Some people think it is “easier” to buy a new home that is under construction because payments are made in stages over a couple of years, depending on the building process.
But if your finances are not in order, it could cost you a bundle.
A buyer learnt this lesson the hard way recently when he failed to complete the purchase of a new $3 million apartment after having signed the deal in 2018.
Not only did he lose his initial 10 per cent down payment of about $300,000, but he was also told to compensate another $700,000 to the developer for various losses that were incurred as a result of him reneging on the deal. The buyer could not make any more payments to complete the purchase due to cash-flow problems stemming from the Covid-19 pandemic.
It is critical to do your sums properly for home purchases because you need to pay at least 25 per cent of the price plus other costs, which can be substantial, even if you have secured a mortgage.
Few people realise there will be hell to pay if you are unable to come up with cash, because the bank loan will not come in unless you pay your portion first.
The saga began when the buyer signed a purchase agreement in July 2018, with the transaction due to be completed in June 2020.
Even before the sale was completed, he and his family were allowed to move into their new home when it was ready, under a special deal with the developer.
His financial woes started in April 2020 when the pandemic broke out, and he made multiple requests to extend the sale completion. The developer agreed to his requests and moved the closing date to August 2021.
Despite this, the buyer still could not pay more than his initial deposit, and the deal was eventually terminated in August 2021. The buyer was supposed to vacate the apartment in October 2021, but when he and his family stayed put, the developer took legal action.
The family finally left in February 2022, but the saga resulted in the High Court ordering the buyer to compensate the developer around $700,000 for losses stemming from the non-completion of the purchase.
The buyer appealed and the parties eventually settled the dispute privately.
While defaults of such a nature are uncommon, this case highlights several important terms of the home purchase agreement that buyers should take note of, because backing out of a deal can be a very costly affair.
The down payment
Just like deposits you make for other deals, you will automatically lose the sum if you cannot complete the payment for your home. Most home purchase agreements contain terms that entitle the developer to keep the deposit, even if they can resell the property to other buyers.
The forfeiture will also not absolve the buyer from having to compensate the developer for other costs that have been incurred because it works like a penalty to deter people from breaking off such deals.
Legal and ‘unnecessary costs’
It is costly to terminate a million-dollar purchase, but it can be even worse if you end up in a legal wrangle with the developer. If the buyer is found to be at fault, the developer can ask for a reimbursement of the legal fees spent to resolve the case.
These could amount to over $100,000 if various actions have to be taken to resolve the dispute.
In addition to legal fees, the developer may ask for a reimbursement of costs that were paid to other people involved in selling and processing the transaction before the deal was cancelled, including the usual 3 per cent to 4 per cent commission paid to the estate agent who sold the unit and the standard legal fees that were “wasted” on the aborted deal.
As the unit in this case was over $3 million, the “unnecessary costs” involved were about $100,000.
Reinstatement costs
Such costs usually apply in cases involving buyers who move into the units and later fail to complete the purchase. If this happens, the developer will require the buyer to restore the property to its original state.
If this is not done, the developer can engage its own contractor to fix the unit and then recover the costs.
In the case in question, restoring the unit to its original condition cost around $100,000 because the buyer left it in a “bad state”.
The developer had to remove various fixtures that had been installed by the buyer, including a partition wall, loft structure, additional doors and cabinets in the study, kitchen and utility rooms, as well as modifications to the electrical system and control panel. There was also damage to the floors, doors and wardrobe.
Compensation for aborting the deal
When a buyer backs out of a property deal, the developer will suffer losses as it cannot book the sale as agreed. The developer can seek compensation by imposing a monthly “rental” based on prevailing market rates if the buyer is occupying the property during the dispute.
The Civil Law Act allows owners to impose up to twice the usual monthly rent on occupants who refuse to leave after their formal agreements have been terminated.
So in this case, the buyer was charged a monthly rent of about $8,000 from June 2020 to August 2021 when he was occupying the unit, despite failing to complete the sale. But after August 2021, when the agreement was terminated as a result of his breach of the contract, he was asked to pay twice that amount in rent until he finally left in February 2022.
So the total amount in “rental” for occupying the apartment, despite aborting the sale, came up to about $230,000.
Interest on loans
It should be common knowledge to all buyers that even developers need to borrow money to build their projects. This is why buyers pay in stages for homes that are being constructed because developers need the cash flow to pay off their loans and pay contractors.
If a buyer defaults on payments, a developer will incur additional costs because interest is still being charged on the loans.
In this case, the developer produced documents to justify the additional interest costs of about $168,000 that were incurred because the buyer did not pay for the $3 million unit as agreed.
Lessons for buyers
While some buyers do default on property purchases, it is not common for such cases to end up in court, notes Omni Law managing director Oommen Mathew, who helped the buyer resolve his case.
Buying a property is an expensive affair, so it is critical to understand the contract you are signing so that you are aware of your rights and obligations if you have to back out.
“Before you sign the purchase agreement, make sure you have the resources to fulfil your obligations under the contract, as well as for the legal action if you don’t fulfil them,” Mr Mathew says.
“Source:[Home buyers who back out of the deal can lose more than just their deposits] © Singapore Press Holdings Limited. Permission required for reproduction”
