Many homebuyers who signed pre-construction Agreements of Purchase and Sale during the peak of the real estate market are now struggling to secure appraisals anywhere near the prices they committed to. With closing dates fast approaching, some are faced with appraisals coming insignificantly lower than expected—leaving them with difficult choices: cover the shortfall, or risk losing their deposits and facing potential litigation.

If you find yourself in this situation, the most important thing is not to panic. Instead, this is the time to lean on your professional advisors and carefully explore all available options.

Here are some options that have worked for homebuyers in similar situations. It’s important to keep in mind, however, that every transaction is unique—each Agreement of Purchase and Sale has its own terms, and each buyer’s circumstances are different. An option that worked for one buyer may not necessarily be suitable for another.

·     Explore Different Lenders: Don’t be discouraged if the first appraisal comes in lower than your purchase price. Different lenders may assess value differently, and shopping around can sometimes lead to a more favorable outcome. This is where working with an experienced mortgage broker can be especially valuable.

·     Check with the Builder for a Blanket Appraisal Arrangement: In some cases, builders have agreements with certain banks to provide financing based on the purchase price in the Agreement of Purchase and Sale regardless of the appraised value. If your builder has such an arrangement in place, you can then reach out to that bank to arrange for mortgage financing.

·     Request a Vendor Take-Back Mortgage (VTB): A VTB Mortgage allows the builder to register the unpaid portion of the purchase price as a mortgage on title. In other words, instead of requiring you to come up with the entire shortfall in cash, the builder finances that portion, and you repay it under agreed terms. If your appraisal comes in low, you may consider negotiating with your builder to see if they are open to this option.

·     Consider an Assignment: Assignment is a transaction where the purchaser assigns their interest in theAgreement of Purchase and Sale to a third-party new purchaser. Usually under pre-construction transactions, assignments are subject to the builder’s consent unless the buyer has a right to assign under the Agreement of Purchase andSale.

·     Negotiate a Price Reduction with the Builder: You may consider approaching your builder to discuss a price reduction in light of the low appraisal. While builders are often reluctant to reduce prices, it may still be worth initiating the conversation, as some have been willing to make concessions in certain circumstances.

·     Negotiate a Mutual Release with the Builder: A Mutual Release is an agreement that releases both parties from their contractual obligations under the Agreement of Purchase and Sale. In many cases, this involves the purchaser forfeiting all or a portion of their deposit. In addition, you may consider offering further funds as an incentive for the builder to agree to the release, thereby avoiding potential litigation. It is important to note, however, that Mutual Releases are uncommon and depend heavily on the builder’s willingness to cooperate.

·     Contact Your Real Estate Lawyer: It is essential to seek legal advice as soon as possible in these situations. A Real Estate Lawyer can review your Agreement of Purchase and Sale, explain your rights and obligations, and identify potential solutions—such as assignment rights, vendor take-back mortgage options, or other options that may apply in your case.

·     Default May Be Inevitable: If none of the available options work and you are unable to secure the shortfall, defaulting under the Agreement of Purchase and Sale may become unavoidable. In such circumstances, it is crucial to consult with a litigation lawyer in advance to understand the potential consequences and prepare accordingly. Please note that our firm does not practice litigation, however we can refer you to recommended litigation lawyers.

At Kormans LLP, we have extensive experience assisting buyers of pre-construction properties in our capacity as Real Estate Lawyers. If you find yourself in this situation, please don’t hesitate to reach out—our team will work with you to explore your options and guide you through the process.

(Please note: as mentioned above, every transaction is unique. The information provided in this blog is for general informational purposes only and should not be relied upon as specific legal advice.)

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