Re-sold presales contracts bite back
Here’s a nightmare scenario: You bought a presales contract for a condo in Vancouver but delays in construction made you change your mind. No problem! Just sell your contract for a profit, and then the buyer resells the contract for yet another profit! But wait – the third buyer defaults, the second buyer defaults, and the developer is suddenly coming after you for a contract you thought you got out of a long time ago.
Attention Presales Buyers: If you are unable to complete your transaction of sale, or have assigned your agreement to another party who has not completed the transaction, gather your contracts and documents and make an appointment to meet your lawyer.
Presales agreements are contractual obligations with a developer, where you, the buyer, are compelled to purchase the unit when it is complete, at the fixed conditions in the agreement.
This is not a sales agreement. It binds the rights and obligations of the potential buyer and the developer to the conditions of the contract.
If you have transferred your presales agreement to another party, you may very likely have an obligation to the developer if the assigned buyer defaults.
Full story at househunting, and a tip of the hat to Bubble Lad for the link.
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July 7th, 2009 at 7:33 pm
What does it matter? Explain why mortgage rates were high in 1999 with low prices and high rental yields. According to you, it’s because it was a risky investment, right? Simple question for someone like you who obviously has extensive economics training.
Greater investment opportunities and returns outside of bonds (relative to now) drove down bond prices (relative to now), thus increasing yields, which in turn leads to higher mortgage rates. What else?
July 7th, 2009 at 10:15 am
# 29 one angry slav
I beleive Hanson was referring to the US.
He was simply using $100G figure as an example on the previous benchmark to acquire a $800,000 home.
That no longer applies, and I agree, it never applied here in BC.
July 7th, 2009 at 10:08 am
#28 oneangryslav
I agree ,….the numbers used are likely b.s.
We were in Penticton in Fall of 2007. It was pretty bleak and barren looking that “non summer” time of year. Nice quaint town per se, but mostly older established homes.
The developers simply misjudged the market, and got stuck.
A lesson learned the hard way. Just because you build it does not mean they will come and buy it .
July 7th, 2009 at 9:21 am
realpaul: “#16, where did you get your education in economics?”
What does it matter? Explain why mortgage rates were high in 1999 with low prices and high rental yields. According to you, it’s because it was a risky investment, right? Simple question for someone like you who obviously has extensive economics training.
July 7th, 2009 at 8:23 am
As usual, this is not going to end well for the working families.
Crooks and thieves will always stay afloat, especially those in or close to the government. Biggest fortunes were always made in times of the greatest misery.
We are all so bloody stupid not to learn from our own mistakes.
July 7th, 2009 at 1:32 am
realpaul:
Look up Greenspan’s Paradox. Then stop laughing. Your brand of ‘economics’ amounts to little more than hand waving and wishful thinking.
July 7th, 2009 at 1:02 am
Some interesting analysis of our housing market at:
http://housing-analysis.blogspot.com/
Add in factors like birth/death of housing units, inflation, and the fact that lending standards were relaxed in 2006 (40 year, zero down payment), the model looks neat, even though the causality isn’t fully understood.
One thing which might make a difference going forward but was not significant in the past is how employment is counted. If everyone keeps their job, but is only offered half as many hours to work, that wouldn’t necessarily be apparent from unemployment rates.
July 7th, 2009 at 12:39 am
Anonymous:
#16, where did you get your education in economics? Fascinating stuff. But , you’re right it is not the right forum for you to get into the meat of economics and institutional finance. You may have to explain what you’re stating. Some of the other posters may take that as a signal to raise a few facts. You could be embarrassed, so stay out of those gall darned FINKANINGCAL ESHXSPLASHNATIONS.
Bwahahahahahahahahahahaaa !!!!!!!!!!
July 7th, 2009 at 12:17 am
NO -LYMPICS: While I agree with the sentiment, I take issue with this statement of Hanson’s:
When has a majority of households had an annual income of $100,000? The median houshold income in British Columbia in 2006 was about $62,000, so nowhere near half of BC’s households made 100K annually.
http://www40.statcan.ca/l01/cs.....8a-eng.htm
July 7th, 2009 at 12:08 am
NO -LYMPICS: Hey, NoLympics, you can blockquote comments by using the blockquote tags…
Yeah, right! Maybe if you include the over-inflated cost of land the developer bought, but there’s no way that the actual construction cost was anythere near a few hundred thousand per unit.
