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House flippers and undue risk in pre con

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Deal Guru
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House flippers and undue risk in pre con

I originally posted this in the Durham region thread but as we are seeing builders putting in $50k + legal fee for assignments...you wonder if the builders are feeling undue risk and trying to get people "booking houses" that actually plan to close and move in.

I'd love to see stats but I'd hazard in the GTA the number of people who own their house + plus the number of houses owned (or booked) by people that live within that same house is absolutely off the charts vs previous years.

There's a reason builders are putting $50k assignment fees now as they are feeling the risk of signing up a bunch of buyer who neither have the means or intent to close on the house. A subdivision with too many of these types of buyers is a massive risk to the builder if the market were to cool. I feel assignment fees should be more like $100k. So unless you plan to move in you shouldn't "book a house". The govt should get in on the action requiring SIN numbers and taxing pre con flipping (any sale between booking and house completion) as income at the highest marginal tax rate. No SIN number no purchase allowed.

I've noticed the flipper community using the terms "investment property" and "book a house" really means flipper when it comes to this pre con nonsense.

As posted by Ketchanny (thanks) in the Durham thread here's the line up yesterday in Bowmanille:
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there are builders out there also will not allow assignment at all. If the original buyer cannot close and default, builder keeps the deposit and resell the house at the market price at that point of time, such that the builder may benefit even more $, than say the $50,000 or $100,000 assignment fee.
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booblehead wrote: there are builders out there also will not allow assignment at all. If the original buyer cannot close and default, builder keeps the deposit and resell the house at the market price at that point of time, such that the builder may benefit even more $, than say the $50,000 or $100,000 assignment fee.
Yep, that can work also. The no assignment clause may scare all the flippers away. I'd hazard the builders do want some flippers in to help push the prices up. The primary goal of the flipper Is to "book a house" as opposed to the price on the understanding it will be much higher in 2 years. But if a development is a very high percentage of flippers and the market cooled it's risky. In many cases on default there will be no buyer to go after if the buyers gone back home or already bankrupt from the multiple flip obligations they have.

I think for the builders it's risk mitigation but still allowing for max profit with a modest assignment fee.
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cartfan123 wrote: I originally posted this in the Durham region thread but as we are seeing builders putting in $50k + legal fee for assignments...you wonder if the builders are feeling undue risk and trying to get people "booking houses" that actually plan to close and move in.

I'd love to see stats but I'd hazard in the GTA the number of people who own their house + plus the number of houses owned (or booked) by people that live within that same house is absolutely off the charts vs previous years.

There's a reason builders are putting $50k assignment fees now as they are feeling the risk of signing up a bunch of buyer who neither have the means or intent to close on the house. A subdivision with too many of these types of buyers is a massive risk to the builder if the market were to cool. I feel assignment fees should be more like $100k. So unless you plan to move in you shouldn't "book a house". The govt should get in on the action requiring SIN numbers and taxing pre con flipping (any sale between booking and house completion) as income at the highest marginal tax rate. No SIN number no purchase allowed.

I've noticed the flipper community using the terms "investment property" and "book a house" really means flipper when it comes to this pre con nonsense.

As posted by Ketchanny (thanks) in the Durham thread here's the line up yesterday in Bowmanille:
You make a great point. If the market cools it would be a nightmare especially if most never had the ability to close. I'm not thrilled with the fact that most deals are becoming firm without cooling off periods, and without conditions on preconstruction. The builders in those cases aren't requiring a preapproval. So as long as someone can put a deposit down, that house is considered sold. If the market crashes, those people will probably walk away, but worse is the people who can actually afford to close will walk away too, thinking why should I have to close and a devalued asset with no one else is (why lose money when no one else will).

In Florida during the recession: Housing crashed, then the builders started selling remaining inventory for less. People refused to close as they had paid more. Those who closed on their house were upset that they paid 500k for their house and now the builder was charging 350k. So they walked away from their houses, and the banks foreclosed. The banks aren't in the landlord business so they said just dump the foreclosure. They would sell for 250k. Then this brought the builders prices down to that level too. Essentially it became a race to the bottom.
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santafe wrote: You make a great point. If the market cools it would be a nightmare especially if most never had the ability to close. I'm not thrilled with the fact that most deals are becoming firm without cooling off periods, and without conditions on preconstruction. The builders in those cases aren't requiring a preapproval. So as long as someone can put a deposit down, that house is considered sold. If the market crashes, those people will probably walk away, but worse is the people who can actually afford to close will walk away too, thinking why should I have to close and a devalued asset with no one else is (why lose money when no one else will).

