Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Buyers hit with big bills for surprise adjustments

2009-11-09T04:51:41-05:00

As many as 244 purchasers received a nasty surprise at the end of September when they got hit with thousands of dollars in "fictitious" charges on final closing of their new condominium units.

The development in question is a 244-unit medium-rise building near Warden Ave. and Enterprise Dr. in Markham.

The builder's agreement of purchase and sale contains an escalation clause typical of those used by local builders.

The clause contemplates that prior to final closing, there may be increases in the municipal levies or development charges, which were in place prior to construction.

The agreement states that in the event there is an increase in any of these existing levies after the day the document has been signed, "the purchaser shall pay the increase to the existing levy ... as an adjustment" to the builder on closing.

This means that the purchasers have to pay the builder the amount of increases in any government charges, which come into effect between signing and closing. Of critical importance, the clause is silent on whether the purchasers must reimburse the builder only for increases actually paid by the builder, or as well for increases imposed by the Town but from which the builder is exempt because the levies were prepaid.

Toronto lawyer Stephen Shub represented a number of purchasers in the Markham project. He told me that on closing, all of his clients were shocked to see that they were being charged between $7,680 and $11,283 for increases in existing levies.

A schedule attached to the builder's statements of adjustments for each purchaser detailed the amount of levy increase charged.

Shub discovered that the builder had not actually paid the amounts set out in the schedule. At the time the building permits were issued in May 2007, the builder had prepaid less than $300 in levies for each unit. When the town subsequently imposed thousands of dollars in higher levies, the builder did not have to pay those amounts because the increases were not retroactive.

On behalf of his clients, Shub took the position that the builder had no right to charge purchasers for levies it had neither incurred nor paid. The disputed clause in the agreement, he said, "can only apply to monies paid by the builder to the Town of Markham and not to monies never paid by the builder."

Despite Shub's objections, the builder insisted it was entitled to recover levy increases that had been implemented by Markham but that it had not been required to pay.

In a letter to Shub, Michael C. Volpatti, solicitor for the builder, said that the purchase agreement entitled the builder to charge purchasers for "any new levy" after the date the agreement was signed, and "without regard to the date of payment" by the builder.

Translated from legalese, the builder's position is that, according to the agreement, it has the right to recover any new levies, including those that it was in fact exempt from paying.

Eventually Shub closed the transactions on behalf of his purchasers, and the amounts in dispute are being held in trust by the builder's lawyer until further resolution.

In a detailed letter to me, Shub estimated that the builder has pocketed as much as $2 million in "unreal, exaggerated, surprise closing adjustments" from 244 "unsuspecting buyers."

To make matters worse, the buyers had to come up with the cash for these charges, and could not add them to their mortgages.

Calling the builder's actions a "rip-off," Shub wants builders to commit to voluntary upfront disclosure of all closing adjustments. He also calls for regulatory intervention by the Ontario government so that builders will not spring "surprise attacks on the unsuspecting public."

I agree with him. Any attempt to force purchasers to pay thousands of dollars in fictitious charges does no credit to the public image of Ontario's homebuilders.

Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto and a board member of the Tarion Warranty Corp. Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears Saturdays in The Toronto Star and weekly on Move Smartly. E-mail bob@aaron.ca

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Media Roundup November 6th 2009

2009-11-06T10:33:48-05:00

Media Roundup

Real Estate News

Is a condo a good investment? (Globe and Mail)

Condo research can keep you from a 'time bomb' (Globe and Mail)

They don't pay off their houses like they used to (Globe and Mail)

Easy credit, soaring prices raise new housing fears (Globe and Mail)

Housing market hot, but will it last? (Toronto Star)

Toronto home prices to keep rising (Toronto Star)

Sales of GTA luxury homes inch higher amid recession (Toronto Star)

Pricey homes ride out recession (Toronto Star)

Permits suggest rebound (Toronto Star)

Expert talks of Toronto condo-sale ‘miracle’ (National Post)

