Calgary Purchaser Cancellations

[seven thirty]

Originally Posted by harpua

long time reader, first time poster...thanks for the great resource guys.

I know a LOT of speculators in castello, union square and xenex and most are having one of two problems:

1) can't close as they cannot get a mortgage for whatever reason (can't qualify, appraised value is below contract price)

2) won't close because they were counting on being able to flip the property before construction was completed....market is putting the brakes on the flip strategy. these guys will walk away from 50k deposits and leave the developer holding the bag, 100%. in most cases these buyers are young speculators with little in terms of assets to go after.

Looking at castello specifically, a few 2nd and 3rd floor listings are on MLS. Centron's listings are priced at well above $500/sf (1500sqf penthouse@$810/sqf, 9th floor 1270sf@$557/sqf, 9th floor 988sqf@$540/sqf )


..while the owner listings are as low as $450/sf. Who knows what price they will actually sell at!

I am waiting until all of these projects are complete and developers are desperate to unload units at build cost, just to get them off their books. That time is fast approaching....2009 will be a year for bargain hunters!

Harpua>welcome aboard. I too have been reading for ages and just recently decided to post. Question for you>do you know if Castello sold out initially? Who has the listings on MLS? Was there not a clause in the purchase agreement that did not allow purchasers to sell for at least one year after the completion of construction?

I think your #1 purchasers (those who are young speculators looking to make a flip and couldn't afford to get financing if they wanted to) are a good majority of the "cancellation" market in calgary right now---primarily because the unit today is not worth what they paid a year or more ago and the lenders are laughing in their face.

I agree with everyone's point about these speculators getting what they deserve but I still wonder about the builder or developer that is left with unwanted inventory they cannot get rid of (ie. Harpua's case with the $450/sqft owner product vs $500+/sqft builder product). Although the purchaser may get what is coming to them (losing their 5-10% deposit), the builder or developer is really the one who will lose when they are incurring carrying-costs for all these units with no real way to get rid of them for the next 15-18 months. Yes, they could sit on them and rent them out but for the most part, they have no desire to be in the rental management/landlord business. The other scenario which makes me more nervous than any of the above, is the builder or developer that doesn't have the strong backing and/or deep pockets and is unable to meet their development financing agreement with their lender (meaning their pre-sale test has gone up in flames after the fact).

If everyone's above estimates are correct (that approx 5-15% of the deals in current condo market are walking), in some cases that would be enough for the development lenders to walk away from the deal themselves, leaving the builders and developers screwed.

[harpua]

Bigtime- re: selling before possession

usually the M.O. of these guys was to privately assign the contract to a buyer for the cash difference between the contract price and the new price...so the contract holder would get cash from the buyer, and have a side contract with the buyer to assign him the benefit of the purchase contract upon closing. obvously, this kind of deal can get very hairy but these are the types of things that were going on during the condo boom!

seven-

Castello did not sell out, centron is still holding units, not sure how many but at least 3 centron-owned units are up on MLS right now.

I know that centron does have "no-sell" clauses like that in most of their later contracts...along with other crazy clauses. one particularly interesting clause maintains that the buyer cannot list at a price lower than the builder if the builder is trying to sell as well..

these clauses are likely unenforcable, however....essentially, once you purchase the property you can do whatever you want with it, especially if it's your home. It would be a stretch for any court to side with centron on those issues...especially since it has to do with buyers who actually closed on purchases!

[freeweed]

Originally Posted by seven thirty

I agree with everyone's point about these speculators getting what they deserve but I still wonder about the builder or developer that is left with unwanted inventory they cannot get rid of (ie. Harpua's case with the $450/sqft owner product vs $500+/sqft builder product). Although the purchaser may get what is coming to them (losing their 5-10% deposit), the builder or developer is really the one who will lose when they are incurring carrying-costs for all these units with no real way to get rid of them for the next 15-18 months.

For the most part, the builders are just fine. Keep in mind that many of these buyers are walking because the unit DIDN'T GO UP ENOUGH, not because it went way below their purchase price. Most developments in this city were sold FAR lower than they're worth today, even with the price drops.

There may be a building or 2 out there where a developer went ahead assuming prices would stay high, but you know what? Fuck 'em. Anyone with half a brain should have seen this coming. There's a reason Midtown got canceled, even though the site was well under way.

[seven thirty]

appreciate the clarity harpua. pretty interesting times in the market right now. Many (those in their early 30's or younger) most likely weren't around in the early 80's to witness a somewhat similar situation. For many Calgarians (being a city with of a lot of young people), its the first time in their lives they will have had to deal with a market like this. Many don't know what to do or how to deal with it. Many went from visions of getting rich quick to scrambling to off-load property or being forced to close on a deal with no real way to carry it. sad.

It seems everyone these days has an opinion as to where the market is going. Everywhere I go, its the hottest topic of conversation. 6+ years ago, real estate wasn't the "in" thing to do. Now it seems everyone, from the bar manager to the O+G engineer, has a serious amount of money tied up in real estate--somewhere.

The million dollar question still seems to be, 'when is it all going to end?' When is this market realistically going to pick up again? I would speculate however speculation doesn't seem to be the way forward anymore

read this great article from Toronto Life magazine about the continuing bidding wars and overinflated prices in the GTA making many young homeowners house poor>worth a read:

http://www.torontolife.com/features/sinking-feeling/

[Bigtime]

Originally Posted by seven thirty

appreciate the clarity harpua. pretty interesting times in the market right now. Many (those in their early 30's or younger) most likely weren't around in the early 80's to witness a somewhat similar situation. For many Calgarians (being a city with of a lot of young people), its the first time in their lives they will have had to deal with a market like this. Many don't know what to do or how to deal with it.

