I got some blowback last week when I suggested that while quite clearly the housing market is in the throes of a strong correction, life and real estate continues on.
Financing is impossible, deals are falling apart, lawsuits are coming — real estate lawyers are the frontline workers of a sharp market drop.
We checked in with two legal experts about the market whiplash and the top three issues they’re seeing right now.
John Zinati, Partner at Zinati Kay Barristers & Solicitors, has closed more than 25,000 real estate transactions and provides industry expertise for media outlets. He regularly publishes an educational newsletter and speaks at real estate offices and conferences.
Bhupinder Lamba, Founding Partner at GLG LLP, leads the real estate practice group for the full-service firm. His clients include institutional and private lenders, purchasers, vendors, construction companies and real estate investment corporations, among others.
ZINATI: Financing falls through, buyers can’t close
Earlier this year, around spring, Zinati says buyers were caught between two very different market realities — they were still bidding high in a hot market, but they had to close in a cool one.
“So the number one issue is buyers having trouble getting financing — and the fallout.
One reason might be that they can’t qualify at the new rates. Or they bought a house thinking it had this value, and then the bank does the appraisal and the house comes in at a lower value. So now that buyer, although they signed a firm deal, finds out that they can’t get a mortgage because … from the bank’s perspective, the house is not worth what the buyer paid for it. So now we have a buyer who’s scrambling to close a deal. That’s the number one problem by far, across the board.
What they will do is ask the seller to discount the price. The seller has no legal obligation to do so — we’ve actually had our sellers take a haircut, $100,000 less on a property, rather than lose the deal. Legally, they don’t have to… but their position was, ‘John, I’d rather not have to go to court and fight over this and resell it. Let’s just take the money off the price. And let’s close the deal.’
Or they will ask the seller to take back a mortgage. Let’s say I’m buying your house and I paid $1,000,000. And because of the value of the appraisal, I’m only going to get $850,000 from the bank now. You can lend me that $150,000 — it’s called the vendor take-back mortgage. So the seller basically is asked to lend the buyer the shortfall.
Now we have other kinds of problems with buyers getting financing. Let’s say you bought a condo four or five years ago, and now it’s ready to be built. You qualified for the mortgage four or five years ago, when the interest rate was 1, or 2, or 3%. But now you’re borrowing, or trying to qualify, at a much higher rate. And most of those pre-approvals that you get when you walk into sales office, they expire after three years — they rarely last right up until closing.
So we’ve had clients who’ve had to request extensions from builders. I had a guy who was trying to close his condo, he couldn’t qualify for his mortgage — we asked the builder for a three-week extension. In the past, that might have resulted in some reasonable request for compensation — $1,000 or $2,000, something like that. This builder actually said, ‘Your deal is done. We’re going to terminate. Because in the last five years or so, that property has gone up by $200,000. And we’d be happy to take the property back and keep the deposits.’ So we told our client, ‘You have to go to a litigation lawyer.’ There’s some duty in Common Law to be reasonable. And a litigator will basically tell the builder, ‘Look, you want to show up before a judge and tell them that you want to kick this guy and his three kids out of the property? And wouldn’t give him three weeks time, after you extended it for all these years, and keep his deposit?’ And [the builder] did give the guy an extension, but it cost him $18,000. For three weeks. And our client had to pay $3,000 to a litigation lawyer. And our client ended up paying almost 9% on his mortgage.
If you’re a buyer and you can’t close, you will lose your deposit. For sure. But the seller can come back and sue you. If I sold you my house for $1,000,000, and you gave me a $100,000 deposit, and you don’t close — now I have to put it back on the market, and I get 800,000 instead of $1,000,000. The deposit is released to me, plus another $100,000 [can be pursued in a lawsuit]. You have to make me whole, back to $1,000,000. That’s what the law says.”
LAMBA: Financing fallout
Lamba agrees — financing has collapsed, buyers can’t close, deposits can be forfeit and purchasers can be sued. At the height of the market frenzy, buyers were bidding high with no conditions. Once the ink dried, rate hikes suddenly yanked financing out of reach — and the no-conditions contract left no wiggle room.
“We’re seeing a lot of buyers coming to us, saying there’s a [financing] gap of $200,000 to $500,000 — the highest I saw was $480,000.
I’m seeing multiple files every month going sideways. And in some cases, you’re able to negotiate — [maybe] the gap is not too large. You know, maybe the seller says, ‘Okay, I’ll meet you in the middle.’
