# Developers asking for 20% down payment



## tavogl (Oct 1, 2014)

Hi,

My wife and I are looking to buy our first home. I know prices are insane high right now but we really want to have a family and the rental situation isn't any easy on this, many land lords wont even look at your application because you have a baby, or a pet (which we do), imagine having both of them... total nightmare. Also the idea of renting and then the owner deciding to sell a few months after is not ideal, moving is difficult the way it is right now, add a baby to it and it wont be fun! with the market the way it is right now is just really difficult to have a family while renting. 

We are looking at some new developments that are supposed to be ready for 2017 and everybody is asking for 20% down payment, is this some sort of rule? is this legal? we are first time home buyers and really is getting difficult to wait until the market cools down, to have a family, been waiting for a few years now and nothing seems to cool the market and lower prices.


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## sags (May 15, 2010)

The 20% down payment refers to the amount necessary to avoid having a CMHC insured mortgage. 

With a good credit score and qualifying income, a 5% down payment can obtain a CMHC insured mortgage.

I understand the anxiety of wanting to buy a home for the family, but try not to let it cloud your judgement.

Can you afford a home AND a family at today's prices ? If so........maybe you can start talking to lenders and go shopping for a home.

If not......I would suggest you look for a rental townhouse or family oriented rental property, from a company whose business is rentals.

Avoiding landlords who own one or two properties, removes the risk of being forced to continually move.

We rented before we owned a home, and are renting now after we sold our last home.

We always rented from very large rental landlords, with thousands of rental units. We have never been told we had to move.


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## tavogl (Oct 1, 2014)

Hi Sags, thank you for your reply.

We do have good credit score, and we make about 130k a year (I know it's not super high but i'd guess it would qualify for CMHC)
We have 0 debt... it would not be super easy to do both things at the same time, a home and family at the same time, but we would be willing to do some sacrifices in order to get it done.
I don't really mind renting but situation here in Vancouver is out of control, I don't know where you live but i'd assume is not the same situation as we have here.

The problem I see is that what people are asking for rent right now is about the same we would be paying for the mortgage, of course mortgage would be a bit more expensive but we are talking 300 bucks a month which I am willing to shed if that's going to get us stability and a home that's going to be mine at the end of those 25 years.


As for the 20% in new developments, I've been getting the same answer from a few different developers, they will only sell to people who'll pay them 20% before the condos are ready, period. That means 20% downpayment, no questions asked. I got the same answer from a realtor so this is really the way it's rolling... is this legal?


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## Spudd (Oct 11, 2011)

I don't see why it wouldn't be legal. The developer needs to spend money up front to build the places, so it makes sense they would need more up-front. 

If you want to put less than that down, buy a re-sale instead. 

The other advantage to a re-sale especially for a condo is that the condo fees are more known. I've heard that developers often advertise condo fees that are unrealistically low, they are set at that rate for the first year, and then once it's turned over to the condo board, they realize they need to raise them, sometimes by a considerable amount.


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## Joe Black (Aug 3, 2015)

tavogl said:


> I got the same answer from a realtor so this is really the way it's rolling... is this legal?


Are you kidding me? Since when is it illegal in a non-communist country to state the terms of what you are willing to sell something for? The price is the price.


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## tavogl (Oct 1, 2014)

Joe, I am not talking about price but about down payment, 2 different things


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## Mortgage u/w (Feb 6, 2014)

It is not illegal. Developers can ask what they want as a down-payment in order to reserve your unit. I could understand why they do not ask for lower such as 5% because in most instances, those people don't have the means to afford the property in the first place. The developer can potentially end up with a bunch of unsold units. By asking 20%, that increases their chances of a firm sale, puts more money in their pockets to get the ball rolling and prove to their lender that they have the cash flow to start building. Everyone is dependent on one another. Nothing is stopping you from borrowing with 5% down. If you really want the unit, provide the 20% and when you obtain your financing at 95%, pay yourself back.


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## birdman (Feb 12, 2013)

I expect the reason for the down payment requirement is that nowadays I believe a lot of lenders require a certain level of pre sales before they will finance a development. Alternatively, the developer may have the cash to develop it on his own but he does not want to proceed unless he has firm sales for the project. Makes sense to me.


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## Berubeland (Sep 6, 2009)

The reason currently for the 20% down is to minimize up front costs for the developer, who has to borrow money because they are undercapitalized, because it's considered good business in the development world to use OPM other people's money instead of your own in your business. This way if things don't work out, the idiots who put 20% down lose their money, and you the developer get to keep your house, your car, and the 10 other companies you own and move on. 

http://www.moneysense.ca/spend/real...buyers-can-learn-from-the-urbancorp-collapse/

I wouldn't buy preconstruction, I even rented an apartment once to a couple who'd been waiting over 5 years and wanted to be close to where their condo was going to be built.


