to boot)unless specifically requested by the Purchaser. I’ve also never heard of the full deposit being due prior to occupancy. In this case, a full 2 years before occupancy. Something doesn’t add up.

    3) If the occupancy is likely to be in 2016, she can ask the developer to break the 20% due on Jan 2014 down into smaller payments and extend the payment schedule. Most developers will agree to this, particularly if she’s able to provide a mortgage pre-approval as assurance of her ability to close on the unit.

    4) She paid $489psf, which is very decent price. She will find takers
    on the assignment market if the unit is well located within the building. Her assignment options aren’t limited to assignit or Kijiji. There are numerous agents specialising in the assignment market.

    5) Purchasing a condo purely with the expectation of capital appreciation is speculation, not investment. An investment is a longer term play and gives more importance to cash flow than capital appreciation. As an investment, she’s done well at $489 psf. Speculation is inherently risky, investing is a much more considered enterprise.
    If she did indeed “invest” in the condo, then she should have ensured that she would have the deposit funds available to coincide with the deposit schedule she agreed to.

    6) Did she have a lawyer or real estate professional review her APS? If so, they would have questioned the deposit schedule immediately upon review within the 10 day rescission period. That is what the 10 day period if for: legal and professional review.

    7) If she closes on her unit, at $489 psf, the property should be cash flow positive if she rents it out. I would advise her, in the event that she isn’t able to assign the unit, to close on it and rent it out instead of walking away from $15,000.

    8) You’re assuming that the inventory units are just as good as the 70% of units sold. This is rarely the case. The units with the best views and floorplans tend to be the first to sell. The balance of the units may not be what buyers who walk into the sales office are looking for. Hence the possibility of an assignment sale.

    9) There are legal and financial obligations in pre-con and re-sale. To say that the pre-con obligations are more onerous is fallacious.
    In pre-con, let’s say you have to come up with a 20% down over a period of 4 years (typical project launch to completion timeline). No monthly mortgage/taxes/maintenance/utilities, no tenants to find/keep/replace. Just smaller deposits at a schedule that you think you can meet. When circumstances change – in pre-con or re-sale, there is an urgency to adjust to them. Having to sell a condo you own, while continuing to pay maintenance fees, taxes, mortgage payments, utilities, etc, is just as taxing as having to find a buyer in the assignment market. The pool of buyers is greater in re-sale than assignment but there is no guarantee that you won’t make a loss, particularly if you’re looking to sell immediately.

    To summarise: if “Vivienne” exists, there are some holes in her “story” and all is not lost. If this is a parable, there are some incorrect assumptions within.

    That being said –

    I don’t agree with the commodification of shelter. A primary function of a “home” isn’t to serve as an investment vehicle. Buy a home to live in because the architecture has merit, the neighborhood is welcoming, the space feels right. That is automatically a “good” invesment. Don’t expect to make a quick buck from buying in some poorly imagined, monolithic mass gussied up to serve as investor bait.

    There are poor pre-con options in the market, just as there are poor re-sale options. Not every pre-con project is another West Side Lofts, not every re-sale building is the Shangri-La.

    My two cents.

  2. Andrewski says:

    Hello David, This young lady is hooped! Some pro bono editing for you:

    “CMHC rules ensure that buyers ensure their mortgages…”, it’s insure their mortgages, not ensure.

    “…consider the worst-case-scenario: forfitting her deposit.” forfitting is not even a real word, it’s forfeiting.


    1. EdenRam says:

      OH MY GOD!!! I’m sorry you spent your hard earned money to have access to a blog he writes in his spare time to harp about spelling errors. Oh that’s right, you didn’t spend anything other than the extra 2 minutes to expose your need to show him up. My bad.

  3. Paully says:

    Why anyone would want to buy pre-construction is beyond me. You have no real idea what you will finally get, or when, if at all, you will get it. What will the market look like in two, three, five years? Who knows. Way too much potential grief, with not nearly enough upside.