As an aside, people don’t seem to understand that an Agreement of Purchase and Sale is a contract. I have so many calls with [buyers] and they’ll say, ‘So I entered into an Agreement of Purchase and Sale.’ And I’ll say, ‘Is it firm?’ And they’ll say yes. And I’ll say, ‘So you have a binding contract.’ And they’ll say, ‘No, I didn’t sign a contract. I signed an Agreement of Purchase and Sale.’ Just because you call it a different term doesn’t mean it isn’t a contract. There’s obviously a gap in terms of the public’s understanding and the significance of the act of signing and Agreement of Purchase and Sale.
What is happening is unnerving. And in a lot of cases, the purchasers, you feel bad for them, because they were just trying to do what they needed to do at the time when the market was hot. And then these hikes just flipped everything upside down. And it’s not necessarily the purchaser’s fault. [The market] has been growing at rates that are unsustainable and they did nothing about it. And then one day, they woke up and they said, ‘Let’s slam the brakes.’ And it’s sad, because for a lot of these people, it’s their life savings.
It’s a unique period in real estate. Often when you get into a contract dispute with somebody, there is a bad actor or somebody that is clearly at fault. In many of the cases at hand, they’re often just victims of this situation that’s been created.”
ZINATI: Flipping condo contracts before they’re built
Condo assignments are another sore spot, Zinati says. Buyers would snap up a pre-construction condo contract — or several of them — with no intention to even close on the property, only to later assign it to someone else. They intended to sell the contract in a couple years with the assumption the market was only going up.
“Now a lot of things have happened with [assignments]. One is that it’s gotten tougher to assign, primarily because the value is not there anymore. Some people bought two or three, thinking that they can just flip it without even closing. Well, if the property hasn’t appreciated that much because the market is softened, you can’t necessarily flip it, you can’t necessarily get out of the deal. And you’re on the hook to close with the builder eventually.
It used to be that whether or not you had to pay HST on these assignment transactions depended on your original intention. So if your intention was to live in the property yourself, which everybody would say it was their intention, there wouldn’t be HST of 13% on the profit that you made. But the government basically knew that this was happening. And they made, at the beginning of this year, every assignment transaction, regardless of whether you intended to buy the property for yourself or not, is now subject to HST. So what you have now are people who are willing to assign out their contracts, just to break even, or just to get their deposits back.
They’re stuck. Even if they sold the contract, they’re still legally on the hook [if the second buyer also struggles to close.] They’re on the hook still to that builder — just as much as the new buyer was — and the builder can sue both of them to get his money.”
LAMBA: Mortgage fraud
When buyers have a financing gap, they assume they can go to another lender for the difference. In many cases, this is not possible — in fact, Lamba says, depending on the terms of your first mortgage, secretly securing a second mortgage can constitute mortgage fraud.
“There’s a lack of education — buyers, and people engaging in the real estate market, don’t actually understand the different moving parts. I’ll have people come to me [with a financing gap] but their mortgage broker says, ‘It’s okay, we’ll just get secondary financing.’ So [the buyer will] get two mortgages — one mortgage with, say, with one of the major Canadian banks, and then a second, which is a private mortgage, to come up with the difference. And they think this is a solution.
With secondary financing, there are some situations where they’ll allow it, but typically they do not. So [buyers] come to me and they say, ‘Okay, I’m in trouble. The bank says I can’t have a second mortgage.’ Well, this solution should have never been proposed in the first place. The broker who is selling you this product should have known that. And either they knew it and they wanted you to look the other way, or they didn’t understand the product they’re selling you.
It’s mortgage fraud. Entering into an agreement, signing paperwork with the bank saying, ‘These are the conditions I agree to follow to obtain a mortgage’ — and then doing the opposite, is fraud.
Deceiving a lender is not an option. [Buyers will] come back to me and they’ll say, ‘Okay, well, I need help getting out of this deal.’ Okay, so now we’re talking about something different — we’re talking about damage control and seeing if we can maybe negotiate the price down, or if we can negotiate a walk-away where you pay the seller a certain amount, they let you out of the deal. So we’re seeing a lot of that as well.”
ZINATI: Lawsuits are coming
Zinati predicts litigation is going to increase as losses pile up, and people need someone to blame.
“People are having to understand what happens when deals fall apart. When the market is declining, there are actual losses. And when people start losing, they start suing.
So let’s say you couldn’t close on my house. And now I’m suing you for $200,000 [because the price has dropped in the market]. You might say, ‘Okay, I’m gonna go sue my realtor. Why did he let me buy this property firm?’
