I heard about this story Friday the old fashioned way: someone my wife works with is a buyer and is understandably unhappy with what’s happening. Based on what my wife told me this thing looked all wrong. I won’t comment on the legality of it – I’m sure that will come out in the fullness of time. However, it appeared on this blog this morning as a comment on an unrelated thread and I think it deserves its own ink.
What is it? Pretty simple. Pre-sale is made, buyers begin waiting for dream home, then get informed that everything is going south. Of course, the buyers were operating in good faith and have made commitments and are likely to suffer great losses.
I’m not the only non-buyer to think that this stinks. The Greater Vancouver Homebuilders Association is also giving it a thumbs down. The simple solution is specific performance, of course, but will we see that?
What other issues are there? If the selling agent is the wife of the developer, there are certainly agency concerns. Forewarned is forearmed/caveat emptor, etc. Read the agency brochure (there’s a link here), and understand who’s doing what for whom. Be aware of the differences between buying a pre-sale and buying an existing property from an individual using standard MLS forms. There is a lot of fine print in MLS stuff, but its there for a reason and the standardization offers the consumer a degree of protection.
The Best Real Estate Anywhere! 
A similiar thing happened to some friends of ours who bought in Poco about three years back. They paid their deposit and waited through numerous delays for almost 2 years until the developer severed the contract & returned their deposit… no interest, no recourse, nothing. The developer then resold the suites for higher prices and I believe the building is nearing completion now. I don’t know who the developer is but I know our friends were told this was becoming common because of the escalating building costs at the time. I thought all along it was simply greedy and despicable.
This reminds me of one scam that was quite popular in Eastern Europe few years ago. Basically they took a deposit for a future RE development (condo buildings typically) and then refunded deposits back in a couple of years. Even paid out some interest. The “scam” part was that they never even planned on building anything, they merely re-invested money.
What if we turn the table around and view a comparable situation like this:
Market has dropped 20% since original purchase contract. Buyer decides it’s not financially viable for them to go thru with the purchase and cancel their deposit and walk away leaving the developer to find another buyer.
CB Development or any other developer need to abide by the contract even if they are to loose money. Doesn’t a contract mean anything?
This could be a round similar to the leaky condo issue where the consumer is left high and “dry”. Developer can always have their ways…. make money.
Nice Scam. Basically, the developer gets to finance the building with the deposits. As time progresses they then either dump them and relist the houses with the added profits of the appreciation or if the houses fall sell it to the original purchasers.
If they get away with this I suspect you will see many other builders trying the same trick.
I suspect this is all permissible by the contract.
Outrageous or not, this is probably all legal.
That is scary. If I had a pre-sale contract I would check the terms right now, and consider assigning it away if the developer does have a right to rescind the contract and re-sell the unit. What’s that they say about cockroaches again?
Canada, shelter of the worlds scum. If your a criminal, come to Canada. Canadians get it up the arse if their not carefull, read the contract!
I have no problem with this as long as the clause refunding the deposits is symmetric and the deposits are in escrow. What would happen to poor CB if the market were to tank? Ouch.
If both parties have equal remedies,and the buyers were made aware of the fine print…. it’s ok with me.
The part that gets me is the Realtor, I wonder if she disclosed her association with the developer?
“I have no problem with this as long as the clause refunding the deposits is symmetric and the deposits are in escrow. ”
Wow Jesse, I guess you haven’t been waiting for the past two years for your home to be completed so you could move in, grateful that you bought when you did because if you had to buy now you wouldn’t be able to afford it. Ya, cause that would really suck!
“The part that gets me is the Realtor, I wonder if she disclosed her association with the developer?”
-A
The “realtor” is, as far as I know, MARRIED to the developer. Not exactly an “arms length” situation, IMO.
I hope they are severely dealt with by the courts. Those “doll houses” are on TINY lots, next to railway tracks The developer bought the property for a song around 1999- 2000.
They have made more than enough. Creeps.
there was a escape clause in my presale contract. it said if the project was not completed by certain date due to some factors that beyond the developer control (weather, labour, supplied, cost…), the the developer has the right to terminate its part of obligation and deposit being held in trust refunded plus interest. the sale agent explained this part to us in detail with our initials; so in case there is a law suite arose, there is no way the buyer could claim he was not aware.
in the nutshell, the buyers are at the mercy of the developer or the market.
“The “realtor” is, as far as I know, MARRIED to the developer. Not exactly an “arms length” situation, IMO.”
The Realtor, whether married or not, is working for the developer. They will “help” the buyer sign the contract, but most often will offer no agency to the buyer. Some people think that they will somehow get a better deal by not bringing in their own agent. In this case the Realtor should have declared her relationship with the developer. I’m not privy to the contract so I can’t comment either way.