In Florida during the recession: Housing crashed, then the builders started selling remaining inventory for less. People refused to close as they had paid more. Those who closed on their house were upset that they paid 500k for their house and now the builder was charging 350k. So they walked away from their houses, and the banks foreclosed. The banks aren't in the landlord business so they said just dump the foreclosure. They would sell for 250k. Then this brought the builders prices down to that level too. Essentially it became a race to the bottom.
Well reasoned points on all fronts. I think the disruption the flippers who really don't care what clauses are in there is that they've allowed builders to slip in a whole bunch of anti buyer clauses...see the other thread about rented furnace / HRV. So those that can walk away, can walk away to another home country while the buy to move in crowd doesn't have that option. So either assign/sell and take the hit OR default when getting sued.
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I can tell you based on my experience actually a lot less builders are allowing assignments these days. As prices go up builders are also changing their risk assessment startegies.
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cartfan123 wrote: Yep, that can work also. The no assignment clause may scare all the flippers away. I'd hazard the builders do want some flippers in to help push the prices up. The primary goal of the flipper Is to "book a house" as opposed to the price on the understanding it will be much higher in 2 years. But if a development is a very high percentage of flippers and the market cooled it's risky. In many cases on default there will be no buyer to go after if the buyers gone back home or already bankrupt from the multiple flip obligations they have.

I think for the builders it's risk mitigation but still allowing for max profit with a modest assignment fee.
X24Secret wrote: I can tell you based on my experience actually a lot less builders are allowing assignments these days. As prices go up builders are also changing their risk assessment startegies.
I'm thinking if the original buyer can't 'close' bc of an economic downturn, but there is someone willing to take it that can close, isn't it in the best interest of the builder to close on whatever units are 'pre' sold? As a builder, I would think "I don't need the headache of taking the deposit even though I get rich off it as re-marketing it is also going to be a pain and potentially damaging to the image of my units"
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booblehead wrote: there are builders out there also will not allow assignment at all. If the original buyer cannot close and default, builder keeps the deposit and resell the house at the market price at that point of time, such that the builder may benefit even more $, than say the $50,000 or $100,000 assignment fee.
It's ok to rent out however as long as the buyer can close on it?
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at1212b wrote: I'm thinking if the original buyer can't 'close' bc of an economic downturn, but there is someone willing to take it that can close, isn't it in the best interest of the builder to close on whatever units are 'pre' sold? As a builder, I would think "I don't need the headache of taking the deposit even though I get rich off it as re-marketing it is also going to be a pain and potentially damaging to the image of my units"
I'm sure some builders might think along those lines that's probably why some allow assignments, but if you look around at the upper end market in core GTA, say 2+ mil pre-con projects, you'd be surprised how very few allow assignments these days. I'm not saying it doesn't happen but it would be rare.

Outlying GTA projects are a different story with many allowing assignment to lure flippers and investors.
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cartfan123 wrote:
I've noticed the flipper community using the terms "investment property" and "book a house" really means flipper when it comes to this pre-con nonsense.
This is my theory, and my theory alone:

What you are witnessing is the maladaptation of the RFD "buy now, think later" motto by RFD lurkers. People are leaving out the "think later" section and literally just keep buying multiple properties at once, hoping to flip all of them for profit. What RFD lurkers are doing is buying now, then "buying now" again, but the "think later" never comes. These people are stopping at "buy now" then living in pure bliss and ignorance with adrenaline and dopamine pumping through their blood vessels.
¯\_(-.-)_/¯ A wise RFD'er once said, "Buy now, think later."

༼ つ ◕_◕ ༽つ Behold!
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at1212b wrote: I'm thinking if the original buyer can't 'close' bc of an economic downturn, but there is someone willing to take it that can close, isn't it in the best interest of the builder to close on whatever units are 'pre' sold? As a builder, I would think "I don't need the headache of taking the deposit even though I get rich off it as re-marketing it is also going to be a pain and potentially damaging to the image of my units"
I guess that's the million dollar question. If there is an economic downturn and if these house were to pull back $100k which might be what they were in the fall and the builders have large swaths of pre con flippers as buyers. Getting a bunch of houses back on the market might be an issue to digest. You appear to be assuming an economic downturn will leave house prices at or near current.