July 6th, 2009 at 11:04 pm
The problem with cpi is that it is too abstract and even for those who have some idea of how they calculate it and what it represents, very few will keep track and actually translate the numbers into what it means on a day to day basis.
What statscan needs to do is publish a regularly updated cpi for dummies and list some basic household staples items with current price versus price say 5 and 10 years ago. Also, how much a typical shopping basket would have changed in price. That would be a great service to the people to remind them on a regular basis what purchasing power their CDN dollar has.
Maybe they do this but I’m not aware of something like this.
e.g. if apples cost 3.30/kg in 2008, they would have cost 3.19/kg in 2004, and if my typical shopping basket has x kg of apples, y kg of meat, etc, how much would my grocery bills be in 2004 compared with 2008.
July 6th, 2009 at 10:34 pm
“Since people are likely to remember the price they paid for their house from many years ago but remember few other prices from then…”
Ever have one of those conversations comparing costs over the greatest remembered times in someone’s life? It’s always stuff that kids care about – penny candy, chocolate bars, trading cards, concerts, movie tickets… The Child Purchase Price Index. *g*
July 6th, 2009 at 10:18 pm
fwiw … robert shiller is on bnn, and he says housing prices in the US will be lower 5 years from now.
July 6th, 2009 at 9:46 pm
RE: Re-sold presales contracts bite back
I smell lawsuits!!!
Great for lawyers. Bloodbath for speculators!
I love it!
July 6th, 2009 at 9:40 pm
RE Bubbles for Dummies:
The New Homeowner Hallucination: “We’ll Rent For A Year And Then Sell When The Market Comes Back”
http://www.businessinsider.com.....kelowna.ca
QUOTE:
Mark Hanson of the Field Check Group continues to write great analyses of the housing market. Mark remains extremely bearish, and he attributes the recent pick-up in sales velocity to seller capitulation rather than renewed buyer demand.
Mark thinks the next segment of the market to crash will be the mid- to high-end, where many smug homeowners are now telling themselves they’ll just rent their houses for a year while they wait for the market to “come back.” Needless to say, Mark thinks these folks are dreaming.
Because of the epidemic negative equity across the mid-to-high end, a large percentage of high-leverage exotic loans still in place, and the belief amongst the upper-crust (or severely over-leveraged depending upon how you want to look at it) [that the market will come back] many are resorting to renting vs. selling. In every case, the homeowner or Realtor managing the lease says “we want to wait a year or two until the market comes back”.
Why in the world would there be such an overwhelming sense of hope among the mid-to-high end homeowners that the prices of expensive homes would come roaring back? If not for interest only loans, Pay Option ARMs, stated income and 100% HELOCs the mid-to-high end would have never got there in the first place.
Two years ago, a household income of $100k a year could legitimately buy an $800k home with almost nothing down and afford the payments using a Pay Option ARM. Now to buy the same house, you need $160k down and an income of $200k a year. The $800k home went from the majority being able to afford it, to only a few. Remember, in the upper price bands most have to sell a home for the down payment and debt-to-income ratios required for a new loan.
=====
July 6th, 2009 at 9:38 pm
NO -LYMPICS: Dave, you should read this article: the money illusion involves your favorite concept, the real value of money
July 6th, 2009 at 9:21 pm
From Penticton
” Few takers for discounted condos”
QUOTE:
Alysen Place, the financially troubled condominium development in the south end of Penticton, is once again selling units, albeit slowly.
The project has been in receivership since the end of the March after running into financial difficulties late last year. Receiver D. Manning and Associates last month announced that the remaining 35 units would go on sale at deeply discounted prices, with Vancouver-based MAC Marketing Solutions handling sales.
Partner John Ryan said his company has so far sold eight units, including two of the most expensive ones. That leaves 27 units up for sale. Another 34 units sold before the project ran into difficulties.
=========
QUOTE:
Discounts range from 20 to 55 per cent, with prices starting as low as $249,900 to a high of $699,900 for the penthouse. The average discount exceeds $200,000 per home.
The units, in other words, are selling for far less than their actual construction costs and it appears highly unlikely that their prices will come down further.
“We feel that we priced it to sell and see no need to discount any further,” Ryan said.
=====
BS in spades eh?
Can’t sell “super discounted ” condos in the sunny Okanagan in the middle of summer ?