GTA home sales up 64%, prices up 20% (National Post)

Toronto existing home prices up 20 per cent (Toronto Star)

GTA house sales up 64% in October (Globe and Mail)

Peter Foster: Break the CREA cartel (National Post)

Real-Estate Shakeup (National Post)

Real estate fees could be slashed (Toronto Star)

Tough lawyer hails real estate fee victory (Toronto Star)

Real estate industry weighs outsider listings access (Globe and Mail)

Real estate agents keep lock on MLS - for now (Globe and Mail)

Second homes: In a global downturn, Toronto's a bubble (USA Today)

Competition in the Real Estate Industry – This Entrepreneur’s Perspective

2009-11-05T13:12:13-05:00

John Pasalis in Toronto Real Estate News, Real Estate Trends

In case you missed the headlines earlier this week, after a two-year investigation into Canada’s real estate brokerage industry, the Competition Bureau concluded that Multiple Listing Service (MLS) rules established by the Canadian Real Estate Association (CREA) restrict consumer choice and limit the scope of alternative business models.

To really understand what this decision means we need to step back a few years to see how this investigation started.

Several years ago, the real estate industry started to take a closer look at a new kind of discount real estate brokerage that was making its way into the market. These new brokerages were charging sellers a flat fee to upload their property listing to the MLS, but were doing very little outside of simply posting the listing. In many cases, the real estate agent responsible for uploading the listing hadn’t even visited their client’s house before uploading the listing to the MLS.

The industry argued that these minimum service brokerages were compromising the integrity of the MLS trademark. In 2006, CREA decided to put an end to these upstart brokerages by changing the MLS rules to set minimum services standards that all realtors must meet before uploading a listing to the MLS. These minimum service standards included:

Inspecting the property
Posting the listing
Maintaining a continuous agency relationship while the contract is posted on an MLS system
Receiving and advising on offers
Sharing compensation by and through the listing broker

The minimum service standards CREA put in place put an end to the brokerages that were running under the minimum service discount model. The former discount brokerage RealtySellers launched a $100 million lawsuit against CREA and the Toronto Real Estate Board for introducing rules that effectively put them out of business.

Three years later, the Competition Bureau has determined that the minimum service standards CREA put in place to curb these upstart brokerages are anti-competitive.

The press has characterized this decision as a big victory for consumers – one that will drive much needed change in the real estate industry.

In reality, this decision underscores why competition in the real estate industry needs to be a stronger priority for those with the power to change the industry.

The first problem with the Competition Bureau’s decision is that it’s three years too late. It does nothing to help the entrepreneurs who lost their businesses three years ago as a result of CREA’s new policies.

When the National Association of Realtors (NAR) in the US tried to introduce new policies that would have put an end to lower cost internet brokerages south of the border, the Department of Justice (DOJ) didn’t sit idly for three years, allowing the NAR to put these upstart brokerages out of business before the DOJ decided that the new rules are anti-competitive.

The DOJ acted swiftly by suing the NAR which effectively prevented any rule changes until the case had been settled in court.

The other problem with the decision is that it does very little to encourage innovation in the real estate brokerage industry.

There’s nothing terribly innovative about charging someone a flat fee to upload their listing to the MLS. This business model may certainly appeal to a small segment of the market, but it’s definitely not going to have a big impact on the way most people buy and sell homes. If cost was the only thing consumers cared about, existing discount brokerages would have had a much larger share of the market.

From my perspective, real innovation in the industry can happen in one of two ways.

A brokerage can either focus on using improved business and/or service models or technology to dramatically improve the client experience or they can use the same to realize savings which are then passed onto consumers as savings.

The US internet brokerage Redfin is a good example of a company that is taking the latter approach. Redfin has streamlined the buying and selling process by building innovative websites and tools for their clients. Redfin passes these savings onto their clients. (Read a previous post on Redfin’s business model.)

