Mastermind for April 24th. The Seller Loses Money
This might be hard for some of you to imagine , but there was a time, many years ago, when people lost money in real estate. Now I know you are probably thinking that we live in Canada, home of the free and continuously rising property values, but believe me, I’ve lived through it and, truth be known, I lost a pant load of money in real estate in the early 90’s. A while ago I did a handy little infographic on the Anatomy of a Canadian Realtor. In my research I discovered that nearly 60% of Canadian Realtors today have only been practising for the last ten years. Those people have enjoyed one of the longest run-ups in real estate in recent history. I wonder how many of them think the ride will just keep on going. I bring this up because in our Mastermind session last week we dealt with an interesting situation where we sold a condo downtown, only to discover later that the owner owed more than the condo was worth.
For those that haven’t heard, real estate runs in cycles. Some cycles are longer than others but the one constant, particularly true about our business, is that what goes up must come down. Hey this isn’t all bad news. Consider for a minute that a slow, if not faltering market means fewer people getting their licences and more people leaving the industry. In the 90’s the Toronto Real Estate Board lost nearly half of their membership. Can you imagine what would happen if nearly half of the nearly 38,000 GTA Realtors left the business? I’m not saying we are going to see a return to the bad old days but I think it is fair to say that the market will eventually point in a negative direction and we, as Realtors, are going to have to think on our feet when we are talking to Sellers who are going to take a loss on their property. So what can we do to minimize the depth of a Seller’s distress? Step One is to understand that we have a responsibility to do our due diligence from the beginning of the listing process. If you are listing a home for sale, our MLS rules are clear….the property has to be saleable. Consider a situation where the seller is under water. Does he have the ability to transfer title when there is more owing on it than received? While the form has fallen out of use, you should insist on the simple Mortgage Verification Form. Failing that, spend the $20 and do a title search. Selling a condo? Contact the management company and tell them you are listing a unit in the building. Are the Seller’s up to date on their maintenance fees? If your Spidey senses are tingling it is imperative that you do as much research as you can before you list.
So the million dollar question is…is the agent’s commission safe? Long answer yes, short answer no. A buyer can walk away from a firm deal if they cannot get clear title. Condo fees have to be paid first, then taxes, than first mortgage, than second mortgage, than liens, than lawyer fees, then Realtors. If the bank can’t negotiate a settlement with the Seller which includes the Realtor getting paid they may find themselves owning a condo. The listing brokerage can only release the deposit (which, thankfully is enough to cover the commissions) with a mutual release or court order, so if the lawyers call and demand the deposit to cover the debts, the listing brokerage does not have to release it. If they do, you can sue them. If everything grinds to a halt, the property can’t close and the Buyer can sue the Seller who will have probably declared bankruptcy by then. Are you getting the sense that by taking this listing you have just walked into a hornets nest? Your right….you have. Remember your commission is at stake. You shouldn’t work for free….. unless that’s your business model.
The truth is that you don’t have to walk away from a listing if you think there is going to be a shortfall. Start the dialogue early and see if there is room for a controlled and organized exit. I guess you are wondering why the agent in the example above took the listing? Truth is, he didn’t verify anything and when questioned about it he said his client lied to him about his financial affairs. Of course he didn’t bother to check.