Garry Marr: Why it could be the right time to walk away from your real estate

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“I’m talking to a lot of people who bought pre-construction condo units they paid $1 million for, but it’s only worth $700,000,” Hoyes said, pointing out the $300,000 gap in that investment makes people not eligible for the shorter consumer proposal.

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Ultimately, you still need a place to live, and he suggests finding a rental before any insolvency hits your credit report.

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“This is still a very emotional decision because it’s your home,” he said, adding that some people have lives that include children going to school in the area, which makes them not want to leave.

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But before you consider this strategy, let’s not forget that developers and lenders have never been more motivated to make a deal that will keep you in your house or have you take possession of that condo you agreed to buy.

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Greg Zayadi, president of Rennie & Associates Realty Ltd., said the first thing any consumer should consider is their contractual obligations, which differ by province.

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The developer will ultimately have to prove they lost money to go after you. If you paid a $100,000 deposit on a $500,000 condo now worth $400,000, it will be hard to go after you for damages.

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“In a lot of cases, developers will do their best to work with the purchaser (rather than go after buyers) legally,” Zayadi said. “They will give more time, arrange financing and sometimes even agree to a vendor take-back mortgage.”

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Some condo developers are now agreeing to let some consumers switch to a less expensive unit if they can’t get financing. In some cases, those who bought a $700,000 unit can arrange to switch to a $500,000 unit, he said.

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Obviously, losing $200,000 is not ideal, but it is a way to avoid bankruptcy or a developer coming after your other assets.

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“You made a commitment and you put down a deposit,” Zayadi said. “You have an obligation, but nobody wants to be the big bad developer. A lot depends on a developer’s exposure. If you sold 100 units and 50 want to default, then you will flex a little bit to make sure everybody starts to close.”

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Toronto real estate lawyer Bob Aaron, who has decades of experience and still considers the Ontario real estate collapse of 1974 the worst time of his life, said he has advised several clients to file for bankruptcy.

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“Sometimes we do go to the builder and say my client has no assets and you’re welcome to sue if you want, but they will go bankrupt, so how about a mutual release to keep the deposit, and that’s the end,” he said, adding that some developers will just say they already have the deposit and go after you anyway.

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Back in the 1970s, Ontario introduced a 50 per cent tax on all real estate profits, which crashed the market almost overnight.

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“A few months later, I said to my wife, ‘The market has absolutely crashed, and we should buy a house.” We did and got a fabulous discount from what they were asking,” Aaron said. “The market goes up and down and those are the rules.”

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The wreckage from that is what people have speculated wildly about. In some cases, they have no assets to compensate for the massive losses. Yet mortgage delinquencies are far less than one per cent in Canada, and part of that is because bankruptcy remains a dirty word.

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“We are politely Canadian. We do not like to default,” Zayadi said. “Our banks are polite people. In the United States, it’s bankruptcy, let’s go.”

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There is a certain truth to that. But at some point, even in Canadian real estate, there comes a time to surrender.

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One more thing to consider: what if the market drops even more? That’s something a client once asked Ted Rechtshaffen, president of TriDelta Private Wealth.

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“Then they’re in even worse shape,” he said. “It’s like being at the casino and being down. Do you want to bet more to win more to cover my losses or walk away?”

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If you can walk away without paying the house back everything, that is pretty tempting and maybe the right financial decision. I’ll let others decide if it’s the right moral one.

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