“…is working for the developer”. -Aaron Best
Or, “workin’ it” with the developer.
Monica Luinsky is workin’ it with Bill!
“I guess you haven’t been waiting for the past two years for your home to be completed so you could move in, grateful that you bought when you did because if you had to buy now you wouldn’t be able to afford it.”
You are right: I have not been waiting for a presale BUT if I had been, I would have got a lawyer before signing. I am all for consumer protection but maybe Aaron actually has a valid point :)? Get professional/legal advice. Does not excuse the nastiness and unfairness of the contract but there are lots of unfair contracts around that stand up in court.
In any case the builder is going to be in court for many years to come. Hope it was worth it for him. It will be interesting to see if the units can be re-sold. Hopefully Rob can do a follow-up piece in a few months.
I could be wrong but shouldn’t the realtor who represented the purchaser have informed them of the potential of this happening?
Damon:
Your question points to a big issue: was the purchaser represented? If they were represented, was it through buyer agency, or limited dual agency?
There are unscrupulous people in all aspects of commerce, however, you have to question the people that bought the presale and are now crying foul. Did you read the contract? No? Well, you get what you deserve. Next time, when you make one of the most important financial decisions in your life, you’ll take the time to do your homework.
It is sounding more and more like tort law will bankrupt CB, pay back the bank, and give the owners their properties. The owners may need to fork over a few $10K more to finish the job, however. I do feel sorry for the buyers; their homes will be in limbo for the next year unless Wally can fasttrack this through the courts. It sounds like the only lesson is that you need to trust the builder and carefully check their history.
I am hearing conflicting reports between “the law needs to be changed” implying what CB did was legal, to “violating terms of this contract is illegal” implying they broke the law. If the latter, why would the law need to be changed other than making it more explicit and quicker to litigate?
“violating terms of this contract is illegal”
Again, I’m not privy to the contracts, but if the pre-sale contracts I read are any indication. The developer’s lawyer created a contract to fully protected the developer from any unforeseen issues. Such as; natural disasters, political, building costs, etc…
Yes, your Realtor should make you aware, that the developer will want to use their own pre-drawn contracts because the developer wants to develop with the least amount of risk to themselves as possible. It makes it all the more easier for the developers when the buyers are competing with each other just for the privilege of buying a pre-sale.
This will be the end of CB. Orders has been put on the properties so that they cannot be sold.
What I have learned about contracts doing business now is that they mean nothing unless you have the money to defend them. In most cases if you hire a lawyer there will be so much litigation the costs will outweigh the benefits.
This will probably settle out of court, but I think most developers are dirty. Laws needs to be changed so that builders are more responsible.
Common practices I see are.
1. Pre-drafted Contracts to Their Favor
2. Every Development Contract is it’s own Incorporated Company. They are trying to limit their liability. They start a corp for a new project. built it and than take all the money out. If you try to sue them you are suing a company with no assets. If a builder is using their name the should be responsible at the corporate level.
The Superintendent of Real Estate (of BC gov.) issued a cease-marketing order to CB Developments 2000 Ltd. yesterday, after the company cancelled presales contracts to dozens of purchasers at the Riverbend site in Coquitlam and refunded their deposits.
…
http://www.theglobeandmail.com/servlet/story/LAC.20070515.CONTRACTOR15/TPStory/National
Snick
May 7th, 2007 at 8:26 pm
“The part that gets me is the Realtor, I wonder if she disclosed her association with the developer?”
Excellent point so I decided to dig a little.
http://blog.myleakycondo.com/index.php?op=Default&Date=200504&blogId=1060
half way down —
Penalty
Marion Shirley Lochhead was reprimanded for the breach described above after an Agreed Statement of Facts, Proposed Acceptance of Findings and Waiver was entered into between the Real Estate Council and Ms. Lochhead and a Consent Order was issued. In addition, as a condition of continued licensing, she is required to successfully complete Chapter 2 (Real Estate Services Act) of the Real Estate Trading Services Licensing Course and pay costs to the Council in the amount of $500.
P: June 3, 2005 R: June 3, 2006
Now that’s just not right – If anything should come out of this it should be that the developer and Realtor should not have any known affiliations.
Wife and I bought into Riverbend about 2 years ago but opted for a pre-owned house instead. Obviously we are thinking we dodged a huge bullet since we considered pre-built option at the time. I truly feel sorry for those caught in the middle of all this but in the end CB will probably go bankrupt and in which case it’s all mute since the contracts are worthless at that point.
