A wave of defaults has real estate lawyers urging presale buyers to be cautious

In 2021, Sudip Sehgall put down an $81,990 deposit on a yet-to-be-built townhouse in Surrey, B.C. While it was under construction, he occasionally visited the site to watch it grow.

The 52-year-old envisioned the deal taking him steps closer to owning his first Canadian home, but he only had enough for a deposit after a loan from his retired father.

Sehgall was relying on selling his home in New Delhi to get financing to close the deal. He began to worry when new regulations in India made his property less desirable. Then floods hit and selling became impossible.

Making matters worse, when he tried to find a buyer to take over the Canadian deal so he could get a refund, the developers opted to keep his deposit and sell the brand-new unit themselves.

Sehgall, who came to Canada in 2016 as a skilled worker, says he is now broke and back to renting, this time a cramped $1,700-a-month basement suite with his possessions lined up in suitcases against the walls. He lost his cheaper rental, thinking he was about to move into his new home.

“I may have to return back to India, and my Canadian dreams have been ruined and crashed,” he told CBC News.

Sehgall is part of a growing contingent of Canadians who are defaulting on deals to buy presale or preconstruction condos or homes due to financial pressures.

This trend of defaults is in part being driven by high interest rates and declining condo values, according to realtors. Many buyers lose their deposits, according to realtors and real estate lawyers across the country. While Sehgall’s circumstances are specific and extreme, other Canadians are also getting a hard lesson in the potential risks of these deals, experts say.

Growing problem

Toronto real estate broker Barry Lebow has not seen this many buyers defaulting in 30 years.

“It’s happening in droves,” said Lebow. “I’m hearing stories about many people walking away.”

Buying presale or preconstructed homes means putting down a deposit and signing a contract that you will pay the balance after the property is built to agreed-upon specifications on a certain date, called the closing date.

Lebow says the declining condo values and high interest rates are making it difficult for people to finance and close on deals. In some cases the unit has lost so much value they now can’t afford a mortgage.

Banks will only loan money on the current value of a property, so if a buyer agreed to pay $1 million and the property is now worth less, the bank will only approve a mortgage for the current value. The buyer is left to find the rest of the money on their own.

“The last time we had a wave like this, it was in the ’90s,” Lebow said.

Lebow helps developers, who are on the hook to resell when buyers default, to prove to their lenders that units were listed then resold at the highest price possible to offset losses and maximize profit. Often the down payments are used to help pay for the construction and the closing payments are needed to complete buildings.

Toronto condo lawyer Gerry Miller says people are “better off buying something they can touch and feel.” He’s seen clients lose up to $300,000 deposits, bound by contracts he describes as “incredibly complex and one-sided to the point of it being almost unfair.”

What happened in this case

In Sehgall’s case, he failed to sell his property on the outskirts of New Delhi when it was flooded with more rain in one day than had been seen in 40 years.

“It just made everything very complicated,” he said. He says he contacted the developer and spoke repeatedly to Jennifer Wilson, vice-president of sales for StreetSide Developments, requesting a refund of his deposit and seeking permission to have the deal assigned to buyers he had found who were keen to take over the townhouse contract.

Sehgall said there is a clause in the contract that allows “assignment,” the transfer of the deal to a different buyer. The contract says, “The builder shall not unreasonably deny an assignment.” He said transferring the deal to another party would have incurred a penalty — but he would not have lost his entire deposit.

WATCH | More Canadians losing deposits on presale homes:

Lawyers urge caution as more Canadians lose deposits on presale homes

A new Canadian who lost his family’s savings when he couldn’t close on a presale home is warning others to be wary. Sudip Sehgall said he found another buyer to take over the contract, but the developer refused and kept his $82,000 deposit.

He says the developer refused to allow it.

“Because they were selling in an adjacent development, they refused,” said Sehgall.

Vancouver real estate lawyer Kenneth Pazder explains that re-assignments may be seen as competition that might divert prospective buyers away from other properties the developer is selling.

Sehgall says he was offered time extensions and encouraged to find a co-owner. He couldn’t come up with anything that would work.

“I begged her, I wrote desperate emails, I did not want to default,” said Sehgall.

Contracts are ‘very one-sided’: lawyer

It is sometimes possible to get a deposit back, Pazder says.

When a developer allows a contract to be re-assigned then a fee of one to three per cent of the sale price is usually charged to the original buyer and they remain legally liable to complete the purchase if the new buyer fails to do so.

But the market is slow right now.

“Presales are not flying off the shelves like they usually do,” he said.

He said while the presale market is regulated by the provincial government, contracts for presales or preconstructed units are not. He also said they can be sticky to negotiate, and the wording is weighted in favour of developers. Not only can the developer refuse to consider an “assignment” option, it’s also not required to deliver exactly what the buyer saw in a showroom.

“All are very one-sided,” said Pazder. “You might be able to negotiate on a price sometimes, or maybe they’ll throw in an extra parking stall or a storage locker.”

In November, TD Bank predicted the average home price could drop by as much as 10 per cent in early 2024 thanks to a surge in housing stock. That leaves presale buyers vulnerable as their investment depreciates.

Pazder said he believes Sehgall has grounds for a legal challenge, arguing that the developer was “being unreasonable” given Sehgall’s claim that he had found another buyer for the property.

Company declines interview

CBC News reached out to the seller in Sehgall’s case, but they declined an interview. The company’s contracts follow the rules set out in the Real Estate Development Marketing Act of B.C., a spokesperson said in an emailed statement.

“This is a legal matter for which we have encouraged Mr. Sehgall to seek appropriate advice from a lawyer,” said Jonathan Meads, vice-president of StreetSide Developments, which is a division of Qualico, a large company building developments in Western Canada. “We won’t be commenting further on this.”

Sehgall has reached out to politicians and Surrey business leaders for help.

“For me, it was a first-time buy. I’m not an investor. I’m innocent and my realtor did not advise me at all. We just went and signed,” said Sehgall. “The contracts are ironclad. And it’s very hard, if the builder denies you. A buyer like me does not have the legal or the financial wherewithal to go against a big builder.”

‘We have been ruined’

B.C. Housing Minister Ravi Kahlon told CBC News that Sehgall’s situation was disheartening.

“Home purchases can be one of the most significant financial decisions of people’s lives, and it’s important that homebuyers have the information they need to carefully consider those decisions,” Kahlon said in a statement.

“That’s why the Real Estate Development Marketing Act requires developers to provide a disclosure statement and gives purchasers the right to cancel presale contracts within the first seven days, so consumers have time to think through their decision.”

Kahlon also said consumers can get information from the B.C. Financial Services Authority to help them understand presale purchases and their rights under the act.

He says a three-day waiting period was introduced last January to help buyers secure financing or arrange home inspections.

Sehgall wishes he’d gotten better advice. The $81,990 deposit was money his family helped save and its loss was devastating, especially to his parents, who are both in their 80s.

“We have been ruined,” said Sehgall.

“My parents were not able to take the shock, and they were still hoping that they would refund, hoping against hope.”