Sandra Jackson with Royal LePage Estate Realty warns agents not to be 'cheap' and pay the nominal fee to check the debts registered against a property.Graeme Roy/The Canadian Press
Realtors are warning of a rise in heavily indebted homeowners defaulting on agreements to sell their properties, creating legal and financial headaches for hopeful buyers.
It’s a return to earlier eras of financial distress in the real estate market – such as the 2008 financial crisis and the recession of the 1990s – and it’s serving to remind realtors to carefully vet their home-selling clients’ for any debts registered against their properties. Buyers and their representatives need to do their due diligence as well.
There are many ways a seller can default, but with home prices falling across the country, the culprit is increasingly sellers who agree to sell their homes for less than the total amount of debt registered against the property.
“The seller looks at the mortgage they’ve got to pay out, but doesn’t bother to calculate the penalties,” said Ron Butler, principal of Butler Mortgage in Toronto. Those penalties can add thousands of dollars that sellers must also cover before they can close the deal. Mr. Butler said his brokerage used to see maybe one of these seller defaults a year; now he is seeing at least one a month.
Done Deal: Advertised as a building lot, Vancouver house sells below assessed value
Done Deal: Hamilton house sells $94,900 below initial asking price
“The seller somehow doesn’t think two and a half years of unpaid property taxes are their problem. Or maybe they had financial trouble and took out a $25,000 personal loan,” he said. If that loan is registered against the property, it has to be cleared before the house can sell.
Sellers face the prospect of losing money on a sale, or losing the sale altogether when the purchase price is too low to cover all these costs.
Over most of the past 20 years, as home prices rose steadily, it was sellers who often had to beware of buyers defaulting on a deal if they couldn’t get financing to pay for the purchase. Now, buyers also have to watch for sellers who, oddly, can’t actually afford to sell.
Real Estate Newsletter
Your house is your most valuable asset. Read about the latest closing sales, house market trends, mortgages and more
Already have account?
“It happens a lot,” said Sushil Mishra of Re/Max West Realty Inc. “Nowadays, people are having a hard time. It happened to me recently. I was representing a buyer in Oshawa, and the seller was short $10,000.”
According to Mr. Mishra, the sellers described themselves as investors with multiple properties. They assured him they could close the deal even with $650,000 spread over two mortgages and a selling price only about $25,000 above that. His wife, Himani Sood, who works in the mortgage business, ordered a title search and discovered the debts. Despite assurances, Mr. Mishra’s buyer clients were the ones who ended up paying extra to the lenders to cover the debts and close the deal.
Reality check: How AI-altered images are duping buyers hunting for their dream home
“Clients do that thing where they fall in love with the house,” said Ms. Sood. The alternative is to sue the sellers for breach of contract. That could end up costing a lot more in time and money, and Ms. Sood warns, a hopeful buyer wouldn’t necessarily end up with the house.
“They ended up selling their house; they had nowhere to stay,” said Mr. Mistra, a situation that also forced his buyers’ hands.
It would all be avoidable if realtors representing sellers did their due diligence, some long-time realtors say.
“You pull the parcel register before you even take the listing and spend money on it,” said Sandra Jackson, who is with Royal LePage Estate Realty. She often counsels realtors on legal options when selling clients claim they can’t pay the commission or close a deal because they are short of funds at closing time. She warns agents not to be “cheap” and to pay the nominal fee (typically about $40) to check the debts registered against a property. The reason: Clients in financial distress may lie to try to get the house sold.
“If they bought the property in 2019 or 2020, of course they are underwater,” she said. “This is 1990, round two. It’s happening every single day, and I warned that this is what was going to happen.”
Big bank earnings point to more consumers struggling to pay off credit cards, mortgages
Even in a better market, when house prices weren’t falling, sellers sometimes defaulted. It happened to realtor Irena Tunjic, with Real Broker Ontario Ltd., several years ago when she helped a client buy from a seller who was in arrears on loans and facing closing costs beyond what her house was worth.
“If you’re cancelling a mortgage with a ‘B’ lender, those fees can be astronomical,” Ms. Tunjic warned, referring to trust companies, credit unions and smaller banks. In order to close the deal, she ended up giving up some of her own commission.
In Ms. Jackson’s experience, big banks aren’t willing to negotiate and accept less than the full amount owed to salvage a real estate transaction. It was different in the 1990s when seller defaults were more common and banks were feeling the strain.
“There’s nobody in a decision-making situation at the bank that can give an answer like that within a couple of days of closing,” Ms. Jackson said.