Litigators will be looking for people who they can hold responsible for the losses. Back in the early 90s, during the last crash, a lot of lawyers got sued. Because people look for who to sue for their losses. Lawyers, mortgage brokers, real estate agents.
I’ve actually had three litigators calling me saying, ‘Look, if you have real-estate-related litigation, let me know.’ Because they know that this is probably coming.
It’s a very tough thing for people to face litigation. It’s not for ordinary people. Litigation is expensive, messy, nasty. Most of my clients would avoid it as much as possible, but sometimes you can’t.”
LAMBA: Renters won’t leave
A stifling rental market means some renters are refusing to leave when their landlord sells, starting a roughly six-month process, which can bring deals to collapse. The seller, both hands tied, is on the hook for breach of contract.
“I’m getting a lot of calls about this recently. [A seller] served their tenant with paperwork, saying they need to vacate the property. The tenant looks around and says, ‘My rent is going to go up $800, $900 a month — I’m not leaving.’ So now it’s the process to get them out. And if you properly serve them, then we have grounds to have them vacate. If the tenant does not agree to leave then you need to go to the Landlord and Tenant Board. Most closings are a month to two months. The Landlord and Tenant Board, you’re probably looking at six months. So how are you going to close on time?
The Residential Tenancies Act is, I think, pretty tenant-friendly. And I think the concept behind it is, you know, there’s a power imbalance in law. These landlords are powerful and have means and tenants don’t — that’s not always the case. Especially downtown Toronto. A lot of landlords that are calling me right now are people that save their whole lives to get an investment property to have an asset for them to pass on to their children, hopefully one day. And their tenants aren’t unsophisticated — they’re young professionals that are educated and make a good amount of money, understand the leverage that they have due to the Act, and are not leaving. In some cases, these landlords are hemorrhaging money and they’re forced to sell … And now, in two months, [the landlord says,] ‘I have a closing date that I’m not going to be able to meet — I’m going to be in breach.’
You could argue [the renter is] a bad actor, but you know, when the market has changed so quickly, it might be out of necessity that they’re doing this — they can no longer afford to live in Toronto and be close to the job.”
Real Estate Trends: Homebuilder Sentiment Drops Along With Housing Prices
- Home builder sentiment, measured by the National Association of Home Builders, fell in October.
- The report indicates that home builder sentiment has fallen for 10 consecutive months.
- The housing market is facing multiple challenges, including relatively high mortgage rates and inflationary pressure on household budgets.
If you’ve been paying attention to the housing market, you’ve likely noticed the relatively bumpy ride it’s had over the last couple of years. After rock-bottom mortgage rates contributed to seemingly endless bidding wars throughout 2020 and 2021, the lightning-hot market has cooled in recent months.
The latest homebuilder sentiment report reflects a slower housing market. Let’s take a closer look at the highlights of changing homebuilder sentiment and falling housing prices.
Homebuilder Sentiment Drops
The National Association of Home Builders (NAHB) takes the temperature of home builders’ sentiment on a monthly basis. In the latest report, home builder sentiment dropped again. The confidence was reflected at 38 in October, which means it’s at half the level it was 6 months ago.
That represents 10 consecutive months of dropping home builder sentiment. With the exception of the uncertain times of spring 2020, this confidence reading is the lowest it has been since August 2012.
“This will be the first year since 2011 to see a decline for single-family starts,” said Robert Deitz, NAHB Chief Economist in a press release. “Given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues.”
Housing price trends
As of November, Redfin reported the national median home sale price at $397,549. That’s a 4.9% year-over-year increase. While that might seem like a steep climb, housing price growth has actually slowed down quite a bit.
Home builders aren’t the only ones warning of a potential fall in home prices. Some economists are predicting a sharp fall. The Federal Reserve is warning that home prices might fall, but it doesn’t expect anything like the unforgettable housing market crash that happened during the Great Recession.
Potential reasons for housing market changes
With home builder sentiment dropping like a rock, it’s helpful to understand what factors are at play. There are many factors contributing to a changing housing market. Here’s a closer look at the reasons that stand out.
In recent months, inflation has been a main feature of the economy.
The Consumer Price Index (CPI), a popular measure of inflation, was sitting at a 7.7% year-over-year increase in the October 2022 report. Although this reflects a gradual decline from the peak earlier in the year, we are still living in highly inflationary times.
But you probably don’t need to look at a special report to know that inflation is present in a big way. You’ve likely noticed inflation as it hits your household budget. Individuals and families across the nation are forced to spend more on basics like food and electricity.
