Desperate Preconstruction Homebuyers Try to Get Out of Their Contracts

The Toronto preconstruction condo market is facing a major crisis. Buyers who once saw preconstruction homes as a lucrative investment are now struggling to close their deals. Many are left trying to close significant financial gaps as property values fall below original purchase prices. Preconstruction homebuyers are looking for ways to get out of their contracts without losing everything since appraisals range from 10% to 30% below purchase prices.

Why Are Preconstruction Homebuyers in Trouble?

Preconstruction condos seemed like a tremendous prospect during the real estate frenzy of the epidemic. Many people invested in these future homes because of low interest rates and soaring property values. The market has changed radically, though. Buyers find their units worth far less than they agreed upon as the building is finished.

 One such is Toronto buyer Joe Baradziej, who paid $2.2 million for a luxury preconstruction condo in 2020. When the building was finished in 2024, the unit was assessed at just $1.6 million— a startling 27% drop. With a $595,000 shortfall, Baradziej decided to give up his $439,000 deposit instead of accepting a mortgage that no longer fairly represented the unit's value.

The Financial Strain of Falling Appraisals

Lenders usually base mortgages on the current appraised value rather than the original purchase price. Buyers thus have to pay the difference out of pocket. Should a condo appraise $700,000 and the buyer agrees to pay $850,000, the buyer must find $150,000 to close the difference. Many find this extra financial load unmanageable.

 Industry data from Urbanation Inc. projects record 30,793 new condo completions in the Toronto and Hamilton areas by 2025. This supply flood could even lower values and worsen the assessment gap issue.

Why Are Buyers Walking Away?

Giving up a preconstruction condo is not a decision taken lightly. Usually losing their deposits, buyers who walk away could lose hundreds of thousands of dollars. Developers trying to enforce the purchase agreement run legal risks as well.

In many cases, however, the math is simple.
Walking away could be the least financially damaging choice if the difference between the appraised value and the purchase price is too great. Some consumers look to family for financial help or investigate other financing options. Others, such as Baradziej, object to committing to mortgages higher than the property's current value.

Options for Struggling Preconstruction Buyers

If you are facing a preconstruction shortfall, there are a few strategies to consider:

1. Assignment Sales: Some contracts let buyers sell their purchase rights before closing. This can be difficult if the market is weak, but it is a workable exit plan.

2. Negotiating with Developers:  Some developers are ready to renegotiate terms or provide incentives for buyer contract closure. Programs like RBC's "blanket assessment" seek to close the disparity by enabling mortgages based on original pricing.

3. Bridge Financing:  Specialty lenders might provide bridge loans to temporarily cover the shortfall, allowing buyers time to sell other assets or refinance.

4. Legal Counsel:  See a real estate attorney to understand your contract responsibilities and possible legal risks should you decide to walk away.

The Future of the Preconstruction Market

The preconstruction market's future is yet unknown as demand declines and interest rates remain high. Once dominant market players are retreating, leaving developers are left to serve more wary and price-sensitive end users.

If you are considering a preconstruction house, you should know the hazards and work with professionals to help you. We at Condo Point offer complete preconstruction services to help customers negotiate the complexity of new home building and make informed decisions.

Looking for new construction homes for sale? Contact Condo Point today to explore your options and safeguard your investment.

FAQs

1. Why are preconstruction buyers struggling?
Falling appraisals (10-30% below purchase price) leave buyers covering large financial gaps, making it hard to close deals.

2. Can I get out of my preconstruction contract?
Yes, you may lose your deposit through assignment sales, negotiating with developers, or legal consultation.

3. What is an assignment sale?
It allows you to sell your purchase rights before closing. However, it depends on market conditions and your contract terms.

4. What happens if my condo appraises lower than my purchase price?

Lenders only cover the appraised value—you must pay the difference out of pocket.