( MAC Marketing is pretty honourable, right?)
Ouch…..
Canary in the RE mine(field) ?
July 6th, 2009 at 9:10 pm
The gas market has lots of spare capacity for sure. But they don’t flare it, they just cap some of the wells and wait for prices to rebound. What it certainly means is capital investment, where most of the jobs are, will fall or have fallen off a cliff.
There’s always mining…
July 6th, 2009 at 8:55 pm
U.S. shale gas supply casts ‘dark clouds’over Alberta
Province warns loss in gas revenue will batter budget
http://www.calgaryherald.com/b.....kelowna.ca
Got any RE in Alberta?
Flu$$$$h !
Anecdote:
Family member lives in Alberta and employed at a “frac-ing”
company.(ie frac-ing extracts the last remnants of a well’s reserves) However,their firm has been working in Northern BC.
Apparently, our BC royalties rates are less than Alberta’s. However, Gordo brags about our booming BC oil and gas gov’t revenue cash cow. However all the signs are that Gordo is full of shite and massive budget deficits loom. If this cash cow dies, like it apparently has in Alberta…more grief on the BC horizon.
The US will exploit its own reserves once the technology exists to exploit it , and for a number of reasons .
QUOTE:
Another issue facing the government and industry is a glut of gas supply in North America, said Gerry Goobie, an oil and gas analyst at Purvin&Getz in Calgary. A recent Tristone Capital report noted the natural gas market was oversupplied by two to three billion cubic feet per day.
“We’re swimming in gas. We have way more than we need,” he said.
In the meantime, idle Alberta drilling rigs intensify the financial wallop of lower gas prices for the Stelmach Conservatives. Canadian gas production is down 630 million cubic feet per day in the first four months of the year compared to the same stretch in 2008.
======
If one reads the article ,(ie new technology re: extracting natural gas from shale )
QUOTE:
“Technological advancements have untapped the unconventional gas’ potential. Low cost and easily deliverable, shale has been the chief contributor to a 35 per cent spike in U. S. natural gas supply, according to a recent report from the U. S. Potential Gas Committee.”
Thus ….it looks like the US, our major trading partner, will be less reliant on our resources. Looks like Alberta has been addicted to heavy reliance on fossil fuel revenues. Correlate that with Alberta RE prices, and the consequential backwash into the BC and Canadian economy.
I can see this getting quite ugly.
July 6th, 2009 at 8:10 pm
realpaul, BOA and Citi are only solvent as long as they’re allowed to pretend their toxic assets are worth 100 cents on the dollar. In reality they are not worth even half that, so those banks are insolvent in the sense that in the real world, their assets are worth less than their liabilities.
July 6th, 2009 at 8:00 pm
FYI:
” The Science of Economic Bubbles and Busts ”
http://www.scientificamerican......amp;page=6
QUOTE:
” The VMPFC turns out to be a central location for what economists call “money illusion.” The illusion occurs when people ignore obvious information about the distorting effects of inflation on a purchase and, in an irrational leap, decide that the thing is worth much more than it really is. Money illusion may convince prospective buyers that a house is always a great investment because of the misbegotten perception that prices inexorably rise. Robert J. Shiller, a professor of economics at Yale University, contends that the faulty logic of money illusion contributed to the housing bubble: “Since people are likely to remember the price they paid for their house from many years ago but remember few other prices from then, they have the mistaken impression that home prices have gone up more than other prices, giving a mistakenly exaggerated impression of the investment potential of houses.”
July 6th, 2009 at 8:00 pm
realpaul: Well if you think Citi is done quaffing from the public trough, call up Vikram Pandit and buy some of the common stock. It’s also interesting how Citi “repaid” TARP monies.
I don’t know about lenders “demanding” risk premiums. This probably isn’t the right forum to discuss this stuff but a lender will demand as much as he can. The MINIMUM he demands compensates him for risk or he defaults to tbonds. When there are lots of competing places to invest, rates are high not because of risk premiums but because other more viable investments are crowding each other out. That’s super important for real estate investors to understand. Rates in the late ’90s were high because of this effect: real estate investments were decidedly LESS risky when prices were low yet rates were high even with low inflation.
July 6th, 2009 at 6:45 pm
I have always wondered what would happen if the sold assignment was defaulted upon.
I think the developer, under some contracts, gets a percentage of the profits of the sold contract. If this happens, would the original seller get that money back? There are too many things in pre-sale contracts that favour the developers way too much.