Our brokerage, Realosophy Realty, has opted for the former approach. We have focused our resources on researching housing statistics for every neighbourhood in Toronto so our clients can make smarter real estate decisions

There was a time when our team flirted with the idea of opening a brokerage modeled after Redfin, but these kinds of brokerages are not allowed to operate in Canada. What the recent Competition Bureau ruling doesn’t challenge is that CREA (along with local boards) successfully restrict access to the MLS database. Allowing access to this data would allow internet brokerages to build an alternative to the Realtor.ca website, a key component of the internet brokerage’s business model. (Learn more about the internet’s role in the real estate brokerage from the DOJ.)

Happily, we feel we have chosen the analytical and technology value-add path that best capitalizes on our strengths and addresses the most critical concerns that consumers have. But there is no doubt that as entrepreneurs, many of our choices were made for us by an outdated approach to the industry. If we are ever going to realize pro-consumer change in the real estate industry, industry regulators need to be more proactive about confronting the gate-keeping behaviour of real estate boards in an age of growth enabled by the free exchange of information.

John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Realosophy Realty focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions.

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Toronto Real Estate Sales Statistics for October 2009

2009-11-04T12:12:21-05:00

John Pasalis in Toronto Real Estate News

A quick summary of the Toronto Real Estate Board's sales figures for October.

The two most commonly reported figures, sales growth and price appreciation are very misleading this month.

Home sales increased by 64% to 8,476 last month. The percentage increase is skewed by the fact that sales in October 2008 were low due to the crisis in financial markets. But it's worth noting that 8,476 sales is still the best October on record.

The average price for a home is up 20% to $423,559. This number is also skewed by the poor sales figures last year and by the significant increase in the number of higher priced homes that sold last month.

The important take away from today's figures is that the imbalance between supply and demand, measured by the sales-to-inventory ratio actually widened this month.

We saw a slight improvement in August and September but the market moved further into seller's market territory in October.

John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Realosophy Realty focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions.

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Toronto Real Estate Prices up 9.4% in 4 Months

2009-11-02T09:33:54-05:00

John Pasalis in Toronto Real Estate News

Toronto real estate prices increased by 9.4% in just four months according to the Teranet National Bank House Price Index.

The House Prince Index does not use average price to measure changes in house values. It uses something called the repeat sales methodology to calculate changes in house values. This approach requires a property to have been sold at least twice in order for it to be used in their calculations. They take the current sale price of a particular house and compare it to the previous sale price to measure the increase or decrease in value over that period. This approach offers a more realistic look into changes in real estate values. You can read more about the index here.

Here is the most recent House Price Index chart for Toronto.

Toronto's House Price Index reached a low of 104 in April 2009 but increased to 114 in August, an increase of 9.4% in just four months. Over the past decade it has taken an average of 2-3 years for Toronto home prices to increase by 9%. If prices continue at this rate for the next eight months we'll see a 28% increase in house values in just one year.

Readers of this blog may recall that in early July I wrote a post titled Alarming Imbalance in Toronto's Real Estate Market. While some in the real estate industry accused me of being unnecessarily alarmist, the fact is that the imbalance I wrote about four months ago is what's driving the rapid price appreciation we are seeing today.

There are a lot of houses selling well above their market value but there are still some houses selling for reasonable prices. What I'm finding is that in any given week 5-10 houses will come on the market in a particular neighbourhood and all will hold back offers until the following week. When offer day comes, all the buyers end up competing for the same 2-3 houses which drives up prices. These houses are usually in slightly better condition and very well staged.

I remember showing two similar houses on the exact same street a few weeks ago. Both houses were accepting offers on the same day. One house sold for $150K above the list price because 10 buyers were competing for it, the other house only had one offer and sold for $30K under list.

If you're a buyer looking in this market, here are a couple of tips for you.

