Lawyer’s Corner: Cash Back Deals

Cash Back dealsLou Pesta, Q.C., writes: A new development in the market has come to my attention recently. Twice in the past couple of weeks, I have been approached by buyers with purchase contracts (with different developers) where the price was inflated by $40,000 to $50,000 to show a higher price on the face of the agreement. In the portion of the contract showing how the price is paid, there is a corresponding “cash back” on closing provision.

Why is this happening? Developers may want to create the illusion that the new home market is not in distress or they may want to give the impression that they are not undercutting their competitors. While this is not mortgage fraud because it is transparent on the face of the agreement (i.e. it’s not a side deal), it nevertheless creates several significant problems that made me advise the buyers not to execute the agreements. I certainly would not be prepared to act on the transaction.

Here are the problems from the buyer’s perspective:

  • The property taxes will be inflated for years and the buyer will not be able to appeal the tax assessment
     
  • On the GST rebate application (if applicable), there are declarations that the application reflects the true purchase price paid. To complete the application in these circumstances would likely constitute fraud
     
  • In recognition of the GST rebate problem, the developers in these circumstances are not giving the buyer a “net of GST rebate” price but instead requiring the buyer to apply for the GST rebate refund to the government
     
  • On submitting the transfer of land to Land Titles, the buyer is required to execute an affidavit of value, based on what the buyer believes the property would be likely to sell for on the open market. Land Titles will not accept a valuation of less than the purchase price reflected on the face of the transfer of land. If the buyer swears that the purchase price reflects true value, then once again, the buyer is likely committing perjury.  
       

Lubos K. Pesta, Q.C.
Walsh Wilkins Creighton LLP
Phone: 403.267.8432 Fax: 403.264.9400
lpesta@wwclawyers.com

   
Copyright Alberta Real Estate Association. Reprinted with permission. AREA makes no guarantee as to the accuracy or completeness of this information. The comments expressed in these articles are for information purposes only and serve to highlight general principles. Each situation s different and you should seek legal counsel before pursuing any particular course of action.

12 responses to “Lawyer’s Corner: Cash Back Deals

  1. Sounds like a lot of despiration to me. The developer must be under a lot stress to sell the properties. I would assume the developer is very market aware and wants out now, regardless of future legal costs.

    Now, would anyone want this developer as their builder?

    Good on you Mike for telling them to walk.

    Mike

    Mike Fotiou says: Hello Mike, I came across these last two articles by Lou Pesta and asked him for permission to reprint since I found them quite informative, and hopefully everyone else does too.

  2. How do you make this public so every nows this is a huge story this needs to be in the news

    Mike Fotiou says: Rick, when you are copying and pasting this article into other blogs and newspaper comment sections, please at least give credit to the article writer, Lou Pesta. A link back to this original posting wouldn’t hurt either 😉

  3. Calgary Condos

    Cash back deals might sound great, but be wary. Just know what you’re getting into.

  4. Excerpt from the new TD Economics report out today (click here to view whole report):

    Wild Rose country was overbuilt substantially during its boom years, and mounting inventories in Calgary and Edmonton are cause for concern. Indeed, even over 1991 to 2001, housing starts in Alberta had already overshot household formation by 12%.

    With oil prices having subsided from their fever pitch and expansion projects now on hold, the net inflow of migrants has slowed dramatically and may even cease completely during 2009. The previous pace of homebuilding could not be sustained and slowed precipitously during the fall. Alberta’s starts further declined to 13,100 units in February, 61% lower than a year prior. With Alberta’s economy set to contract by 2.5% this year in real terms and roughly 10% in nominal terms, homebuilding has likely not yet bottomed.

    While around 30,000 new households will form in the province during 2009, starts are likely to be nearer 14,000 units on the year. Even accounting for the population inflows, the province’s homebuilding overshot fundamentals by nearly 10% during the commodity boom. From 1991 to 2006, Alberta has approximately 72,000 more housing starts than new households, and the estimated 13% overshoot of fundamentals
    during 2002-2008 exhibits this excess.

    Now, plunging sales-to-new listings ratios and mounting unsold inventories clearly indicate that the present stock of homes is excessive. As of February, Calgary had an overhang of 1,133 unsold units (874 singles and 259 multiples) and a sales-to-new listings ratio of 0.29, indicative of a definitive buyer’s market, having now fallen to its lowest value in two decades.

