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Tuesday, May 30, 2006

Buying a Home Without Knowing the Cost

The Calgary real estate market is now so hot, that buyers are putting deposits on new homes, without knowing the final price. You heard me, putting down a deposit and signing a contract to buy a house, that isn't built yet, for an unknown price. Wow! Rumour has it this trend could move its way north to Edmonton soon too... here's the article from today's National Post:

Buyers putting deposits on lots without final price of houses
Desperation in Alberta
Garry Marr, Financial Post
Published: Tuesday, May 30, 2006

Consumers in Alberta are now putting down deposits on housing lots without knowing what the final price for the finished home will be, in the latest example of the desperation for housing in the province.

The bizarre situation in which consumers are contractually bound to pay a final price yet to be determined has been going on for the past few months, said Allan Klassen, president of the Alberta chapter of the Canadian Home Builders' Association.

"That's how people are securing housing now," said Mr. Klassen, adding the situation is being driven by demand for housing as opposed to greed from builders. He added it's the only way builders can agree to sell a home because their costs are rising so quickly.

The influx of out-of-province workers into Calgary, flush with cash from jobs connected to the energy sector, has created a surge in demand for homes. The Calgary real estate board said last month existing home prices were up more than 37% from a year ago.

New-home prices are rising quickly in the province, up about 30% in Calgary in the past year. Canada Mortgage and Housing Corp. said this month Alberta is one of the few provinces in the country where new construction activity will rise this year from 2005.

The flipside to all the demand has been rising expenses. Builders taking an order today at a set price could end up spending more money building a home than the price paid, Mr. Klassen said.

"One of the reasons we capped sales is because we couldn't guarantee our costs," said Mr. Klassen, referring to the fact his company, Albi Homes, stopped selling houses it couldn't guarantee would be built in the next year.

To combat price worries, builders are now willing to let consumers guarantee themselves a space in a development if they are willing to put a deposit on a lot. Mr. Klassen said that deposit can sometimes be about 20% of the value of the lot.

For that deposit, consumers are usually signing a contract that binds them to buy the house once it is completed. The final price is dependent on what type of costs the builder incurs. The prices rise as costs rise.

The deposit contracts vary from builder to builder but Mr. Klassen said most builders are willing to let consumers have their deposit back if they are unhappy with the final price because the current market conditions are strong.

It's a dangerous game for consumers, according to Brian Hollohan, manager of market analysis for CMHC in Calgary. "It's not something I would do," he said. "But there are a lot of unusual transactions taking place and people are taking unusual measures to secure a home."

Ron Odynski, a partner with law firm Ogilvie LLP, said it is possible to draw up a contract that binds a consumer to pay for a finished home based on fluctuating costs. He said you would have to take a close look at the terms of the contract, adding, "It's the type of contract you would want a lawyer to look at."

Consumers looking for more price certainty in the existing-homes market are out of luck. Kevin Clark, president of the Calgary Real Estate Board, said the average price of a home in the city was rising as much as $500 per day.

"The resale market is quite insane," said Mr. Clark, whose board is expected to release another set of stellar numbers on Friday that will almost certainly surpass the record high for home prices in the city set last month.

The level of unsold inventory in Calgary is just 16 days, meaning at the present pace of sales all the homes on the market would be sold in 16 days. Normal unsold inventory levels are 120 days.

Mr. Clark said it's no wonder people are willing to put deposits on new homes without knowing the final price. "If they don't there is another person right behind who will," he said.

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