Look for value. Stainless steel appliances and granite countertops are not that expensive. Avoid paying a premium for a well staged house. Seek out the houses that don't have that immediate wow factor. You'll save money because you won't end up competing against 10 other buyers to win it. You can use some of the money you saved to make the house your own.
Understand what the house is actually worth. In a multiple offer situation many agents will tell you what you need to offer to win the house but they may not tell you what the house is actually worth. This is important because as a buyer you need to know how much of a premium you're paying to win a particular house. Furthermore, you need to know the home's value to assess the risk of waiving your condition on financing. You can read more about this in an earlier blog post titled Competing in a Multiple Offer in Toronto's Real Estate Market.

The Toronto Real Estate Board will be releasing their October sales statistics this week. Stay tuned!

Competing in a Multiple Offer in Toronto's Real Estate Market

John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Realosophy Realty focuses on researching Toronto neighbourhoods to help their clients make smarter real estate decisions.

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Rules on terminating a deal all over the map

2009-11-02T06:05:00-05:00

Bob Aaron in Legal

Can a buyer refuse to close the purchase of a new home if there are deficiencies in construction, forgotten or incomplete items, or unauthorized changes to the design, layout or materials?

That question was the subject of a paper presented to a builder's conference earlier this year by Harry Herskowitz, of the Toronto law firm DelZotto Zorzi LLP. Herskowitz is well-known and respected as an author, lawyer for builders and developers, and chair of the Tarion Warranty Corp.

In his presentation, Herskowitz carefully analyzes 10 reported Ontario court decisions in which the purchaser was entitled to refuse to close, and seven other cases where the court ruled the buyer was wrong in refusing to close.

According to the Herskowitz analysis, whether or not a purchaser may refuse to close depends on the nature of the builder's default. If it is considered to be a fundamental breach of contract, one which substantially deprives the buyer of the whole benefit of the transaction, the buyer may terminate and get a refund of all deposit money.

If, however, it is a minor or "immaterial" breach of contract, one which is incidental or inconsequential to the main purpose of the contract, the buyer has to close, but may be able to claim damages from the builder.

Unfortunately, the reported court decisions in this area are all over the map. Ontario courts have failed to create a clear guideline so buyers and their lawyers are able to decide when a home deficiency or unauthorized alteration entitles the buyer to terminate the contract.

"One would think," writes Herskowitz, "that over the years, in the aftermath of several real estate recessions ... the courts in Ontario would have clearly delineated when a particular breach or misrepresentation ... will be considered minor, or conversely fundamental..."

He notes that more often than not the demarcation line between a minor and fundamental breach by the builder is blurred by the facts and equities of each particular case.

To me, one of the most puzzling cases cited in the Herskowitz paper is the 1995 decision of Justice Sidney Lederman in the case of Three D Developments (Kingwood) Ltd. v. Gogos. On the day of closing there was only temporary power in the house, the heating was incomplete, and the screens, kitchen desk, kitchen island, garage door and outside steps had not been installed.

The concrete garage floor had not been poured, and there was construction debris strewn around the house.

When the building inspector arrived on the morning of closing, the house failed inspection and he determined that it was not fit for occupancy.

The buyers refused to close and pay the balance of the purchase price, claiming the interior work of the house was not substantially complete so as to permit reasonable occupancy.

By the time the inspector returned at 4 p.m., the water was connected and although the furnace was not completely installed (it was July), the house was deemed fit for occupancy.

The builder sued the buyer for damages and won. The judge found that the issues were "relatively minor in nature." The house "on any objective standard" could reasonably be occupied, said the judge, and the buyer was not justified in refusing to close.

Other court decisions reach opposite results on similar facts.

Herskowitz concludes that the facts of each case are critically important to a court ruling whether or not the purchaser is entitled to terminate. The risk to the purchaser of refusing to close, he says, is very high, but so is the risk to a builder who refuses to acknowledge the purchaser's legitimate concerns.

In situations like these, Herskowitz urges both sides to act with the utmost good faith on closing day, to avoid winding up in a courtroom.