I would say however, Riverbend is an awesome community to live in. The houses are beautiful, the scenery and development as a whole is well worth even paying today’s price for. Certainly paying the extra 100K to get in here, although may not be fair or right on any level it still is an excellent investment. Consider other properties in the area and you will quickly see 480 k for a brand new house in Coquitlam is decently priced. I guess the heart of the problem lays in the fact that people sold their existing houses too soon and wouldn’t be in this situation had they waited till their new houses were 100% complete. A little common sense tells you a house being built is NEVER ready on time esp in BC’s hot economy.
Joe and Sheila
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Joe and Sheila:
The REC is a government body composed of Realtors and government appointees. They deal with licensing issues. I served on the REBGV’s Business Practices committee for many years, and its standard practice to defer to the higher body when they have/should have concerns. Afterwards, if there is need, the Board would take a look. I have often been disappointed with the results of council hearings. To be fair its possible that council felt very strongly, like you, about this, but was unable to find grounds for serious punishment. The consent/waiver could indicate this.
If something like this came before the REBGV committee, and they were able to pin something on the Realtor (and given that these were pre-sales with lawyer drafted contracts that might be a challenge), the Realtor would get a stiff punishment.
On the bright side the council hearing is probably preliminary to a civil case. Note also that the Superintendent issued a stop trading order. That means the properties won’t be re-sold by CB. Its become a case of a pre-seller going bankrupt, more than a case of a pre-seller returning deposits and re-listing. (I wonder of the returned deposit cheques cleared? 🙂 )
$500 penalty and have to take a course? Thats sort of laughable. No wonder many realtors don’t care at all fo breaching rules. Its a small price to pay for huge commissions!
Did anyone see the news story the other night where some people already moved in now have leins on their homes, from various sub-contractors?
I am just wondering if there is a limit time that the contractor can put a lien against a property?
e:
The $500 and course are from the Council. She may or may not be disciplined by the Board. She may or may not have to face civil proceedings. Her “crime” appears to be that she failed to deliver a developer’s disclosure form. Most buyers wouldn’t have read that document anyway.
I’m not apologizing for her. I’m suggesting that the Council got her on what amounts to a technicality because they weren’t able to make more stick. Remember, (as Aaron and others have pointed out), the sales were probably made under a sales agreement drafted by the seller’s lawyer. Its possible for a lot to happen that strikes you as wrong without it being, strictly speaking, against the rules.
Typically it is the subtrades that put liens on your house because it is up to the contractor to pay them and sometimes they don’t get paid. I believe a subtrade has 30 days to put a lien on your house after finishing a job. That is why you should have a holdback account
Those buyers should not be compensated in any way. It’s buyer beware. They chose to take the risk of buying promise to be built home, they have to suffer the consequences. The subcontractors should be paid. The game was played fair and square. The builder filed or insolvency. Nothing wrong there. That’s just the risk you take. I’m very glad there’s a problem. Let’s hope more of these problems come up.
Fair:
The subs should be paid, there’s no question.
Should the buyers get compensation? No. They should get what they paid for. If that’s not possible they should be able to collect damages from the seller. If the seller is bankrupt then someone has to eat the shortfall.
But, if the only rationale is buyer beware, shouldn’t have the sub-trades been careful who they were dealing with? (just kidding)!
The whole thing may end up less of a problem than originally envisioned. I’m sure the buyers will have to pony up some money for the sub-trades, but hopefully it will not be excessive and hopefully it will be more than compensated for by the increase in value since they bought. I guess we can only hope.
You are right to point out the greater risk involved in buying a pre-sale.
Househunter added this comment to another thread, so it’s moved here:
househunter | blahblah@hotmail.com | IP: 142.52.203.66
A bit off topic… this is a thread on the Riverbend problem. This is a disaster waiting to happen:
http://www.discovervancouver.com/forum/topic.asp?TOPIC_ID=163374
Thanks for the link, househunter. I took a breif look there. A lot of heat, but not much light, unfortunately.
The buyers signed contracts. The contracts are probably pretty solid, and probably benefit CB.
If, as CB claims, they have no more money, it will be pretty tough to enforce specific performance. Someone has to pay the trades.
I’d be examining the role of any buyer agents in this, as well as the selling agent. I am always a little nervous when a client wants to buy a pre-sale. The future product and profit look good, but the contract is usually stacked against them. Its tough (as this situation demonstrates) to prepare for the downside.
Its worth considering the flipside: if CB had sold the places at 2004 prices, and the market subsequently collapsed, meaning that the new owners had lost equity, how would we look at it?
with the court ruling, I wonder how it will set a precedent for other projects.
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