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## Joe Black (Aug 3, 2015)

tavogl said:


> Joe, I am not talking about price but about down payment, 2 different things


Well, think of it as the price for the down payment if you wish, but it really is just part of the price of the house. It's up to you whether or not to accept the terms that are offered.


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## sags (May 15, 2010)

Berubeland said:


> The reason currently for the 20% down is to minimize up front costs for the developer, who has to borrow money because they are undercapitalized, because it's considered good business in the development world to use OPM other people's money instead of your own in your business. This way if things don't work out, the idiots who put 20% down lose their money, and you the developer get to keep your house, your car, and the 10 other companies you own and move on.
> 
> http://www.moneysense.ca/spend/real...buyers-can-learn-from-the-urbancorp-collapse/
> 
> I wouldn't buy preconstruction, I even rented an apartment once to a couple who'd been waiting over 5 years and wanted to be close to where their condo was going to be built.


Exactly what I was thinking.

Why would anyone give 20% down payment for something that isn't even built, based on a promise from a developer who can't get capital from a bank ?

It is bad enough buying an expensive condo with "a view" and a year later a building is put up 6 feet away and all you see is concrete.

I wouldn't buy anything that wasn't already completed and the surrounding area finished developing.

In fact, given the construction quality issues with condos...........I would never buy anything but a town home condo.


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## carverman (Nov 8, 2010)

Berubeland said:


> because it's considered good business in the development world to use OPM other people's money instead of your own in your business. This way if things don't work out, *the idiots who put 20% down lose their money, and you the developer get to keep your house, your car, and the 10 other companies you own and move *on.
> 
> I wouldn't buy preconstruction, I even rented an apartment once to a couple who'd been waiting over 5 years and wanted to be close to where their condo was going to be built.


yes, you are correct there. 
Some idiots in the Ottawa area lost their deposits on pre-construction units when the developer went bankrupt because they were under capitalized. 
But the creditors (and the bankruptcy court bailiff-sheriff went after the builder, and even the wife lost her jewellery and Caddie..
...so sad to see 'honest builders' lose their shirts like that.:biggrin:


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## marina628 (Dec 14, 2010)

I guess it depends on where you think the markets will go but to pay 20% down to lock in the price for a couple years could turn out to be a very good investment.My friend put down 20% on a condo in 2011 and waited almost 3 years to get it finished but the price on his unit went from $239,000 to $288,900 during that time.Another friend did this but tied his money up 5 years and only seen a $23,000 profit in all that time.


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## birdman (Feb 12, 2013)

I would presume you would enter into an agreement or contract with the the builder and the 20%DP could be held in trust by your solicitor and only be released after the building is completed in accordance with the contract including a specific completion date, etc. and occupancy gained. Giving it direct to the builder is one thing but giving it to a lawyer is another. Again, if the developer is going to build the condo they will almost certainly require pre sales in order to obtain bank financing. It is also possible to have the lawyer hold it in an interest bearing account on your behalf but at todays savings account rates it probably not practical.


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## carverman (Nov 8, 2010)

frase said:


> I would presume you would enter into an agreement or contract with the the builder and the 20%DP could be held in trust by your solicitor and only be released after the building is completed in accordance with the contract including a specific completion date, etc. and occupancy gained.


Most builders will want the 20% check given to them. That way your deposit is an assurance from you that you will arrange financing on the rest of the real estate thing that you are buying from them and they can arrange financing for the build.



> Giving it direct to the builder is one thing but giving it to a lawyer is another. Again, if the developer is going to build the condo they will almost certainly require pre sales in order to obtain bank financing. It is also possible to have the lawyer hold it in an interest bearing account on your behalf *but at todays savings account rates it probably not practical*.


Most lawyers will charge you a fee for managing an account that you should be managing in the first place. 

That fee could be significant, if it is part of their escrow account(s) as their accountants have to examine and verify this fund and that involves time and money for them.

I remember a real estate closing lawyer hired by me and my ex to retain the residual from the sale of the matrimonial home in 1996, until the all the monetary issues that were leading to a court battle could be heard in court.

Neither one of us got any disposition of the sale until both sets of lawyers agreed or the court ordered it.

For about 2 years, the closing lawyer's fee to keep those funds in an interest bearing account in trust, far exceeded any interest earned..about $600 a year ($ 1200) in fund management fees by that lawyer, to eventually write the two checks to split the proceeds of the fund 50-50.


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