    1. George says:

      Furthermore, this blind investment is what keeps churning out new buildings to the dismay of many existing owners (and even just anyone who hates the vanishing view of the lake). That process would slow down if investors/buyers focused much more on resale units.

  4. JC says:

    Is the additional 54k the only extra payment she has to make? I had a client that was a non-resident purchase pre-construction and he had to come up with several “installments”.

    I’ve worked with some smaller builders and I know that they’ll gladly take your deposit and resell the home to another person, but they have to have the legal right to so so. Which means terminating the agreement. They may demand the 15K AND an additional fee for administration. They’d rather have the ability to resell something than have something that hasn’t closed, likely will not close PLUS the hassle of litigation.

    If this is a bigger developer, they may not care that much about screwing over a customer.

    Just for fun, I asked a couple of people I know that told me to advise them of any investment opportunities I came across. Short answer – none of them would be interested in buying a condo right now that doesn’t close for another 2 years. Even at a 15,000 discount.

    I’d try contacting the developer and see if they’d be willing to sign a mutual release up to and including the 15K and go from there.

  5. lui says:

    I personally would not take a $15,000 hit and have a black mark on my credit history if Im able to come up with the %20 balance.I would let it get registered and if market dictates sell and hopefully turn a small profit after expenses or rent it out and let it mature.Hell even though everything is rosy in LA things may change that force her back to Toronto.

    1. dave says:

      Note that a black mark on her credit history in Canada will not affect her credit history in the US. And it will clear from her Canada credit history after 6 years.

  6. ABB says:

    It does not cost the developer much time or legal fees to file a statement of claim for breach of contract. That could follow any time after her failure to complete the final deposit payment in early 2014. She cannot walk away from the contract. It is false advice to think they will be satisfied with $15,000 when the contract is for over $250,000.

  7. Geoff says:

    They talked her into it because she was in pursuit of profit. She gambled, and lost. C’est la vie. I don’t have a lot of sympathy for your client to be honest.

    1. @ Geoff

      She wasn’t “my client,” just a lady who called me for advice.

  8. Kay says:

    How much pain can a developer inflict using the courts? How much money are they willing to spend to pursue someone who doesn’t have the money, is out of the country and potentially not responding to letters? They can threaten all they want. You can’t get blood out of a stone.

    1. ABB says:

      You assume she has no assets. False assumption.

      I would nail her to the wall with a statement of claim (cookie cutter legal effort, just template it like the ones issued by the developer previously).

      Then with a little negotiation, she could sell off some investment assets, etc. and settle the matter for $60k or $70k.

  9. dave says:

    Good story. A useful insight into what can happen behind the scenes in pre-construction investing.

  10. lui says:

    I think if she has no problem coming in with the rest of the %20 deposit I say keep the faith and stay in the market.Unless the project is getting bad vibes from the media she paid $500 a sq feet which isnt bad and her unit is rentable.She may still come out with a positive cash flow since rents in the downtown are still high and her mortgage isn’t huge.

  11. Bud Fox says:

    David, how you continue to write such fanciful stories makes me wonder if you were a journalist for the Globe in a previous life.

    Duh! Everyone KNOWS that real estate ALWAYS goes up! Viv should follow through with the $54k and see her unit to completion because by then, the economy will be booming and the King/Dufferin area will be the hottest nabe in the city. She’ll be able to make at least 50% on her unit!

    Oh, I’m sorry…reality check about the current market environment got you down?

    Good advice (not that the developer has any incentive to agree, they already have her $15k) and an important lesson: Sometimes you have to take a loss.

    Hey, is that considered a Capital Loss if she walks away?

    1. @ Bud Fox

      I can’t tell if your comment is a dig at me, or a pat on the back…

      1. Bud Fox says:

        Pat on back. Definitely not a dig.
        It’s a great blog to read. You tell it like it is with no BS.

        Keep it up.