Buying a pre-construction home or condo is an exciting investment, but sometimes buyers find themselves unable—or unwilling—to close the deal. When this happens, they may consider walking away from their deposit. However, before making that decision, it’s essential to understand the legal and financial consequences, including how likely a developer will pursue legal action.
Understanding Deposits in Pre-Construction Agreements
When purchasing a pre-construction property, buyers typically pay a deposit that can range from 5% to 20% of the purchase price. This deposit is meant to secure the agreement and demonstrate commitment to the purchase. It is usually held in a trust account, as required by provincial real estate laws, and becomes non-refundable if the buyer fails to close—unless certain conditions are met.
Why Buyers Walk Away from Their Deposits
Several factors can cause buyers to back out before closing, including:
- Financing Issues: Mortgage approval may fall through due to rising interest rates, changes in income, or stricter lending policies.
- Market Downturn: If property values drop significantly before closing, buyers may feel their investment is no longer worth it.
- Personal Circumstances: Job loss, relocation, or other life changes can make homeownership unfeasible.
- Buyer’s Remorse: Some buyers overextend financially or change their minds after signing the agreement.
Can a Developer Sue for More Than the Deposit?
Yes, and this is a crucial risk to consider. If a buyer defaults, the developer has the right to claim not only the deposit but also additional damages. These can include:
- Loss of resale value: If the developer resells the unit at a lower price, they may sue for the difference.
- Carrying costs: The developer may seek compensation for property taxes, interest, and other holding costs until a new buyer is found.
- Legal fees: Developers may recover the costs of pursuing legal action.
How Often Do Developers Take Legal Action?
The likelihood of a developer suing depends on several factors:
- Market Conditions: If demand is high and the unit can be easily resold at or above the original price, a developer may choose to keep the deposit and move on. However, if prices have dropped, they may pursue additional damages.
- Contract Terms: Some agreements contain clauses that explicitly outline penalties beyond forfeiting the deposit.
- Deposit Size: If the deposit covers the developer’s potential losses, they may not find it worth pursuing further legal action.
- Reputation and Precedent: Developers may take legal action to discourage other buyers from defaulting.
What Are Your Options If You Can’t Close?
If you’re at risk of walking away from a pre-construction purchase, consider these alternatives:
- Assignment Sale: Many contracts allow buyers to sell their purchase agreement to another buyer before closing, helping recover some or all of the deposit.
- Negotiation with the Developer: Some developers may offer an extension or alternative financing options to help you close.
- Legal Consultation: Speaking with a real estate lawyer can clarify your obligations and potential risks.
Final Thoughts
Walking away from a pre-construction deposit is not a decision to take lightly. While some buyers may forfeit their deposit without further consequences, others could face costly lawsuits. If you’re in this situation, it’s best to explore alternatives, negotiate where possible, and seek legal advice to minimize financial and legal risks.
Have you or someone you know faced this situation? Share your experiences and insights in the comments below!
Richard Wang 