By Natalka Falcomer

Caveat emptor – translated to “buyer beware” – is a legal concept that doubles as a popular warning used by real estate salespeople. The reason for caveat emptor’s popularity is because it’s an important legal rule in resale real estate transactions. Generally, caveat emptor means that the purchaser will buy the existing property in the condition he finds it. The buyer must make himself aware of the condition of the property by doing his own due diligence and he cannot sue the seller if he fails to do his homework. While this warning is heeded by purchasers in the resale market, it is largely ignored in the pre-construction market. This is a mistake.



In 2018, Ontario saw a steep rise in the number of condo projects being cancelled by builders. The numbers are shocking: more than 4,000 units will not be built as a result of project cancellations, beating the 2017 record of 1,678 cancellations. The reason for the cancellations vary – from failure to obtain the number of units desired to make the project feasible to simply underestimating the cost of the build and bankruptcy. While the builders walk and often build elsewhere, the buyers are stuck with a variety of losses.

Buyers who forked over down payments also had to absorb corresponding legal fees. Buyers also no longer have the opportunity to find a home they can afford because prices have increased over the last few years while their money was tied up in a project they once could afford.

Could they launch a lawsuit? Not that simple. Legal recourse is generally quite limited and may be ineffective considering how much buyers would have to pay in legal fees. Even if damages are awarded and lawsuits are won by the buyers, it is unlikely that an insolvent builder would be able to fork over the damages.

Given the risk associated with buying pre-construction, the application of caveat emptor is critical to the pre-construction real estate market; buyers must do their due diligence on the financial health, reputation and history of the builder before they buy. If they don’t, they may suffer the consequences with little recourse.

How to research a builder

1. Check them out with your province’s building regulator:

In Ontario, Tarion Warranty Corporation is the non-profit entity that is empowered by provincial legislation to administer new home warranty protections and to empower consumers when making purchases of new homes. Builders of new homes must be registered with Tarion and Tarion, in turn, collects information about the builder on the Ontario Builder Directory. Searching this directory will ensure that the builder is registered with Tarion, which affords certain protections if the project is cancelled or poorly built. The directory dates back 10 years and provides information about claims against the builder.

2. Online reviews:

While a good place to start, the directory is limited to only 10 years and claims may have occurred years before then. What is more, a builder can hide by changing the name of his company, effectively covering up whether or not lawsuits have been filed or claims have been made against him. Accordingly, it’s prudent to find the names of the management, executive team or the directors of the companies and conduct informal or formal background checks on various court websites and social media.

3. Speak to homeowners:

Talk to homeowners who’ve purchased property built by the builder. Homeowners are an important barometer of the quality of the builder as they – unlike media websites and the builder – have little to lose by telling the truth (unless they’re selling their unit!).

4. Review the financial plan:

The financial plan holds information about whether or not a project is well capitalized or if the builder is running a thin margin (and risky) business. The financial plan will also reveal the quality of materials being used, how many fees you will be responsible for (such as development charges) and if the reserve fund will be healthy and able to withstand any massive repairs. The better capitalized and funded, the less likely a builder will be unable to proceed with the project.

Along with the financial plan, dig deeper into the sale price of the units. If the price is higher than usual, determine if the higher cost is justified or if the builder has not done his homework, putting the project at risk. If the price is lower than justified, the builder may be cutting corners, which will hurt the project and its resale value in the long run.

If you or a client are thinking about preconstruction ownership, dig beneath the surface and investigate who you’re buying from. Don’t get distracted by the glittery finishes because, as the old adage goes, all that glitters it not gold.

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16 COMMENTS

  1. Gail, you’re right: Not all purchasers use a Realtor when buying pre-construction. However, they should all do for the following reasons:

    The builders and their salespersons’ interests are to sell you a new home/condo. If you don’t have a Realtor at your side, nobody represents your best interests. A Realtor provides you objective and professional advice and insight during all phases (contract, construction, walkthrough and closing).

    It’s already paid. The builders allocate a sales commission to be paid to buyers’ Realtor when Realtors bring buyers to them. However, builders do not discount the price when buyers are not represented by a Realtor. The builders’ salesperson who represents the builders’ best interests just makes salary plus possible bonuses.

    Contrary to Realtors, salespersons working in builders’ sales centres are not regulated under the Real Estate Council of Ontario (RECO) and can essentially say whatever they want, true or not, to get a buyer to sign the dotted line.

    Buyers lured by potentially false promises may get carried away by floor plans and models, and make impulse buys.

    On average, salespersons working in builders’ sales centres make much less commission. So, for them, every potential single sale matter$…

    • You make some very good points. Buyers should be represented. There is no valid reason or point not to use your own realtor However in my area(Kitchener/Waterloo) almost all sales people in new construction are actually licensed realtors.

      • Thanks. Very interesting that almost all sales reps working directly for builders in your area are licensed realtors.

