The close

Brad and Jill sold their house five weeks ago for $1.895 million in a crappy-but-uppity part of the Big Smoke. In their late forties, this was their third place and not only had they grown disenchanted with old houses (“the deck was rotten… the roof was iffy.. the backyard was a swamp…”) but they had dollar signs in their eyes.

So they found some greater fools to pay them exactly double what they shelled out five years ago, will trash the $420,000 mortgage upon closing and walk with about $1.3 million. The plan is to invest, harvest four grand a month in income and move into a bigger, better place two streets away. “Just signed a three-year lease,” he says. “It’s perfect. I can’t believe we’ll be living for free.”

Not so much for the buyers. They’re Millennials, Jill says, shaking her head a little, who made a big withdrawal at the Bank of Mom and are taking on a mama of a mortgage. The deal is set for late June, and now B&J have only one thing keeping them up at night: “Will they close?”

Exiting a deal isn’t simple. Yes, you will lose your deposit – that’s a given. Unless the seller agrees to sign a mutual release letting you out of the deal (fat chance) also expect to be sued for breach of contract. The amount of damages claimed usually depends on what price the sellers are ultimately able to get for the property. If they sell for less, the original buyer will be expected by the courts to make up the difference, plus cover actual costs the sellers incurred in re-listing. If the sellers had already purchased another home, for example, and have to get out of that deal, the damages could be Trumpian.

Also there’ll be legal costs. Lots of them. Litigators ain’t cheap, so both parties will have to fork over five or ten grand just to get their claims and defenses rolling. The odds of a negotiated settlement, instead of a full-blown court case, are high since burning through judge time is even more expensive.

In this market anyone who bought in February, March or early April and decides to walk may end up severely pooched. Realtor-provided price stats haven’t moved a whole lot yet, but actual real estate values are tumbling. Look at this little report from blog dog Steve:

“Just thought I would share with you a couple of images as evidence that the housing market may be finally correcting itself. The first image is of a house in the Weston neighbourhood, which I took on April 20, when it was listed at nearly $1mil. Today, that same house is still available over a month later for $300K less, with an asking price of $699K. As a renter, I sure hope house prices continue to plummet across the GTA.”

Given that listings continue to flood in and buyers have lost their house lust, prices are destined to fall. The increases in late winter were so off-the-chart we could see a 20% decline within a few months, and still have an affordability crisis. Recall the charts published here yesterday. This is a classic bubble, the result of excessive speculation and human emotion detached from economic fundamentals. Worse, it’s a debt-fueled keg of risk. Of course it will end, as every asset bubble before it has. And there’s never a soft landing.

So, buyers who walk can look forward to a protracted process since jilted sellers may require months to find a new buyer. Guaranteed, it will be for less. So the damages could be substantial, with no place to hide other than personal bankruptcy or moving back in with mom on the Isle of Man and herding goats.

The question is simple: is losing your deposit, paying tens of thousands in legal costs, going through marriage-busting stress and facing a settlement for damages that could amount to hundreds of thousands – then ending up with no asset to show for it – better than actually closing? Maybe not. If this was a piece of property you’d planned on living in for a decade or more, running away could be folly since the needed correction won’t last forever, plus you get a house. On the other hand, if you’re a speculator everyone thinks you should fry.

Well, the next few weeks and months will test many people whose unshakeable belief was that real estate is safe, and ascendant. Surprise.