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.

Apparently it can happen.

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.

37 Comments
newest
oldest most voted
Inline Feedbacks
View all comments
Ahab
Ahab
11 years ago

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?

NO -LYMPICS
NO -LYMPICS
11 years ago

# 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.

NO -LYMPICS
NO -LYMPICS
11 years ago

#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 .

Anonymous
Anonymous
11 years ago

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.

pimppin tom
pimppin tom
11 years ago

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.

Ahab
Ahab
11 years ago

realpaul:

Look up Greenspan's Paradox. Then stop laughing. Your brand of 'economics' amounts to little more than hand waving and wishful thinking.

observer
observer
11 years ago

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.

realpaul
realpaul
11 years ago

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 !!!!!!!!!!

oneangryslav
oneangryslav
11 years ago

NO -LYMPICS: While I agree with the sentiment, I take issue with this statement of Hanson's:

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.

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/cst01/famil108a-eng.h

oneangryslav
oneangryslav
11 years ago

NO -LYMPICS: Hey, NoLympics, you can blockquote comments by using the blockquote tags…

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.

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.

observer
observer
11 years ago

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… Read more »

Arwen
Arwen
11 years ago

"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*

Anonymous
Anonymous
11 years ago

fwiw … robert shiller is on bnn, and he says housing prices in the US will be lower 5 years from now.

Bilbo Bloggins
Bilbo Bloggins
11 years ago

RE: Re-sold presales contracts bite back

I smell lawsuits!!!

Great for lawyers. Bloodbath for speculators!

I love it!

NO -LYMPICS
NO -LYMPICS
11 years ago

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/henry-blodget-next… 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… Read more »

observer
observer
11 years ago

NO -LYMPICS: Dave, you should read this article: the money illusion involves your favorite concept, the real value of money 😉

NO -LYMPICS
NO -LYMPICS
11 years ago

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… Read more »

Anonymous
Anonymous
11 years ago

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…

NO -LYMPICS
NO -LYMPICS
11 years ago

U.S. shale gas supply casts 'dark clouds'over Alberta Province warns loss in gas revenue will batter budget http://www.calgaryherald.com/business/shale+suppl… 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… Read more »

mino3
mino3
11 years ago

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.

NO -LYMPICS
NO -LYMPICS
11 years ago

FYI: " The Science of Economic Bubbles and Busts " http://www.scientificamerican.com/article.cfm?id=… 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… Read more »

Anonymous
Anonymous
11 years ago

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.

davers
davers
11 years ago

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.

realpaul
realpaul
11 years ago

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/2009/07/07/business/global

realpaul
realpaul
11 years ago

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… Read more »