        • I said “almost” because I am not 100% sure but until now I have never been to a new construction project (as far as I can recall) where the sales staff was not registered. I guess we are still “small town”….lol

  2. I agree wholeheartedly with you, Sabine. To go along with rose colored glasses, and when a problem arises you blame everybody else, is foolish and self-serving. It reminds me of the disaster we are currently facing with climate change.

    As we move along in time, we should learn from our mistakes and change our habits, not point at others to solve our errors. That’s the lazy coward’s way out.

  3. First, if you are willing to put tens of thousands of dollars in an unknown company’s bank account without some legal protection, then you deserve what happens next. If you have guts and look at the situation, you do have the right to insert any clauses you choose.
    I bought a new build years ago and was told the builder (a very reputable one) would not negotiate. When the dust settled, he agreed to upgrades totaling over $12,000 to my offer of $8,000. over his base price. So, don’t tell me you can’t negotiate with builders. Fear us the only thing stopping you.

    On another comment, Mr. DeHoey , I believe, is aptly named. If he is a Realtor, he would know the law still recognizes this “Caveat Emptor” thing. He obviously is neither a lawyer nor a Realtor! He is dreaming of what he thinks it should be, and not what really is!

    • Thank you for your comment. I “only” took my courses in 2006/2007 but Caveat Emptor was still part of the curriculum. And in reality, real estate or not, buyers should always be aware.

  4. “Caveat Emptor” are you serious it’s 2019! Who wrote this nonsense!

    In 1995 “Caveat Emptor” died in Ontario and was killed off in 2002. Caveat Emptor was rooted in 75 years of Seller Representation where not a single Home Buyer in North America was ever LEGALLY allowed to be represented (their interests protected) in a transaction delivered by MLS system members.

    The mere fact this article starts with False, Misleading and Misrepresentations says the rest of it cannot even be trusted.

    The days of Fairy Dust and Unicorns must end if Brokerages are to have viable businesses post 2019. Articles like this allow new registrants to be mislead into believing myths that died decades ago.

      • I don’t believe the poster to whom you refer speaks in anger… more in frustration? Case in point the date 1995… still being taught when you say you took your courses, a full decade later.

        Even more peculiar, I took my courses in 1980, and never heard the term taught or even referred to. Of course having been in the business world since the mid-60’s the world in general uses the term. But it certainly should not apply in our industry.

        There’s enough rules and regulations and a preponderance of education out there for free, aimed at the public in general, especially now in the Net-world, that certainly no one in our industry should ever put themselves in the business of having to defend themselves against even using the term? much less in relation to buying and selling real estate.

        The world of emails and forum-speak serves a good purpose of course, but we cannot know if someone is speaking sotto voce, if they got up on the wrong side of the bed a particular day, being grumpy cat, or is speaking so-called tongue-in-cheek. No body language available. No tonal quality. No timbre. Case in point.

        But this poster supports his findings and even his opinions with stats and facts.

        And this poster brings a wealth of insider knowledge that would put many in the industry to shame. We are strangled from the outset, when entering the field. There’s always people looking for trouble. But charts and graphs and real stats don’t lie. Some in our industry are strong evidence supporters, and want to be proud of our industry and weed out those who aren’t. And can back up their findings.

        That doesn’t fall in the category of anger, does it? (Opinion and interpretation of course: to each his/her own.)

        Respectfully
        Carolyne L 🍁

    • 1995 The Ramada and Merv Burgard was talking Buyer Agency when he first warned Ontario REALTORS “Caveat Emptor” had died. Merv had along and distinguished career teaching Ontario REALTORs which today’s realtors all benefit from.

      The SPIS was created solely to alleviate Brokerage risk from the end of Caveat Emptor.

      Krawchuk v. Scherback is the case most commonly cited.

      RECO annually charges REALTORS for failure to disclose never requiring the Buyer to check it out themselves first.

      It is only the lack of Consumer awareness that prevents 1000s of non-disclosure cases being brought forward in the post Caveat Emptor world. As consumers seek redress from FAKE housing news posted in the lead up to this housing correction we should all expect to see those who still believed Caveat Emptor applies removed from holding a license to trade in real estate.

      I have watched Mr. Bailey over the years and I know he would not allow any seller to not disclose to his buyer facts about a home. Buyer Beware died in that Ramada conference room back in 1995 and the but..but…buts never recovered.

  5. Perhaps, one more step needs to be made. Take the contract to your lawyer for revue. You do have a cooling off period of 10 days where you can cancel the contract. As a Realtor, I would advise putting a clause in the contract that the builder invest your deposit in an interest bearing trust account, with the entire proceeds going to the buyer if the development is not completed for any reason.

    A contract us between two parties, and therefore, can have clauses that protect the buyer AS WELL AS the seller. It does not have to be one-sided, as all builders contracts are.

    I have been involved in representing sellers and buyers of new homes, and been a Realtor for just shy of 44 years.

  6. Always recommend to your Buyer that any deposits be placed into a Lawyer’s Trust Account (Preferably with the Buyer’s Lawyer), with a Term written in to the Contract detailing a full refund for non performance by a certain date. If the developer won’t accept that, it’s time to walk away.

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