With this pressure on household budgets, it’s difficult for many would-be homeowners to pull together the funds necessary for a down payment on a home. Plus, the increased costs in other areas of their budget might make shelling out for an expensive monthly mortgage payment impossible.
Rising interest rates
In response to sky-high inflation, the Federal Reserve has been aggressively tackling the problem. Although the central bank prefers to have some level of inflation in the economy, the current inflation rate is well above the 2% target.
The Federal Reserve increases the federal funds rate when it wants to tame inflation. Throughout 2022, the Fed has instituted a series of rate hikes. As the federal funds rate increases, so do borrowing costs for homeowners.
Mortgage interest rates hit a 2022 peak of 7.08% for a 30-year fixed-rate mortgage. Since then, mortgage rates have fallen a bit. As of November 18, mortgage interest rates are down to 6.61%. But regardless of this small tumble, mortgage rates are still significantly higher than this time last year when the average interest rate on a 30-year fixed-rate mortgage was 3.10%.
Higher mortgage interest rates lead to higher monthly payments for borrowers. The National Association of Realtors reported that the average monthly payment for a homebuyer in the third quarter of 2022 was $1,840. That’s significantly more than the $1,226 average in the third quarter of 2021.
Higher mortgage costs often mean that buyers can’t afford as high of a sales price. With this factor in play, the possibility of falling housing prices seems to make sense as would-be homebuyers are getting priced out of the market.
How This Impacts Your Investment Portfolio
The housing market isn’t the only sector of the economy impacted by a combination of hot inflation and rising interest rates. As the real estate market shifts around us, you might be interested in adding this exposure to this asset class to your portfolio. But you might not be interested in monitoring the minutiae of the up-and-down housing market trend.
One way to add exposure to real estate trends is by harnessing the power of artificial intelligence through a Q.ai Investment Kit. For example, the Global Trends kit takes real estate into account when making trades that align with your portfolio goals. Consider using this new style of investment technology today.
Buyers in driver’s seat as sellers ride out real estate rough seas
But notable to me is the fact that even amidst all of the scary headlines and all of the well-founded doom and gloom, there are still real estate deals happening in this city. And while as far as I can tell, the who and the how and the why has shifted from the who and the how and the why that drove that wild market that already feels like a distant memory, I’m not sure what we’re seeing should be written-off as anecdotal outliers.
Transaction volume is down by half compared to this time last year. Interest rates currently stand at levels inconceivable less than a year ago. New homeowners are stressed, would-be home buyers are spooked, and everyone else is trying to figure out how worried they need to be.
But here’s what I am observing in real time: buyers are absolutely still out there.
Our transaction volume may be down by half, but the remaining half of what was truly record-levels is not inconsequential. It maybe just feels that way.
Case in point: I listed an adorable house in a central Toronto neighbourhood last week. The perfect starter home for first-time buyers. It would have been an absolute bun fight last winter.
I wasn’t sure how it would go. And because of that, I left nothing to chance. We shined her up, I spent a small fortune on staging, the photos were perfect. We did all the things.
Never would I have guessed that we would end up with twenty-five groups braving the miserable cold to come to the open house. And these weren’t people just out killing time on a Sunday. These were buyers, with parents in tow, and home inspection reports in hand, armed with their questions and their critical eye. The same buyers that are supposedly priced out or debilitated by the fear of catching falling knives.
Offer night yielded four offers. But unlike the offer nights of days prior, these prospective buyers weren’t armed with letters to the sellers and waving their bank drafts around. They were cool. They had conditions. And their numbers were conservative. Even in competition.
And this experience tracks with what I am hearing from my colleagues: the buyers still out there will participate at the right price. They will come forward when they’re good and ready. There is no FOMO. They will offer on things, sure, but will walk if it’s not right for them.
And this will be how the prices continue to grind downwards.
So while yes, the market has slowed right down, I wonder if the stasis is also due to the logjam of sellers determined to wait out these unfavourable conditions.
I suspect that once reluctant acceptance of new-new normal settles in, we will see inventory rise and sales volume increase. But I feel pretty confident in saying that it will be quite a long time before sellers leave the table feeling like heroes again.
Everything you should know about the metaverse real estate
With an expected CAGR of 31.2% from 2022 to 2028, the metaverse is one of the most rapidly growing economies globally. Developing a virtual world through the metaverse offers infinite possibilities for creating better spatial experiences. Its immersive and engaging virtual environment makes digital interactions feel real. This quality has grabbed the attention of leading tech companies who are now vouching for metaverse as the future of the built environment. Thus, investors and developers are looking at the metaverse as a potential investment for enhancing user experience and the saleability of a place.
