If you live in this world and occasionally follow the news on your phone or TV (don't overdo it for sake of your mental health!), you would not have missed the news stories about the many pre-construction condo apartments that were sold in the last couple of years and scheduled to “close” this year. There are also related new stories about how a lot of “investors” are looking to offload these units before they need to “close”. And if by any chance you have missed them (I am surprised!), then let me bring you up to speed. Checkout Globe and Mail, Star, CTV , CP24 , CBC and finally Bloomberg
Obviously, most of these news stories are trying to work the reader up into a frenzy and as usual do not get down to analyzing the impact in general or to relevant parties; or pointing them to resources which can be useful (what else can you expect?). So, let me try and break the situation down for you.
But, firstly let us see who will be directly or indirectly impacted by this situation and you can follow the thread that applies to you. Mind you that the degree of impact (positive or negative) will vary based on their personal situation and the below generalization may not be 100% applicable.
1. Existing Buyer – a party that entered into an agreement with a builder to purchase the pre-construction unit at an agreed price. This buyer might have intended to “purchase” this unit for their own occupancy (principal or 2nd home) or might have intended to purchase it as an “investment” property or “assign” it away before closing. Skip to the next section for details.
2. Potential Buyer – an opportunistic party who might be looking to purchase a unit through an assignment sale or resale (details to follow soon)
3. Existing Homeowner – a party owning an existing unit and is currently occupying the same as their principal home but has an upcoming mortgage renewal / wants to refinance / is struggling with payments (details to follow)
4. Existing Investor - a party owning an existing unit as an investment but has an upcoming mortgage renewal / wants to refinance / is struggling with payments (details to follow)
Did you buy a pre-construction property with closing scheduled in 2023?
You probably booked the pre-construction unit couple of years ago when the interest rates were quite lower (maybe 2.5% to 3.5% range) and could not have imagined the situation that we currently find ourselves in. Surely, this is one of those Black Swan kind of situations which just materialize suddenly and unless you were one of those Doomsday Preppers (in a financial sense) you could not have planned for it.
Now that we are in this situation, you might ask “So tell me, Neil. What options do I have?” Let's see...
If you currently do not have a property or a mortgage / have sold your only home, then you can get a mortgage amounting to about 4.5x of “qualified income” through your bank / a prime lender. This is provided you do not have any other debts and have a downpayment of 20% or more of the home “value”. If the value of the property has reduced below purchase price and/or you do not have at least 20% downpayment and/or your income is not sufficient, then you could face significant challenges in getting a mortgage and therefore closing the purchase unless you are able to bring more funds and/or co-applicants who can increase your mortgage eligibility. Now that was the tough part! The positive side to the story is that you are one of the lucky ones to have a place that you can soon call as your home. It might not be the start that you were expecting but believe that it will work out well in the long run. Checkout this interesting ad from 1955 for the community that I live in. Key is to survive the ride which can be bumpy at times!
If you are buying your next property, then your mortgage eligibility is also impacted by the burden of debts that you are currently carrying. Since, most investment properties do not generate much positive cashflow for an investor, it is rare for borrowers to be eligible to carry debt more than 5~6 times their “qualified income” (including additional borrowing required for this purchase). From a qualification standpoint, you are better off if the existing mortgage payments have a fixed value each month or is eliminated entirely (other mortgage is paid off or property is sold). If the value of the new property has reduced below purchase price and/or your income is not sufficient, then you could have challenges with the new mortgage. Finally, even if you do close on the purchase do you have surplus funds each month to cover the monthly shortfall in cashflow (unless you are a bit creative)? The silver lining though is that your property might not be rent controlled and so you may be able to efficiently breakeven in future!
If you had secured the purchase agreement with an intention to “assign” the property to another buyer before closing, then this strategy will most probably not work in this environment. You might be forced to “close” this purchase to avoid forfeiting your deposit with the builder. “Fooled by Randomness” by Nassim Nicholas Taleb would be a good read for you! Something that has worked in the past would not necessarily work every time and we are currently in such a random moment.
If you want / are forced to close the purchase, then a capable mortgage broker should be able to work out options with a bank, prime lender, alternate lender, mortgage investment corporation or private lender, as the need be. Depending on your situation it might require you to refinance an existing property(s) to pull funds out or reduce your monthly payments. You might even have to cross-collateralize your properties for a new mortgage. Be sure to explore your options and prepare for the same well in advance of the closing date. The nearer you get to the closing date without a solid plan, the final solution may prove elusive or work out to be that much more inefficient.
Irrespective of your situation, you can always try to avoid closing on the purchase by assigning the property to another interested buyer (difficult unless you have a motivated buyer) and you could recoup your deposit in its entirety or at least partially. Most probably, you will need to get consent from the builder before you can assign your property, and it may or may not come with a charge (read your purchase agreement). Even still, you would be liable if the new buyer fails to close on the purchase for any reason. So be very thorough if you are going this route and work with a knowledgeable realtor and lawyer to navigate the situation. It would be highly advisable to understand what kind of financing the new buyer has and possibly get that even validated with an experienced mortgage broker.
Hopefully this gives you enough pointers to start investigating your options and the key is to NOT panic.
Comments