    In both of Alberta’s major cities, homebuilders have worrisome unsold inventories of new singles, and, with demand having cooled rapidly, resale markets already appear saturated.

    The steep appreciation of house prices during Alberta’s boom times now appears to have been far too optimistic. Although income growth was very strong, Albertan housing during 2007 and 2008 was especially overpriced relative to fundamentals. The quick climb of Albertan resale prices substantially eroded affordability and, even though Albertans were Canada’s highest income earners on average, the growth in household income was not sustainable.

    The 9% year-over-year decline in Alberta’s average resale price in February is evidence that past prices exceeded fundamentals. Those inflated prices drove homebuilding in excess of fundamentals. Given Albertans’ deteriorating incomes and the overhangs of unsold inventories, Alberta’s resale prices probably have another 20% leg down over 2009.

    In other news, the 42-storey second tower of Arriva has been put on hold as the developer seeks bankruptcy protection. (Source) This even though 60% of its 221 units are presold.

    Considering the oversupply the TD report above as well as the Atlus Group Report in the Herald article cites, this could be viewed from a positive angle: more project cancellations could help move the condo market into a balanced market more quickly since there were 7,039 condos under construction at the end of February in the Calgary census metropolitan area (CMHC)

  5. Hey Mike no problem I did that where it counts dont worry. Ill also make sure to put your link there as an add on sorry about that. I contacted that people that would make this story alittle bigger then Blogs maybe you should do the same thing. This is big news people would really look twice if they knew this.

    Mike Fotiou says: Thanks Rick! 🙂

  6. for anyone wondering where all the listings have gone…check the rental market!! Its absolutely amazing the number of rentals available right now. My guess is that rents have dropped 15% in the last 6 mths. I’m currently renting a home work $425K, 2000 sq ft in an “inner city” location for $1350/mth. My guess is at some pt owners wouldnt be able to rent so they will put them back on the market, probably in a month or two.

    Mike Fotiou says: I’ve been told that there’s now a $100/month discount for year long leases at Boardwalk.

  7. We just rented a Townhouse totally renovated in inner city for 1300, The guy is trying to sell it but its been on the market for 4 months and no buyers at all. So lucky for us to get a great place and now we will have 2 bathrooms. Signed a years lease so bet we have to move after that but the way things are going maybe get a better deal next year! And yes there is a crazy amount of rentals on the market now.

  8. Here are the sales so far in April compared to previous years. I’ll have a more indepth update when I do the Mid-April review complete with prices as well.

    SFH Sales April 1 – 8
    2009: 339
    2008: 351
    2007: 497
    2006: 546
    2005: 494

    Condo Sales April 1 – 8
    2009: 141
    2008: 151
    2007: 181
    2006: 232
    2005: 188

    A week into April, and the the inventory level for SFH’s is back at March’s month-end of 4369. Condos have had a net increase of 29 to 2081. The month-end inventory for April 2008 was 6881 (SFH) and 3214 (Condo)

    With sales keeping pace to 2008’s levels (in April) – and inventory not – it’s a tighter market than one would expect amidst our current economic climate (prices aside – will compare prices in the mid-April review)

  9. Mike why are your inventory numbers less than what the mls says

    http://www.realtyexecutivesapex.com/search_mls_map_form1.pup

    Looks like there are more homes for sale

    Mike Fotiou says: Sorry, your link isn’t working.
    Update: Ok, figured the link out. The inventory stats I post are for Metro-Calgary. That map includes Banff, Cochrane, Canmore, Airdrie, Chestermere, Olds, Didsbury, Okotoks, Strathmore, etc, etc. If you’re curious about the entire Alberta MLS count, click here

  10. A couple days ago I’ve talked to couple who bought a house few weeks ago, they told me they bought because they’re afraid they could lose their jobs and may not able to get a mortgage until they find new jobs, they are first timers with %5 down. Never heard this one before, buy out of panic that you can lose your job ….

  11. Lowest Price of the Day Stats:

    $225,000 $185,100 $186,800 $185,100 $95000**

    There sure are a lot of SFH homes going for under $200k out there vs a couple of years ago when it was $300k. Wouldn’t that be a good leading indicator of what % drop the market has had thus far? (ie 33%)

    I remember in 2007 finding any homes under $300k was a needle in a haystack.

    Mike

  12. Pingback: Lawyer’s Corner: Condition of Property at Possession | Calgary Real Estate Review

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