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Media Roundup October 30th 2009

2009-10-30T07:21:31-04:00

Media Roundup

Real Estate News

Canadian Home Prices Rise for Fourth Straight Month in August (Bloomberg)

Rebound hammers affordability of GTA homes (Toronto Star)

Don’t Get Excited By Rising Yields, Suggests Carney (Canadian Mortgage Trends)

An infill builder tells tales from the inside (Globe and Mail)

As condo sales dip, the new homes market is turned on its head (Globe and Mail)

Toronto settles for half a Libeskind (Globe and Mail)

How to invest in real estate (Globe and Mail)

In condo marketing, a gut feeling is no longer enough (Globe and Mail)

Low inventory leaves Toronto buyers scrambling (Globe and Mail)

The great B.C. real estate bust (Globe and Mail)

Housing bubble possible, not likely (Montreal Gazette)

Fewer McMansions on the Horizon (Wall Street Journal)

Economic News

Economy finally back in gear (CNN)

Mortgage Payments Declined in Third Quarter (Wall Street Journal)

A Look at Case-Shiller, by Metro Area - October Update (Wall Street Journal)

Economists React: ‘Blockbuster’ Month for Home Sales, but What’s Next? (Wall Street Journal)

Neighbourhood and Urban Planning

The Junction’s secret history checked out (Globe and Mail)

CONDO CRITIC: Jane/Finch rehab faces uncertain future (Toronto Star)

Hume: A brilliant beauty built to last (Toronto Star)

Honesty won't resolve disclosure form issues

2009-10-26T07:29:58-04:00

Bob Aaron in Legal, Home Selling Tips

The Great SPIS Myth

It's time to reveal The Great SPIS Myth – the prevailing fiction about the Seller Property Information Statement (SPIS), a disclosure form published by the Ontario Real Estate Association (OREA).

Although its use is endorsed and encouraged by many OREA member boards, real estate agents remain sharply divided on whether the form is too dangerous to use, and whether it protects the public or the agents who try to get sellers to sign it.

I have been very critical of the form because it results in a great deal of litigation among sellers, unhappy buyers and the agents who are caught in the middle.

The official position of OREA and industry commentators who support it is that the problem with the SPIS is not the form itself, but that some sellers do not tell the truth.

The key to the successful use of the SPIS, OREA says, is honesty. In every one of the court cases I have written about in this column, OREA's view (set out in a letter to me last month) is that "it was not the SPIS form itself that caused legal difficulty for the sellers: rather it was the failure of the sellers to be forthright in their disclosures about the property."

This, in my view, is the fatal flaw in the OREA logic. I call it The Great SPIS Myth – the fiction that if sellers are honest they won't wind up in litigation over the SPIS form.

A careful analysis of the reported court decisions shows that this position is simply not accurate, and that is probably why OREA's president declined my request for an interview.

Consider some of the questions on the form:

"Does the survey show the current location of all buildings, improvements, easements, encroachments and rights-of-way?" My response: only a licensed land surveyor can answer this question. Even the most honest seller doesn't have the skills to answer it properly.
"What is the zoning on the subject property? Does the subject property comply with the zoning? If not, is it legal non-conforming?" Unless a seller is intimately familiar with the municipal zoning bylaw, it would be foolhardy to answer these questions.
"Are there any restrictive covenants that run with the land? Are there any drainage restrictions?" Few sellers have a current title search at hand in order to properly understand or answer these two zingers.
"Are there any local levies or unusual taxes?" To me, all taxes are unusual and most sellers have no idea if there are any levies.
"Is the sale of the property subject to GST?" Only someone familiar with the GST legislation would be safe in answering this. "Has the use of the property ever been for the growth or manufacture of illegal substances?" Note the use of the word "ever." Unless the proverbial "honest seller" knows what happened in the house under previous owners, this question could be an invitation to litigation.
"Is the property under the jurisdiction of any Conservation Authority?" Not something most homeowners would have the slightest clue about.