July 6th, 2009 at 6:42 pm
I couldn’t help adding this side bar to the risk equation. The US deficit increasing and lower overseas buying of dollars will mean that the sellers of dollars will HAVE to offer an incentive to the buyers of USD. That will be the direct causal factor of increasing rates.
http://www.nytimes.com/2009/07.....mp;emc=rss
July 6th, 2009 at 6:31 pm
Well don’t look now but CITI and the BOA have offered to pay 100% of the TARP back and are fully solvent. What has happened is that they have in fact written off 100% of the bad loans which in Japan they couldn’t do because of the onerous legislation in Japan, BIG diferance.
BTW I own BOA stock and its done well since the implosion and the chopping and the crying and wailing. Unlike many ‘fraidy cats I was a net buyer throughout the biggest down days of March and April. The stock has re-upped from under $3 to $12 today.
Infamous yes, insolvent no. Like me, the big picture in the US bank sector looks bright.
Intrest rates ( Long term bond and mortgage) go up when the lenders demand more premium for risk, nothing to do with private investment. Government revenues go up when buisness revenues do giving the Fed an incentive to raise overnight rates in the domestic market to crank up spending.Look for much higher overnight intrest rates to piggy back a call for deficit reduction.
I would never diss a grandfather so I leave his memories gracefully intact. I draw the line at children and old folks.
July 6th, 2009 at 6:31 pm
Hmmmm, I just heard about these ETFs that supposedly track the Case-Shiller index. UMM if you are bullish on US real estate and DMM if you want to short it. Interesting anyway…I was watching a BNN interview with Robert Shiller about them on Sqeeze Play: http://www.bnn.ca/tvschedule.aspx.
I also found this little write up online for those of you who are interested in reading about them:
http://www.telegraph.co.uk/fin.....cking.html
July 6th, 2009 at 6:30 pm
googled around for the cost of office space in vancouver:
http://online.wsj.com/article/.....%3Darticle
$355/sqft
July 6th, 2009 at 6:19 pm
On a tangent, but here’s a cherry picked datapoint for how much real estate is worth in San Francisco – The best place on Earth (outside of BC) TM
http://sanfrancisco.bizjournal.....tory1.html
(for those of you who don’t frequent calculatedrisk)
172/sqft – commercial property though – don’t know how it relates to residential really, but washroom to floorspace wise – comparable to an SRO?
July 6th, 2009 at 5:10 pm
realpaul: Last I checked, Citi and BoA, both pretty much insolvent, are still alive and cooking the books. Sounds distinctly Japanese to me.
Interest rates go up when private investment picks up. Right now nobody wants to invest. I think, though, that when they do, interest rates will turn fast. That’s the untold story of the depression my grandfather told me. Through most of the ’30s everything looked like a bad investment and rates were low. Then, seemingly overnight, there was a shift and everyone was making investments in stocks and capital equipment. When would this happen? Look for de-leveraging to work its way through the system; at least the next 2-3 years.
July 6th, 2009 at 4:19 pm
Anonymous:
#6 Japan is the poster child that every other government holds up on what NOT to do. Japan held off too long on cleaning up the banks balance sheets and bad loans for political reasons, it sunk the BOJ’s ability to issue new bonds and forced the government in QE which in turn stripped the country of liquidity. You don’t see a lot of foot dragging on bad banks, do you?
So, count on it, the Japanese model will not be used in the west. Mr. Obama is quickly learning what ‘running out of credit’ means. The CDN Fed is backpaddling away from QE as fast as their little legs can spin. The Japanese are in no position to cover US treasuries now that the ‘carry trade’ is dead. Who’s buying? Not the Russians. Not the Chinese? Not the Suadi’s” So, the trillion dollar question is ‘where is the money going to come from for the health plan and second stimulus, at what cost?
You may have noticed some serious back peddling from the democratic floor in the US as well. After all these guys have to run for house seats in less than two years. Are they going to run on higher taxes? You bet they aren’t. The big picture is bad.
The Japanese model in isolation is a bad choice to choose as a response. Simply ain’t gonna happen. Expect MUCH higher intrest rates and expect your grocery bill to keep creeping higher as well. Are you trying to figure out how oil has nanaged to stay at these levels despite the recession? Then don’t think about transportation costs when a recovery does turn the economy.