An excellent point, and dare I say an area where those of us that are born and raised Calgarians are beating our counterparts that weren't around in those times.

I was born in '81, 2 months later my father started his business. Not the best climate at the time, but growing up I've always heard the stories of how ugly it was out there and just how bad it was. I've always remembered those stories and kept them in my mind especially during these last couple of "the good times are never going to end" years.

[harpua]

yes, great point seventhirty. most of these young speculators I know had a mentality that real estate will go up 'forever' because they made 50-100% on their first 3 or 4 deals during the crazy boom.

so based on that, they kept putting down deposits on condos and new houses...

now, they are learning the hard way that real estate doesn't always go up!

[seven thirty]

this market is proof that>'what goes up must come down,' everything in the markets is cyclical in nature, no matter what direction a trend is going.

[Surrealplaces]

Yes, for the most part the builders won't do too badly. What really hurts the builders more than anything is construction delays and issues. Those costs can really add up.

Take Castello for example, at the time they were submitting the DP to the city the average price of a condo was far lower than it is today. Even at those costs, they still had planned to make a profit. I would bet that overall they'll make good coin on that project.

Originally Posted by freeweed

For the most part, the builders are just fine. Keep in mind that many of these buyers are walking because the unit DIDN'T GO UP ENOUGH, not because it went way below their purchase price. Most developments in this city were sold FAR lower than they're worth today, even with the price drops.

There may be a building or 2 out there where a developer went ahead assuming prices would stay high, but you know what? Fuck 'em. Anyone with half a brain should have seen this coming. There's a reason Midtown got canceled, even though the site was well under way.

[harpua]

the real question is....what % of builders/condo developers 'sales' are speculators...and what kind of hole does the loss of these sales blow in their financial models?

[freeweed]

Originally Posted by seven thirty

this market is proof that>'what goes up must come down,' everything in the markets is cyclical in nature, no matter what direction a trend is going.

Actually it's just proof that short-term investing is very dangerous and mostly for the foolish. Much like daytrading.

The housing and stock markets go up in a pretty continual line, if you ignore short-term corrections. Investing in either for the long term is just about a guaranteed winning strategy.

[seven thirty]

couldn't agree with you more freeweed. The age-old philosophy of the investment company, AIC Berkshire, "Buy, Hold and Prosper" is true for our fical real estate world as well.

Harpua>that is the million dollar question. There really is no information out there currently (as far as I know) that tracks this type of information. Unfortunately, the information purchasers are filling out on their 1st visit to sales centres and show homes does not get passed along to the CHBA or CMHC. I know most sales teams in the industry could tell you who is a speculator and who is not. Any other thoughts?

[etown]

This story doesn't indicate a trend but . . .
I was just golfing on Sunday with a guy from a mid sized developer in Calgary and he said they are starting to see people walk away from their homes before possession. In one case the couple left $150k behind - this included deposit plus a few construction draws. The problem was they were counting on their current house for equity. Either it won't sell right now or it won't sell for enough to make the deal work. Ouch.

[Coldrsx]

^yup... heard similar stories here as well.

[freeweed]

I think you'll find a common current amongst all of these walk-aways: people who thought real estate values would continue to increase at a guaranteed 10-20% annual rate.

Let's politely call them "misguided". Let's also count our blessings that subprime lending never took off in Canada.

[seven thirty]

the stories are popping up all over the place and the unfortunate part is that it's happening more often the we are hearing.

the question is.... what's the solution to the problem? the vast majority of the sales people that originally brought in the deal and got it to firm, are now gone as it was most likely 1-2 years prior. The majority of sales people are championed with bringing deals to firm--not to close.

Could "walk-aways" be avoided if the problems or issues were addressed prior to possession? It's a bad situation for both the builder AND the purchaser as it stands now.

[240glt]

what's the solution to the problem?

About the only option is to let the market run its course.

All those units are going to find buyers sooner or later.

[Look way up]

Originally Posted by 240glt

About the only option is to let the market run its course.

All those units are going to find buyers sooner or later.

Exactly. The only really specific solution to this type of situation is called "free market economy". It will work itself out. some people will get stung, and for others it's a good opportunity.

[CMD UW]

Originally Posted by Bigtime

Freeweed: You and I are totally on the same page. Did all these speculators think they were mini Donald Trumps or something?

Yes. As soon as Joe Neighbour or Susie Homemaker start becoming real estate investors or specialists, get out of the game. Its the first sign that the cycle is reaching its peak.

[CMD UW]

And to add another point, I believe that in the future, developers will be placing restrictions on when people can 'flip' their units upon possession, or they will reserve a number of units for investors only. This way it will reduce the mass invest-ation of the market.

[seven thirty]

well said gentlemen. Letting nature takes its course may be the only way indeed. However, the problem I believe that will exist for the next year++ does not just affect those that are "walking away," but the many builders and developers that were over leveraged themselves and will buckle under the pressure of a relatively large and unanticipated exodus of sales contracts. My fear is the problem's impact on future (already approved) projects.

There are a decent number of them in Calgary (Edmonton too I would assume) that have already received permits/approvals and are having no choice but to cancel or postpone construction. Maybe its a good thing they are getting canceled or being postponed? ..might give the market the time it needs to absorb the surplus of inventory sitting around, not moving.