Other questions ask for the size of the electrical service, the type of wiring, , whether there is any lead or galvanized metal plumbing, and what is under the carpeting. How the honest but typical homeowner is supposed to know the answers to these questions off the top of her head is beyond me.

Condominium owners are asked to itemize what is included in the common expenses, whether a reserve fund study has been completed, how much money is in the reserve fund, and whether there are any pending rule or by-law amendments. Again, these are not questions that even the most honest condominium owner could readily answer without extensive investigation.

The SPIS form is so impossibly technical, so complicated, so ambiguous and so badly worded that even a college of cardinals, a posse of priests, an institution of imams, a multitude of monks or a regiment of rabbis could not honestly fill it out.

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Media Roundup October 23rd 2009

2009-10-23T07:45:57-04:00

Media Roundup

Real Estate News

Bank of Canada monitors real estate surge (Globe and Mail)

New condominiums will have Don River on the doorstep (Globe and Mail)

Fixed or variable mortgage? That is the question (Globe and Mail)

More home owners using cash for renos (Globe and Mail)

Developers willing to dive into distress (Globe and Mail)

Has a backlash begun? (Globe and Mail)

Sales of existing homes in full recovery after downturn (Toronto Star)

Analysts forecast near-record home sales in 2009 (Toronto Star)

CMHC bubble is 100% made in Canada (National Post)

Toronto now bedroom community for 905, report finds (National Post)

Sony Centre gets facelift, L-Tower gets started (National Post)

Commercial real estate bounces back (Globe and Mail)

Housing, industry fuel U.S. rebound (Globe and Mail)

Waiting for the Next McMansion to Drop (Wall Street Journal)

Neighbourhoods and Urban Planning

The new zoning bylaw: a confusion of bases (Spacing)

WATERTABLE: art commission under the Gardiner unveiled (Spacing)

Hume: A watershed for Toronto artworks (Toronto Star)

What Colour is Your Toronto? (Creative Class Blog)

Why are there fewer for sale signs in Toronto?

2009-10-21T07:06:33-04:00

John Pasalis in Toronto Real Estate News

There are a lot of factors at play when it comes to the current shortage in housing supply that we are seeing in Toronto.

From 2004-2006, annual resale home sales hovered around the 86,000 mark, and in 2007, sales jumped up to 97,000. The sudden increase in sales was attributed to the jump from 25-year mortgages to 40-year mortgages which made homes more affordable for a greater number of buyers. We did some analysis at Realosophy and found that the majority of this increase in sales was driven by repeat buyers, not first time buyers.

This means that thousands of repeat buyers who were planning to sell their existing house and buy a new house between 2008-2010, may have rushed into the market ahead of schedule in 2007 because of the introduction of the 40-year mortgage. This shock to our market not only impacted sales in 2007, it is having a lagging effect on supply in the years following because fewer existing home owners are moving.

It’s also worth noting that the number of new listings peaked in 2008 which may also be having an effect on the supply of homes in 2009. The peak in new listings was likely a result of home owners trying to time what they thought was the peak of the market.

But above all, it’s important to understand that some of the basic principles we know and understand about economics don’t necessarily apply to the real estate market (and as the recent financial meltdown has shown, they may not apply to many other markets either). Many of the commentators I hear from on our blog have long been predicting a big increase in the supply of homes (even oversupply) because demand is so high.

In economic theory, businesses increase their supply of goods when demand is up. In the real estate market, there are many factors outside of price and demand that can influence a home owner’s decision to sell their home, some of the greatest factors being psychological. Many sellers are fearful about job conditions and would like to stay put until things stabilize. But there are other effects at play.

Some sellers tend to measure gains and losses against theoretical benchmarks that represent what they would have gained had they sold a year ago or two years ago. These sellers tend to hold off for better market conditions though they may currently be seeing substantial gains on the investments they originally made in their homes.

I expect that we'll see supply improve and demand moderate in early 2010.

John Pasalis is the Broker owner of Realosophy Realty Inc in Toronto. Email John

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