How can developers protect against defaulting buyers? Mitigation strategies in today’s market

Developers of residential buildings, whether condominium or low-rise “freehold” homes, have faced significantly increased numbers of purchasers not closing their deals due to the inability to obtain financing, even where significant deposits have been paid to the developer. This is particularly the case for homes sold at high prices at peak market (particularly in late 2021 and early 2022). We are not seeing as many defaults on high-rise condominiums due to the longer build period. High-rise condos closing today were likely sold 4 to 5 years ago when the market was not at a peak, whereas high-rise condos launched at peak will likely not close until 2025/2026 or later, at which time the market and prices are expected to have rebounded. Mitigation strategies As we work through the various deals in which purchasers are unable to secure sufficient financing as a result of low appraisals, there are a number of strategies for developers to mitigate the risk of purchasers defaulting. Most purchase agreements allow developers to require proof of purchaser financing: the purchaser has either available cash or a mortgage pre-approval for the sale price, failing which, the vendor can terminate the deal. Developers should obtain this information when accepting agreements, and request periodic updates to ensure the purchaser’s financials have not changed. As closing dates approach, obtaining pre-approvals with a long enough rate hold (if possible) reduces last-minute surprises where a purchaser is unable to secure financing. Many purchasers themselves will not realize they cannot obtain financing until it is too late to find alternate arrangements. Similarly, educating purchasers about closing expectations is an important mitigation strategy. Purchasers frequently do not take into consideration the extent of adjustment costs on closing and/or whether they are eligible for the HST Rebate (which, if not eligible, that amount is added to the sale price). Although it is the responsibility of the purchasers and their lawyers to understand these items, developers can help avoid last-minute surprises by emphasizing these items early on.

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