I had an interesting conversation the other day with a friend of mine. He’s thinking about selling his home in central Toronto and was wondering about whether he should just sell it to a builder and not bother putting it on the market. He was also wondering whether a builder would pay a premium for his home if both he and his neighbour sold their homes to the same builder at the same time.

As we spoke, I thought to myself “This is a sign of the times” because let’s face it – almost any older home in central Toronto is attractive to builders in today’s market. Why? Because in almost all cases the land component of a property’s value now comprises such a large proportion of its total value. The homes themselves often have little or no value. I’ve seen older homes on 25’ lots in North Toronto that were in original condition sell for $1,250,000 and I’ve seen similar fully renovated homes sell for the same price.

If you’re thinking of selling your home and current trends continue, there are certain issues you should be aware of when it comes to selling to a builder. These are a few of the things my friend and I discussed:

• Should he sell it to a builder he knows or put it on the market and try to sell it to other builders and users, too? (A user is a person who buys a home to live in.) It used to be the case that users would normally be willing to pay more than builders because builders want to pay the lowest price possible for their land to maximize their profits. It’s a business for them, after all. But lately I’ve been finding that this is no longer true. Builders are now often willing to pay more than users. I don’t know if it’s because some of them have investors’ funds they need to spend or because they’re no longer concerned about overpaying for land since prices keep increasing or because there are more builders now so there’s more demand for land. Whatever the reason, some builders are now spending freely to procure land. (And some builders are spending obscenely to procure land.) I told my friend he should put his home on the market to get maximum exposure because there are so many builders and users from all over the city looking for homes that he would likely find someone willing to pay significantly more than the builder he knows. There was one caveat to my advice: if the builder he knows is willing to pay him an obscene price, he should sell it to him and rest easy that he received a good price.
• Then we talked about the deposit. Most users in this market would want and need to move into my friend’s home. They’re looking for a place to live. Builders are different. They don’t have emotional attachments to properties. If they find a better property at a lower price or if prices start to fall they might be more likely to walk away from the deal than a user. I suggested to my friend that he ask for a substantial deposit if he sells to a builder, preferably something in the range of 10% of the price. The larger the deposit, the less the chance that a buyer will walk away from it.
• Some builders will include unusual or lengthy conditions in their offers to tie the property up while they consider whether or not to actually buy it. They might make their offer conditional on Committee of Adjustment approval. Or insert a two week financing condition. I told my friend to be wary of any unusual or lengthy conditions.
• One thing we didn’t discuss but which you should beware of if you ever sell to a builder are offers from a buyer in trust or a numbered corporation buyer or an offer that contains an assignment clause. These types of offers could result in you selling your home to a buyer without assets against whom you have no recourse. For example, an assignment clause allows the builder to assign the agreement of purchase and sale to a third party. Your builder buyer might have significant assets, but what happens if he decides that he doesn’t want to buy your property and assigns the agreement to a corporation or an individual without assets before telling you that he’s breaching the agreement? Yes, you can sue, but you won’t get very far suing a corporation or an individual without assets. Don’t sell to a buyer in trust or to a numbered corporation buyer and don’t allow the agreement to be assigned.
• My friend was thinking of moving to another home that wouldn’t be ready for about a year. In an ideal world he’d sell his home now, collect the money and rent his home back from the buyer for a year until his new home was ready. I mentioned to him that a builder might consider renting his home back to him after buying it because it would likely take a builder a year to get plans and permits anyway and the builder would probably prefer that the home not sit empty for a year. He might even be able to negotiate a low or nominal monthly rent depending on how badly the builder wanted his home.
• The big question was whether he should sell at the same time as his neighbour to a builder willing to pay a premium for two adjacent lots. This strategy can work well with semi-detached homes because builders might be interested in building two homes but won’t buy a single semi as they can’t tear down half a semi and build on the lot. (Single semis are only of interest to builders who want to renovate instead of build new or who are buying them as investments and hoping to buy the attached semi at some time in the future). My friend and his neighbour both have detached homes. If they put them on the market at the same time, it’s possible that a builder would pay them each a premium, but this type of builder is rare as it would require deep pockets to buy two such properties. If the properties were listed at the same time, single property builders and users might assume that the two properties would get purchased by a builder with deep pockets and get scared off. Since there are more users and single property builders than there are builders with deep pockets, my friend and I agreed that he was probably better off not selling at the same time as his neighbour.

It’s a tricky market these days with lots to consider. That’s why it’s always best to be prepared if you’re thinking of buying or selling. It’s also best to face reality and selling to a builder is part of today’s reality. I hope this conversation with my friend helps you.

If you know anyone who’s interested in learning how the market works and who’d like to receive the kind of help that involves honest answers, straightforward advice, no pressure and being treated like family, please let me know the best way for me to connect with them because I’d like to offer them this kind of help. And as always, don’t be shy if you have any questions or comments about this post! Thanks for reading.