And before the Bulls attest to this wasn't how it played out in 2008...there also wasn't this growing trend of pre con flippers which is adding systemic risk to the market. Merely saying we don't have subprime is irrelevant since this is pre con and before the actual mortgage and loans have to take place.
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OP ..When was last time you went to precon?

It's limited to one house per household address and no assignments..Have been this way for a few years now

Even condos only allow one assignment after 90% are sold
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May 4, 2016
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santafe wrote: You make a great point. If the market cools it would be a nightmare especially if most never had the ability to close. I'm not thrilled with the fact that most deals are becoming firm without cooling off periods, and without conditions on preconstruction. The builders in those cases aren't requiring a preapproval. So as long as someone can put a deposit down, that house is considered sold. If the market crashes, those people will probably walk away, but worse is the people who can actually afford to close will walk away too, thinking why should I have to close and a devalued asset with no one else is (why lose money when no one else will).

In Florida during the recession: Housing crashed, then the builders started selling remaining inventory for less. People refused to close as they had paid more. Those who closed on their house were upset that they paid 500k for their house and now the builder was charging 350k. So they walked away from their houses, and the banks foreclosed. The banks aren't in the landlord business so they said just dump the foreclosure. They would sell for 250k. Then this brought the builders prices down to that level too. Essentially it became a race to the bottom.
There are two things to know between Canada and USA. There is something called Recourse and Non-Recourse loan. In the USA home loans are non-recourse and Canada is Recourse loan...brace yourself for the meaning of the difference or just google it.

Recourse - If you buy house for 500k, sell for 400k, and @ -100k loss the banks cant go for other asset to claim back the loss of 100k
Non-Recourse - Well, 100k loss they can go after your asset.

With this difference you can guess why the US defaulting magnitude. Also, currently the mortgage default rate is .28%......I will let you google what US was before the crash..
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cartfan123 wrote: I guess that's the million dollar question. If there is an economic downturn and if these house were to pull back $100k which might be what they were in the fall and the builders have large swaths of pre con flippers as buyers. Getting a bunch of houses back on the market might be an issue to digest. You appear to be assuming an economic downturn will leave house prices at or near current.

And before the Bulls attest to this wasn't how it played out in 2008...there also wasn't this growing trend of pre con flippers which is adding systemic risk to the market. Merely saying we don't have subprime is irrelevant since this is pre con and before the actual mortgage and loans have to take place.
With assignment clause, the first purchaser is still on the hook to close if the new assignee fails to close.
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pakwan11 wrote: There are two things to know between Canada and USA. There is something called Recourse and Non-Recourse loan. In the USA home loans are non-recourse and Canada is Recourse loan...brace yourself for the meaning of the difference or just google it.

Recourse - If you buy house for 500k, sell for 400k, and @ -100k loss the banks cant go for other asset to claim back the loss of 100k
Non-Recourse - Well, 100k loss they can go after your asset.

With this difference you can guess why the US defaulting magnitude. Also, currently the mortgage default rate is .28%......I will let you google what US was before the crash..
As far as I know only Alberta has non-recourse mortgages. So in an extreme down / black swan event Cdns are way more exposed and being able to walk away while keeping other assets isn't going to happen. Although it's something that Cdn purchasers don't seem to care about. Which they should.
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pakwan11 wrote: With assignment clause, the first purchaser is still on the hook to close if the new assignee fails to close.
I don't believe this is how it works, not in Ontario at least as the amendment deletes the original purchaser's name and adds the assignee on to the purchase agreement.

Besides, builder's leverage and only recourse against a defaulting purchaser is their deposit which in an assignment sale, the original purchaser has presumably already recovered anyway.
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X24Secret wrote: I don't believe this is how it works, not in Ontario at least as the amendment deletes the original purchaser's name and adds the assignee on to the purchase agreement.

Besides, builder's leverage and only recourse against a defaulting purchaser is their deposit which in an assignment sale, the original purchaser has presumably already recovered anyway.
i dont get your point...If you dont believe find the information to know and accept.
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pakwan11 wrote: i dont get your point...If you dont believe find the information to know and accept.
Thanks for this very informative post and the important life lesson. :facepalm:

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