After several years of double digit price increases, the greater Victoria real estate market has cooled down.  As we return to a more balanced market, the power dynamic between buyers and sellers has shifted. Until recently, sellers dictated the terms under which they would sell their property.  Now, there is more selection for buyers.  This, combined with a modest downward price correction in some types of properties, has led some buyers to reconsider their planned purchase.  The following are some issues to consider and steps both buyers and sellers can take to strengthen their positions.

Sellers

When buyers were vying to purchase properties and having to compete with multiple offers, sellers were not as concerned about the enforceability of their contract of purchase and sale.  If one buyer reneged on a contract, another buyer would take his place (and often agree to pay a higher purchase price than that in the previous offer!).  As a result, sellers became a little sloppy in their contract drafting and contract review. Having a legally enforceable contract is of critical importance for a seller.  The following are some basic points sellers should consider:

1.                  Read the contract before you sign it – don’t assume your realtor or lawyer will do this for you.  Your advisors will point out important and unusual terms but they may assume you have read the contract.  There are certain matters, the importance of which only you may understand.  For example, if a buyer has asked that the fireplace in the den be included as part of the purchase, your advisors may believe the buyer is referring to a built in fireplace when in fact, he is referring to a portable electric fireplace that happens to be a cherished wedding gift.  Only you would know that the buyer wants your future family heirloom.

2.                  Get it in writing - all terms of the agreement should be in writing.  For example, if you verbally agree to postpone the completion date, make sure the new completion date is confirmed in an addendum.  This will also ensure that time remains of the essence, meaning the parties continue to be bound by the dates referred to in the contract.
 
3.                  Disclose issues - in the property disclosure statement, a seller discloses, among other things, known defects of the property.  It is important to complete the property disclosure statement to the best of your ability.  Failing to disclose a defect in the property could be grounds for a buyer later refusing to complete the purchase transaction.

4.                  Give priority to clean offers – Buyers’ offers typically have several conditions precedent (also known as “subject to’s”).  Common subject to’s include arranging financing, reviewing the state of title and conducting a building inspection. Until the buyers waive their subject to’s, they have the right to cancel the contract.  They are also entitled to the return of their deposit.    A clean offer with few or no conditions may be more attractive than a contract with several conditions, even if the conditional contract has a higher purchase price.

5.                  Ensure the deposit is adequate –Typical sales contracts will provide that the buyer forfeit his deposit if he fails to complete the purchase.  After accepting the buyer’s offer, a seller usually stops marketing the property.  Losing the opportunity to market the property is a cost of accepting an offer.  When assessing whether the offered deposit is large enough, the seller should consider the length of time until the proposed completion date, the size of the deposit relative to the purchase price and the likelihood of the buyer defaulting on the purchase.  The deposit should be large enough to:

a.                   dissuade a reluctant buyer from defaulting on the purchase, and

b.                  provide some compensation to the seller for the costs associated with a buyer failing to proceed with the purchase.

Buyers

Buyers face different challenges in this new real estate market.  Many people entered into agreements to purchase condominiums or houses that were not yet built when they signed the contract.  These are called “presales” in the real estate industry.  If the presale contract was signed before September 2008, the property may now be worth less than what the buyer agreed to pay.  In these circumstances, some buyers are reconsidering their decision to buy the property.  A careful review by your lawyer of the contract of purchase and sale and the development’s disclosure statement will assist in determining whether you are legally bound to complete the purchase.

Sometimes, even when faced with a legally binding contract, buyers are electing not to proceed with the purchase of a presale.  There are serious financial risks involved with this decision.  Many buyers believe that if they choose not to complete the purchase, they simply forfeit their deposit to the seller.  Generally, this is not accurate.  The seller’s remedy is not limited to keeping the buyer’s deposit.  Under contract law, the seller is entitled to be returned to the same position he would have been had the buyer not breached the contract.  If the seller sells the property to another buyer at a substantial discount, the seller is entitled to recover from the defaulting buyer the difference in the purchase price as well as any other expenses the seller incurred as a result of the buyer’s default. A buyer may be better off completing the transaction and holding the property until the real estate market recovers.

When buying a presale and relying on a mortgage to complete the purchase, a buyer should reconfirm the mortgage terms with the lender.  Lenders will only lend up to a certain percentage of the value of the property (called the “loan/value ratio”).  If the property appraises for less than the purchase price, the lender may require the buyer to pay an additional down payment to meet the required loan/value ratio for the property.  If a buyer finds this out early enough, he may be able to secure alternate financing.  Some sellers may be willing to grant the buyer a “vendor take back mortgage” for the increased down payment. With a vendor take back mortgage, the seller lends the buyer some or all of the purchase funds. The seller registers a mortgage on the property to secure repayment of the loan.

For most people, buying or selling a home is the single largest financial transaction of their lives.  To protect their interests, both prospective buyers and sellers should retain a lawyer to assist them. Most people do not solicit advice from a lawyer until after they are legally bound to complete the transaction.  It is critical to have the contract reviewed by your lawyer before you commit to the sale or purchase.  The easiest way to do this is to incorporate the lawyer’s review into the contract with a subject to.  This means that until the contract is reviewed and approved by your lawyer, you can back out of the purchase or sale.  This way, you have an opportunity to renegotiate or cancel the contract if its terms are oppressive.