Lou 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