What is Metaverse Real Estate?
Real estate in the metaverse refers to land parcels and buildings in the virtual environment. The land in the metaverse is virtual, implying that it has no physical attributes. Land parcels in the metaverse are essentially pixels that act as programmable spaces in virtual reality platforms. These lands can be used to develop workplaces, playgrounds, and meeting rooms.
Investors can buy land plots from multiple metaverse platforms providing unique virtual environments. Each of these platforms provides various functions; hence, no one platform represents the metaverse in totality. The Sandbox, Decentraland, Metahero, Horizon Worlds, and Celebrity Atlas are some of the most popular metaverse platforms for real estate developers to invest in.
Why and How to Purchase Real Estate in Metaverse?
Metaverse real estate provides people with a place to connect with people located in distant locations across the globe. Developers can monetize their virtual properties to advertise services, host events, and provide unique visitor experiences. Similar to physical land, real estate properties can also be rented or leased. Hence, investing in metaverse real estate can be profitable for key players in the AEC industry.
In 2017, during Decentraland’s first LAND auction at the Terraform Event, a plot of land was sold at an average of $20. In 2021, the same parcels of land were sold for an average above $6,000. Further, the beginning of 2022 witnessed a boom in the metaverse real estate prices, with property costs rising to $15,000.
For land purchases in the metaverse, the investor must require a virtual wallet to make all transactions. MetaMask is one of the most trusted browser-based wallets for making digital transactions. The digital wallet will have to be filled with cryptocurrency since it is the virtual world’s currency. Investors can study the features of various metaverse platforms and compare them against each other before registering.
Following this, the investor can create a digital avatar of themselves and take a tutorial on the platform to get acquainted with its virtual environment. After this, the plot selection and buying process can begin. Purchasing a metaverse property involves a deed of ownership, a unique code on a blockchain. This code certifies the ownership rights over a piece of virtual land. The purchased plot can be used to develop a new building or a digital twin of physical space.
Benefits of Investing in Metaverse Real Estate
The key benefit of metaverse real estate is that it compensates for the lack of space in the physical world. For instance, employers can create conference rooms and event halls in the metaverse if an office lacks physical meeting spaces. Further, the metaverse provides a seamless collaboration experience that allows people living in different parts of the world to communicate with each other.
Project marketing and property showcase is other significant benefit of the metaverse in the real estate sector. Developers are creating immersive metaverse experiences for potential buyers to witness their “dream house” in virtual reality. Equipped with VR headsets and compatible smartphones, buyers can take virtual reality tours of various places worldwide.
Many countries such as Germany, Croatia, Hungary, Norway, Mauritius, Iceland, Spain Costa Rica have invested in virtual tourism with the aid of the metaverse. Tourists can look at the most popular public buildings, experience their charm, and indulge in regional activities by weaving VR headsets.
Risks Associated with Metaverse Real Estate
Investing in the metaverse is promising, but it can also pose high risk owing to its relative newness. Although researchers predict that the metaverse has an excellent scope for growth, it is very early to predict how the industry will grow. For instance, if a metaverse platform decides to go offline permanently, the real estate in them would also become non-existent. In this case, the value of investment made by real estate developers would be questionable.
The valuation of physical land gets appreciated or depreciated based on market conditions, environment, and other tangible factors. But, all these factors have no impact on metaverse real estate since the virtual environment can be controlled. So, the only and most important variable that impacts the value of the real estate in the metaverse is the volatility of cryptocurrencies.
Developing and Managing Real Estate in the Metaverse
In the metaverse, developers can assign property development roles to architects. In the case of neighborhood developers, urban planners and urban designers can be involved. Architects can design the virtual world by planning the land parcels to maximize space utilization. Further, the land in the metaverse needs management similar to physical property management. The virtual world can potentially grow real estate through effective virtual property management, rental assortment, dealing with client queries, and general land maintenance.
Investing in metaverse real estate is associated with high risks and equally high rewards. The uncertainties of the virtual world can exponentially multiply to reap enormous benefits or deteriorate into a complete loss of investments. So, before investing, the developer must ensure that they have complete knowledge and understanding of how the metaverse works.
Investors must identify their risk appetite, weigh all their investment options, and speak to experts before investing. Considering all these factors, the fact that the metaverse will define the future of living is undeniable. Therefore, all key players in the AEC industry should prepare themselves for the dawn of this next-generation technology that is empowering, immersive, and engaging.
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