The Final Stage Has Begun

On September 1, 2008, we reported that the West Coast market was primed for the final stage of a real estate collapse. That stage occurs when buyers start walking away from sales contracts, foregoing the deposits they made.

That stage is now well underway. In fact, so many buyers are now walking away from sales contracts, that some developments are going into receivership. The H&H condo in Yaletown has been placed in receivership for a number of reasons, including the fact that at least 15 buyers have walked away from their deposits and sales contracts.

A condo development that goes into receivership with a portfolio of buyers walking away from deposits can be a very long term work out, taking from 2-4 years. A market with buyers walking away from sales contracts can take anywhere from 4-10 years to recover. In the meantime prices are certain to drop by 25-35%, sometimes 40% in the case of cookie-cutter type condos in suburban locations.

There are legitimate business reasons to walk away from sales contracts. Developers can sue to recover damages and there are very simple ways for both buyers and developers to mitigate losses. Developers will try to enforce sales contracts, however if the developer is late delivering the product, the buyer cannot meet the financial requirements of closing, or the buyer has no assets in the legal jurisdiction, it is very difficult for the developer to get and enforce judgement in their favour.

Walking away from a deposit is something that depends on an individual's unique profile, the sales contract and the status of the development. We do not recommend that someone simply walk away from a deposit because market prices have changed, however there are times where an individual buyer is best to walk away from a deposit if the completion of the project is in question.