Canada

Canadian Home Builders Are Asking Buyers For More Money To Finish Building

Phew! Canadian real estate prices are soaring, so it’s a good thing you bought years ago, and are just waiting for it to be built. About that… The cost of building a new home has increased so fast, many developers are struggling with costs. Buyers who thought they secured a home at prices years ago, are now being asked to give up some of the gains, or take their deposit back. Here’s how Canada’s real estate bubble made paper homes more profitable than real ones.

Building Construction Costs Are Rising 

The cost of building a home is soaring, almost as quickly as home prices are rising. In Q1 2021, the 11 largest cities saw construction costs rise 5.6% over just the quarter. Costs are now 11.7% higher than a year before, and 25% higher than they were in 2017. That’s the aggregate of cities, not regions seeing explosive growth.

In Greater Toronto and the surrounding area, costs are rising even faster. Q1 2021 saw construction costs rise 7.2% over the quarter, and are up 15% from a year before. From 2017, builder costs have increased a whopping 27.7%. More than half the increase was just over the past year.

Costs are rising primarily due to a material squeeze. Record demand, sparked by low interest rates, means it’s outstripping supply. Materials like lumber increased by over 240% in the past year. Sparking demand while supply faces artificial constraints, has become a disaster. There’s a shortage of everything, from building materials to labor.

Developers Are Now Asking For More Money or Cancelling Purchases

Sudden cost increases are now squeezing home builders, and screwing pre-sale buyers. A typical home builder has a profit margin of about 18%, leaving them with a decent cushion to absorb any cost overages. They also typically plan for higher than inflation cost escalations.

If costs rise higher than their profit margin, they basically have three options. They can lose money, cancel and re-sell the project, or ask buyers for more cash. The latter appears to be an approach that’s been quietly happening across the country.

Canadian Home Builders Are Asking Buyers For More Cash

Canadian home builders are asking buyers from years ago for more cash to finish. For example, one Southern Ontario builder asked buyers as far back as 2016 to give up half of their gains. Threatened with the project becoming unviable, buyers are being asked to pay up or find a new home.

Source: Home builder email to a buyer from 2016.

Above is a letter sent to a 2016 pre-sale buyer, who is still waiting for their home to be built. The home builder is asking them to agree to increase their purchase agreement up by nearly a quarter. In this case, they had bought a home for $489,900, which the builder estimates as worth $724,900 today — a 47.96% increase. The suggested solution is to split the gains and adjust the purchase price to $607,400. This would see their cost basis rise 23.98% higher than they initially signed up for. The alternative is they receive their deposit back, and the builder resells the home. 

Source: Home builder email to a buyer from 2016.

Imagine watching an insane home price run, and being relieved you barely beat the market. Then thinking you just made a small fortune for your decision. Only to be asked to give up $117,500 of your gains — a little more than a year worth of gross income for the median household. The other option is you get your $80,000 back, and try to buy a home at a price 50% higher than when you initially thought you bought. I don’t know about you, but I’d feel like I was just mugged.

Low interest rates increased the value of goods so fast, it’s no longer cost-effective to actually make them. Paper homes are seeing values soar, but can’t actually be produced at the price they were sold at. Both the builder and buyer have bigger gains to their net-worth, than if the home is actually built.

I’d say we’re now a few months past where interest rates need to be increased to reduce demand, wouldn’t you? Damn production. It’s always getting in the way of rapid paper wealth.

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21 Comments

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  • Mo 4 months ago

    Blood. Boiling. I don’t know what more frustrating either, that these poor folks are being asked for more money, or the fact the Bank of Canada has pushed materials costs so much you make more money not actually building anything.

    • Jason Chau 4 months ago

      Definitely the BOC. I don’t know if the developer attached further costs of the project, but it sounds like they’re not making any more money.

      This is what inflation does, it squeezes corporate profits. It’s also why periods of high inflation are followed by recessions. Companies aren’t making much more. Everyone loses, but the government who sees their debt decrease in real value.

  • Erin l 4 months ago

    I don’t get the part where they say no additional deposit is necessary. Don’t they have to still give 20% of the value of the home?

    • Nassim 4 months ago

      I think they’re hoping most people don’t understand it either. I believe they’re asking for some of the equity they accrued. Since it’s less than half of the gains, they won’t really notice. It’s almost a bayonette contract.

      Now a good question would be to ask what happens if prices pull back from the ultra low rate environment? If it falls past a certain point, the adjustment cost basis still means you gave them half of the gains before it fell. About a 16% drop would start to eat away at their equity.