Inflation coming, yessir, higher commodity prices yup #2, intrest rates being touted as neccesarily higher to increase government revenues? score 3. You just gotta be patient and be sure you’ve got the popcorn bin filled up, cause the next few years are going to be fun fun fun.
BTW, ask yourself why the majority of people will lose their homes BEFORE a recovery takes place when interest rates are at their lowest. Who wins under that sceanrio. You’ll have to be a bright spark to get an ‘A’ on that one.
July 6th, 2009 at 4:15 pm
The calm before the storm……:
I’ve basically given up on trying to figure out the greater fools, except to presume they will soon be an endangered species.
The news coming out of the U.S. and elswhere gets bleaker and bleaker….and we here in Canada are simply on borrowed time.
In our area, I see a lot of previously suspended condo projects now commencing. This cheap money being thrown around seems to be used as bait to lure in the dregs of the last greater fools. Is the RE industry , banks and Gov’t really that desperate that they give up on hiding any whiff of collusion ? Bad sign !
If one reads articles on the US collapse, and follows the trail, it’s quite scary seeing that Goldman Sachs and its “old boys club” has basically taken over the US Gov’t. Seems the strategy is ” Gov’t can’t go broke “, even though the citizens who actually are the Gov’t can. Thus, the fox either forecloses the chicken coop, or the fox is bailed out ,….and /or the fox is given more chickens in the near future. Canada is now slipping down this same well worn path/slope lead by the US.
One thing I am noticing is that many of these local RE projects are financed by obscure lenders, and NOT the more well – known lending institutions. What does that tell you?
Last year ( US meltdown ) was a good wake -up call as to what really goes on behind the scenes.
The voodoo economics and appropriate duct tape they are using now to prop up the bubble is sticky on both sides…and the last of the “greater fools” will soon be stuck inextricably on the outside looking in and simply become a catalyst to expedite the inevitable economic judgement day.
No sense being partisan about it, they are all the same, a pox on all their political party houses. They are cloned clowns and have sold us out and betrayed us and future generations. Fasten your seatbelts…the worst is yet to come.
Sad, truly sad.
July 6th, 2009 at 3:47 pm
Interest rates to double? Speak-y u Japanese?
July 6th, 2009 at 1:08 pm
that’s funny. flippers might be caught, he he he.
July 6th, 2009 at 10:33 am
not paranoid: Now is probably a good time for the original owner to unload the unit since there is a spring bounce and it seems that not everyone has got the message. If they can get rid of it now, they’ll probably see a smaller loss than if it drags on. Although *if* the spring bounce was strong enough I suspect the builder would want to resell the unit to a new sucker – guess the markets still a fair bit weaker than the last couple of years and its more profitable to go after the original buyer than try to resell.
July 6th, 2009 at 10:24 am
The assignment does not change the terms of the original contract. Party #1 is always on the hook until the consideration is satisfied. Buyer #1 really does have something to worry about.
Meantime, Interest rates set to double and thats going to set up a wee bit o’ difficulty here in Canada as the stats show the majority will blow their brains out at anything over 5%. ” Affordability, we don’t need no steeenking affordability!”
http://www.telegraph.co.uk/fin.....ouble.html
The unemployment bubble is going parabolic, and that can’t be good news for the hypsters. Expect more hype! Can the current slate of developers get out before the REAL collapse when the economics of real estate can no longer be pimped up by the governments phony rate policy?
http://www.telegraph.co.uk/fin.....cking.html
Sleep well my pet, you’ll need your strength. Bwahahahahaha
July 6th, 2009 at 9:54 am
The original buyer received 50k, that should help recover some of the loss, the one who really will feel the sting is buyer #3.
There are some purchasers of assignments that paid a premium for the contract (eg.10%) and are on the hook to complete on projects that are now being appraised at 15-20% under the purchase price when GST etc. is factored in.That makes financing a real challenge when the banks will only lend based on 70% of the original purchase price. Quite a mess happening out there when combined with the buying euphoria of the greater fools who think the decline in prices is over.
July 6th, 2009 at 8:12 am
Why worry? If the assignee fails to complete it is just like finding a lost jackpot-winning lottery ticket for the original party to the contract! All presale assignors proably regret their decisions in light of the spring turnaround and will be glad to get in on the next leg up!
- This message brought to you by the home builders’ association and your local real estate board.