We all remember the ‘game of chicken’ from our childhoods, well, at least those of us that didn’t worry too much about our teeth! As kids we’d run at each other until one broke the line out of fear for hitting the other head on. This children’s game has found its way into game theory in recent years, with one definition being, ‘the principle of the game is that while each player prefers not to yield to the opponent, the outcome where neither player yields is the worst possible one for both players.’
With the shifting market, which we’ve described extensively in recent months, we have begun seeing buyer’s remorse motivate some truly dangerous ‘games of chicken’ instigated by buyers of properties that entered contracts at the peak of the market. Below we’ll describe a couple of scenarios we have personally experienced on our team in the last two months and how we handled them. Names and other details have been altered to ensure nobody’s privacy is breached.
Scenario 1 – ‘$50,000 Price Reduction Or The Buyer Walks!’
That’s not a phone call any Realtor wants to receive, never mind one who’s client has already purchased and is bridge financing until the completion of their sale. These buyers had been tough to deal with from the beginning, acting out of poor faith throughout. We held firm with them until a minute before midnight on offer presentation night and they sent us the signed contract with seconds to spare. That was the first ‘game of chicken’ with these buyers, we should have expected it wasn’t over quite yet.
With two weeks left before completion I received that phone call, basically saying the buyer was having financing problems and wouldn’t complete unless our sellers dropped the price $50,000! Our immediate perspective was, ‘the negotiation is over, that’s a ‘you problem‘ not an ‘us problem.”
“Scary Math”
Most real estate consumers and agents will be aware that a deposit is held in trust between a contract firming up and the completion of that transaction; they also know that that deposit will usually be forfeit in the case the buyer fails to complete. A standard deposit in our market place would be around 5% of total purchase price in many cases (not all), if the market has dropped more than that amount you could almost be forgiven for thinking pragmatically (taking ethics off the table), ‘well, if that’s what I lose it’s better for me not to complete and go buy something else.’
What too few consumers and even agents know is that is not the limit of the liability they have if they walk away. Two words should strike fear in a buyer and their agent if they are considering that path, ‘punitive damages.’ It was time for us to add up the ‘scary math’ of punitive damages for them.
“You’re not just looking at losing your $50,000 deposit, you need to communicate to your buyers the potential punitive damages:
- Our seller is bridge financing, if that loan is not paid back in time the monthly interest jumps to $20,000/month. It will take us another four months minimum to sell the home again – add $80,000.
- With prices having dropped since your buyer entered this agreement, once we do sell the home again it will likely be for a minimum of $150,000 less than what your buyers paid – add $150,000.
- Having already executed our obligations to the seller, real estate fees will be due again, and this time may require a realtor bonus for the buyers to incentivize a sale – add $30,000.
- The deposit and punitive damages will be pursued in court, requiring legal fees – add another $30,000.”
You get the picture! That’s some scary math totalling at least $360,000, over seven times the amount of their deposit and far beyond the amount the home has dropped in value.
How Did It End?
The buyers continued to act in poor faith, continuing to ‘play chicken’ with us and our seller. We alerted the broker that had arranged the financing so that if they really did fail to complete there would be an alternative to the $20,000/monthly interest. For the most part though we continued insisting upon completion as per contract with no renegotiation on price. The buyers were so committed to their manipulative position that they even began lying to their own agents, stating they would not be signing – eventually we asked the buyers’ agent to call the notary to see if they had signed and they had! Right up until the 11th hour, they were trying to manipulate us into conceding $50,000 on price. We didn’t, and our client won.
Scenario 2 – ‘$100,000 Price Reduction Or The Buyer Walks!’
Just when we’d won one game of chicken we found ourselves in another! Again we were representing the sellers, for whom we’d secured an incredible offer a number of months prior. Foolishly this buyer, who should have known better as they are a licensed mortgage broker, had delayed their appraisal until just two weeks prior to completion. In a downward market that was a huge mistake, as the appraisal came in over $100,000 short of what they’d contractually obligated themselves to pay. So in comes the threat again, ‘we need $100,000 off or we’re not completing.’ The buyers’ agent even told us, ‘hey, we’re agents, let’s work something out as it needs to complete…’ Again, this is not our clients’ problem!
So, How Did We Respond?
First, as we did last time, with the ‘scary math.’ This agent didn’t seem to comprehend the gravity of the situation though so we alerted our managing broker to the situation and asked him to call her managing broker. By then we’d obviously alerted the sellers to the situation, and with their permission their notary too.
In this situation the sellers also had a purchase that was due to complete the next day. With the sellers’ consent we alerted the listing agent of their purchase. Doing some digging, we discovered there were five transactions that would have cascaded into five failed completions – the ramifications would have been enormous.
We continued to press the buyers’ agent, recommending local mortgage brokers who could potentially find alternative lending options; we encouraged them to ask ‘friends and family’ for help closing the appraisal gap; and we continued keeping everyone appraised of the situation.
How Did It End?
Thankfully by holding firm again the clients’ did not concede the $100,000, or any amount, and we completed as scheduled. These ‘games of chicken’ should never be acceptable forms of negotiation, especially when the consequences could domino multiple transactions and people’s lives in the process. The sellers will most likely be reporting the behaviour to multiple licensing boards.
Why This Matters For You
This market requires genuine courage, a cool head, a lot of experience, and the relationships necessary to find alternative options for any situation. We are that team. The next year or two look like they will be a challenge to navigate, with contractual, intellectual, and relational nimbleness demanded to navigate purchasing and/or selling a home.
If you’re considering a real estate transaction in the coming months, don’t hesitate to reach out to our team, we’d love to help you achieve your goals without compromise too!
david@davidsmithhomes.ca
778-246-4344