      • Vinny 4 months ago

        What governs what the price increase should be? I can understand the amount to allow the project to get built (just maybe), but not any purchase price increase that allows the builder to make a profit. It’s not as if, if the builder made a windfall gain (such as if costs came under budget), the builder would share any excess profit with the buyers.

        • Eli Bennett Bennett 4 months ago

          This is exactly it. Isn’t the whole reason business make big money is because they are supposed to shouldering risk? And here they are facing the downside and turning to the buyer to strong arm them into shouldering that risk.

          Criminal

  • Marc 4 months ago

    This has been happening just outside of Montreal the past few months. A friend was to take possession, and they asked him for $50,000 to cover the material cost increase before it could be transferred.

    Email me if you want the name of the project, I can connect you to my friend.

  • Ian Brown 4 months ago

    Wow. So I know builders can ask for more money, but I’ve never seen them ask for this kind of money, but I guess I’ve never seen the cost basis rise this much. Probably hasn’t happened since the 90s, maybe the 90s.

    Usually, the worry is it comes in under the appraisal value, and you end up having to top up your mortgage. Which also sucks. I have a friend who needed to round up an extra $100k at completion when they implemented the foreign buyer tax, and prices dropped really fast. At least appraisals dropped fast.

  • Erik 4 months ago

    Read your escalation clause carefully. I know a lot of developers that eating the costs on projects, and some are stalling to build. Laying down the foundation, and just going to wait.

    Others are going to build because they don’t have the time, and know they can just pass the cost on to you.

  • Oakville Rob 4 months ago

    It’s TOTAL BS. The increased building cost has nothing to do with the builders demand, it’s strictly an opportunity for the builder. Period.

    Just say no.

  • JC 4 months ago

    What if you sign neither the amendment or mutual release document. The valid contract is still in place as long as buyer has fulfilled it’s obligations. If other buyers sign off i doubt the builder can just negate one contract without canceling the whole project and not be in breach.

    • Baio 4 months ago

      It doesn’t need an ammendement. Most pre-sales have cost escalation clauses, since building a house is far from an exact science. Any number of reasons can make it run over that are outside of the builder control.

      • Oakville Rob 4 months ago

        It’s a house, not a rocket ship. The list of suppliers might not exceed 20. Find the other buyers and demand an audit of every supplier contract to get transparency. Contracts that were not fulfilled by the developer should be examined to determine the cause of the nonfulfillment. Something went wrong somewhere, and the buyer had nothing to do with the problem.

  • Jimmy 4 months ago

    It makes sense because when they were making insane profit they shared that with the future home owner.

    Logic goes like this.
    If we make profit this is fair and we get to keep it.

    If we loss because of poor planning this is unfair and we need to be compensated.

    Capitalism has never been so good. Risk free profit for all.

    • Easy 4 months ago

      Exactly. Lawyer up. Start a threat on redflagdeals or something to find the others.

      Legally defend yourselves from this fleecing.

      • David 4 months ago

        Everyone has expert legal advice on the internet, don’t they?

        Don’t forget to use a real lawyer though, because your pre-sale contract has an escalation clause that says you’re liable for any overages they incur because it’s an *ESTIMATE*.

        It doesn’t matter how much you complain on redflagdeals, I wouldn’t build a client a home wth my own out of pocket expenses. Pound sand.

        • Oakville Rob 4 months ago

          Dear Pound Sand (David) VP Customer Service, I suggest you study the concept of bait and switch. You’re contract doesn’t provide a direct feed from the pockets of the unfortunate people who hired you. If you want an increase be prepared to justify it – and defend it – in court. The gravy train has come to a stop.

  • SUMSKILLZ 4 months ago

    Thats why I’ll never buy new. I tried to rewrite the contract terms to my liking and the builder refused any changes. You can do that when there are 100 buyers for every unit for sale. The builder would not even agree to “be silent” on clause 22, 56, 86, 99…etc. You really have no power as a buyer. None.

    My favorite is the clause, where they force you to accept possession but its not really done. Wtf?

  • NickSal 4 months ago

    The real estate market is insane. The builder’s should go out of business if they cannot honor their agreements. All this shortage and escalation in a country of 30m people which is the second largest by land area in the world. I have a few properties and am just waiting to see right time to sell and buy overseas keeping just one here. I will get a lot more for my buck and generate a much higher return through rent.

    • David 4 months ago

      Most builders will never resort to asking for more money, they’ll just take much longer and wait for cheaper supplies/labor.

      • Oakville Rob 4 months ago

        Bingo.

        You represent the problem with your industry. Not everyone in the industry, just the bad ones.

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