Pre-construction condo buyers forced to off-load units for as much as $150,000 less than they paid

March 26, 2024

If buyers continue to sell condos below contract value in assignment sales, the sell-off could lower valuations for entire buildings, experts warn

Toronto pre-construction buyers are selling assignments at a loss and the numbers are piling up, putting valuations of whole buildings at risk, experts warn.

A growing number of pre-construction condo buyers in the GTA are struggling to close deals as appraisals fall short — leading to a sell-off that’s seeing unit prices up to $150,000 lower than the original purchase price.

Industry insiders say the sell-off could put entire buildings at risk of seeing unit valuations drop, which would lead to a loss in equity for all buyers in new buildings and could eventually cause a delay of units coming to market.

“Very few assignment sales that I see are making any money,” said Toronto-based realtor Grace Chan. “You see investors who bought up eight units and can’t close on any of them and have to off-load them at a loss.”

The rising number of below-contract value sales is not currently delaying projects, said Daniel Foch, a Toronto-based realtor and director of economic research with RARE Real Estate, but in a worst-case scenario the lower prices could result in significant delays for new units coming to market.

“My fear is if this happens at scale — so hundreds and hundreds of units — the builder then has these units just sitting in inventory,” he said. “The builder doesn’t want to sell the unit at a loss, because it’s not fair to the existing unit holders. But they also need to close.”

In a market downturn, buying pre-construction can cause severe financial distress. If someone purchased a condo unit in 2020 at $750,000 but now the valuation of the unit has dropped to $600,000, Chan said, the purchaser can have a distressed assignment sale.

In the GTA, a growing number of people are seeking to sell their properties through assignment sales — a legal transaction in which the original pre-construction buyer transfers the rights and obligations of the purchase agreement to another buyer — and have listed their asking price below their purchase price. In Mississauga, an assignment sale was offered at a $10,000 discount, another at King and Bathurst streets was offered at $20,000 below purchase price, one on Sheppard Avenue West was offered at $60,000 less, and a unit on Willowdale Avenue went for around $150,000 below purchase price.

“There are still buildings that are nice and desirable that do close,” she said.

“The issue lies more so with the overinflated studio apartment,” she said, as smaller downtown condos, while in a good location, are overvalued for their size.

A race to the bottom is forming, said Foch, where buyers are assigning below contract value, which results in the value of the building falling.

“When this happens it shakes the confidence of other buyers in the valuation of the project and creates a negative feedback loop,” he said.

Buyers also don’t have incentive to close, he said, because if their shortfall is $200,000, “they might as well walk away from the deposit if it’s the same cost.”

When a purchaser chooses to walk away from the transaction, the builder must resell the unit — if the builder chooses not to sue the purchaser. “As long as builders keep the 20 per cent deposit, they’re usually OK to close it themselves or leave it in inventory. To do that, they need a bit more financing, which is annoying for them, but eventually they just sell it.”

Depending on the builder, some allow for assignment sales while others don’t, said Leah Zlatkin, expert and licensed mortgage broker, as they want to know the building is maintaining its value and to prevent any liabilities.

In the last few months, Zlatkin’s brokerage has seen up to 15 properties appraised at a much lower price than anticipated. The discrepancy meant that clients had to make “extra-large” down payments or ask for financial help from family, and some weren’t able to close.

In that case, the purchaser can lose the deposit and may also be responsible for paying the builder the amount lost on resale, she said. There is also the possibility that the builder proceeds with legal action against the purchaser.

“There can be very negative consequences,” she said. “For some people being out $80,000 or $100,000 is a substantial sum.”

While there has been an uptick in assignment sales, said Tim Syrianos, principal broker and owner of Re/Max Ultimate Realty, there “isn’t a widespread problem.”

“The percentage of units unable to close hasn’t given me concern,” he said. “They won’t be coming to the market at a drastically discounted price.”

Zlatkin feels this period is a “blip” in the radar, and once home valuations begin to increase — which is expected once the Bank of Canada begins cutting interest rates — the market will stabilize. Rate cuts, when they come, will offer some relief for buyers and builders who need to close on their units, she said.