I was recently hired to write an expert witness report for a case that perfectly illustrates the domino effects of the real estate correction that started in 2022.
As you may recall, the Bank of Canada began to raise interest rates in the spring of 2022, signalling the beginning of the end to the real estate party that had been going on since the start of the Pandemic. From March to October 2022 the Bank of Canada raised interest rates by 3.50%. The days of cheap money and real estate hysteria were over. Left in its wake were real estate transactions entered into by otherwise responsible people who could no longer live up to their contractual obligations.
At the peak of the hysteria, much to my chagrin, it was common practice to hear purchasers entering into purchase agreements before selling their current home. This always terrified me but when the market was humming along there were seldom any issues.
Fast forward to 2022 and the Defendants had entered into an agreement to purchase the home of the Plaintiffs. The Defendants had not sold their current home prior to entering into the agreement and due to the sudden change in the real estate market, they were unable to sell their home prior to closing. The Defendants were relying on the sale of their principal residence to purchase the Plaintiffs home and informed the Plaintiffs that they would be unable to close on the purchase.
Meanwhile, relying on the firm sale of their home, the Plaintiffs had purchased another property and were downsizing for their retirement. Having received the news that the sale of their current home was being aborted, the Plaintiffs decided not to close on the purchase of their new home. The Plaintiffs were sued by the vendor of this other property for failing to close the transaction and the subsequent losses that were incurred.
The Plaintiffs then sued the Defendants (the original purchasers of their home) for the losses they incurred from the eventual sale of their home AND the losses that they were sued for on the home that the Plaintiffs failed to close on. The domino effect of the original failed closing was looking like it would be very expensive for the Defendants.
This is where I was hired by the Defendants lawyer. I was hired to offer my expert opinion on whether the Plaintiffs should have been able to close on the purchase of their new home even if the sale of their current home was aborted.
The Plaintiffs had significant equity in their current home, solid jobs, verifiable income, and very little debt. Since they were downsizing on the new purchase they would have been mortgage free if the sale of their principal residence had closed. My job was to review the information presented to me and offer my opinion on whether the Plaintiffs could have arranged financing to close on the purchase of their new home without the sale of their current home closing.
After reviewing the numbers, it was clear that there would have been several lenders who would step in to offer financing. The only question would be at what cost. Would they have to use a mortgage investment company (MIC) or a private lender, or would they be able to find institutional financing through a bank or a credit union? Supposedly the Plaintiffs bank had declined their request for financing but, in my opinion, any competent mortgage broker could have arranged financing for them. The only question was how to structure the financing to minimize costs.
This sort of financing is more of an art form than a science so there would have been several ways to structure the mortgages required. My report offered up three plausible scenarios with different cost structures. With limited financial information on the Plaintiffs, it was impossible to say with certainty that they would qualify for financing via a low-cost provider like a bank, but it was clear a MIC or private lender would have provided the financing but at a higher cost.
Ultimately, if this goes to court, a judge will have to determine whether the Plaintiffs acted reasonably in failing to close their purchase after their bank declined them for financing. Should they have explored alternate financing options? Could they have mitigated their losses? Either way, the original failure to close by the Defendants led to a domino effect that impacted several other transactions and innocent parties. What a mess!