Real estate sales in the Toronto area are slowing to a trickle as sellers delay listing and some buyers try to wrangle a “COVID discount” on deals they’ve already struck.
The Coronavirus pandemic has put much of the business of buying and selling properties on hold as the Canadian economy contracts and physical distancing measures make viewing houses and condos difficult.
John Lusink, president of Right at Home Realty Inc., says he’s still been busy in April, but much of the work involves closing transactions that have already been agreed to.
“That tap is slowly getting turned off,” Mr. Lusink says. “It’s going to be a very dry May and June.”
Meanwhile, some buyers are turning to him for advice because they are suddenly finding their financing in peril just before they complete a transaction.
Many offers from mortgage companies contain fine print giving the lender the right to pull the financing at the last minute, he says. One self-employed buyer, for example, received a call just days before closing asking for more information about her income and expenses.
The risk departments at financial institutions are scrutinizing many deals and the buyer’s financial stability, he says.
“The mortgage companies are continuing to ask very difficult questions.”
Carl Langschmidt of Property.ca Inc. says business has plunged more dramatically each week since mid-March.
“It’s just the craziest experience ever,” he says of the current market. “I know people are scared but they’ve been rattled to their core with this.”
As a broker, Mr. Langschmidt says, he has signed lots of mutual releases as agreements fall apart.
In some cases, buyers have a conditional offer accepted and then use that condition as leverage to get out of a deal.
In another instance, he knows of a buyer who signed an agreement to purchase a condo unit preconstruction and is now walking away from his $5,000 deposit. The 10-day cooling off period had expired, Mr. Langschmidt says, but the buyer is gambling that the developer won’t pursue him in court.
“He’s just trying his luck.”
Mark Weisleder, a lawyer with Real Estate Lawyers.ca LLP, says he is seeing some buyers who are not even facing a problem closing trying to negotiate what he is dubbing a “COVID discount” because they speculate that sellers will be desperate to close.
“The buyer may suspect that the seller needs the money to close their own purchase and thus cannot afford to get into litigation.”
In many cases, buyers have a legitimate reason to request a price reduction, Mr. Weisleder says.
For example, if a buyer paid $700,000 for a property and the appraised value came in at $650,000, the buyer may not be able to obtain a mortgage without coming up with additional funds and therefore might ask to renegotiate the sale price.
But in other cases, the buyer is just testing the water.
Before giving advice to a buyer or a seller in that scenario, Mr. Weisleder says, his firm would ask for supporting documents from the buyer to prove that he or she is having trouble getting financing. In some cases the lawyers might ask the buyer for net worth statements.
“The lesson for everyone is that once you sign a firm deal, do not sign anything afterwards that may change the price or the terms without legal advice,” he says.
While the consensus in the real estate industry – from the regulators on down – is that agents should avoid a “business as usual” mindset until the health crisis has passed, some homeowners do need to sell, Mr. Lusink says.
Mr. Lusink sees signs that prices are softening as fewer bidders compete for the properties that are listed.
Properties tend to be listed around market value and may sell for between 95 and 100 per cent of that asking price, he estimates.
“We forget that we were in such an overheated market,” he says of the early weeks of 2020, when many properties were selling for jaw-dropping premiums to the asking price.
The most common reason for sellers to list now is that they have bought another property, he explains.
At mid-April his brokerage had 1,425 listings, which is only a small dip from the same time last year, he says, but adds the caution that April, 2019 was also a slow month for listings.
Mr. Lusink says real estate agents at his firm’s 12 branches around Ontario are still receiving commissions for the sales agreements signed in January and February that are closing now.
Typically the exchange of money and keys – along with registering at the land title office – lag sales by 30, 60 or 90 days.
Agents will feel the greatest impact in May, June and July, Mr. Lusink says, because sales are so thin today. Part of his efforts now involve figuring out to what extent agents will qualify for programs such as Canada Emergency Response Benefit.
As self-employed workers, agents are eligible, he says, but he’s not sure if the program will extend into the months when commissions dry up.
Real estate firms also need to pay office staff, rent and other expenses. Some may qualify for government aid under schemes for small and mid-sized businesses.
“We’ll also see some brokerages that, unfortunately, won’t be able to hang in.”
Meanwhile, talking to his counterparts at other brokerages, Mr. Lusink says there is an optimistic view among some industry players that sales will rebound once restrictions on physical distancing are lifted.
Based on the legions of prospective buyers competing for listings in the first quarter, some agents expect there will be a lot of pent-up demand to propel sales when agents are able to go back to holding open houses and conducting more showings in-person.
“I don’t see that until later in the year,” Mr. Lusink says.
Mr. Lusink doesn’t expect a surge in listings when the market comes back but he says there may be some distressed owners who are forced to sell. Others who have been on the fence may decide to plot an exit strategy.
He also worries that there is a more pessimistic scenario where high unemployment could keep would-be buyers out of the market.
The unprecedented amounts of government stimulus may help the economy, he says, but he will wait to see if it will provide enough relief to homeowners and would-be owners.
“That’s the big question,” he says. “Is it enough?”
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