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REAL ESTATE A large developer wants to buy my parents house

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jasonrego

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My parents called; a large developer have given them an offer-to-purchase-letter that developer willing to pay significantly large amount of money (about 9X the money my parents paid in 2005) to buy their house. Developer is buying total of 10 houses on the street and we are the 5th house right in the middle. (Location: Toronto, Ontario, Canada)

**
current market value is about 5x from the price my parent initially bought the property for; if we looking at based on current market value the developer is offering 2x current market value.
**

My parents are retired and have no reason for selling it now; they love the area and if they sell they have to move to new area because the current area is very expensive. What should we do?
 
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Kevin88660

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Depends on their retirement plan.

If they have enough money for retirement there is little need to sell (other than speculating the god price will not last).

It also depends on the size of the house. People often downsize to cash out for retirement.

If the place they are living right now is already small it is impossible to downsize in the same area.

These are general pov to consider only, as I have no knowledge in the Canadian real estate market.
 

jasonrego

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We have no idea if 9x what they paid is a good price. It really doesn’t matter what they paid for it. What’s the market value now?
current market value is about 5x from the price my parent initially bought the property for; if we looking at based on current market value the developer is offering 2x current market value.

the location phenomenal due to the area intensifying my guess is that developer are planning on building a high-rise.
 

Pink Sheep

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Get an estimate from a few realtors, accept offer, I would suggest at least 20%+ over valuation, then they can get a cheaper house and be more comfortable.
If at all possible.
 

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current market value the developer is offering 2x current market value.
yet
if they sell they have to move to new area because the current area is very expensive.

So you’re saying that selling the house at 2x market value for the area will
not be enough to relocate within the same area where prices are half?

These posts are getting more and more confusing by the day..
 

thechosen1

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If current market value is 5x and they are offered to sell for 9x, then they should be able to sell and then buy a house that’s the same size and style in the same location (nearby) and still have money leftover.

If they are unable to do so, then the premise that they are getting an offer nearly double market value is wrong.
 
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jasonrego

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Since the price offered is not reason enough to immediately say "YES!", counter-offer with whatever amount would have prompted such a response in the first place.
I agree with this option; I feel that my parents would get a better deal. Its just a first initial offer counter officering at 2x the initial offer would be good idea.
 

MoneyDoc

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@Antifragile might be able to provide some insight from the developer side and how they normally think.

One thing to keep in mind, I was bidding for a property a few months ago and the sellers agent told my agent that a developer was at play but they had pages of conditions. Stuff like VTB mortgage, contingent on zoning approvals, long due diligence periods, etc. With current prices in Toronto, I doubt the developer will pay "market" price unless they have an amazing potential site and this land is the key to the puzzle.
 
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wanttogofaster

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They may be forced to sell, eventually, if the rest of the neighbors do and they are the only ones left in the middle, as you said.
 

biophase

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Yeah this makes no sense at all. I don’t believe any of these numbers.

Let’s say the house is worth $500,000. You were telling me that developer is offering $900,000?

If this is truly the case, why can’t your parents take the money and buy a house one block away? They should be able to buy 2 houses on the next block LOL.

edit: I read the OP wrong and flipped the 2x and 5x. Edited it to make my numbers corret.
 
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thechosen1

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Yeah this makes no sense at all. I don’t believe any of these numbers.

Let’s say the house is worth $500,000. You were telling me that developer is offering $2.25 million? OK, let’s decrease it by a lot of money and say The house is worth $200,000, and your parents paid $100,000 for it. Are you saying the developer is offering $900,000?

If this is truly the case, why can’t your parents take the money and buy a house one block away? They should be able to buy 4 houses on the next block LOL.
Exactly! That's what I was saying - like, none of this adds up if OP has the correct numbers.

Just do it if it's really 9 times higher versus 5 times higher. 9 times is almost double 5 times.

Either they're wrong or they're ignoring a whopper of an offer.
 

eramart

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I’d seek an advice from a lawyer who knows about that kind of deals - he will know what can be negotiated and to what end. Maybe @Antifragile can point you in the right direction.

Edit: Maybe lawyer was not the right recommendation here - see @Antifragile answer below. I meant the professional person who knows about that kind of deals, not the lawyer per se.
 
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Antifragile

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Busy day here... but I'll chip in. Thanks for tagging me. I am a developer who does this, so speaking as "insider", consider the following:

1. Market value for a house is not the same for someone buying it to live there and a developer. I buy on a per square foot buildable. You buy on comps for similar houses.
2. As a developer, I often pay 1.5 to 2x from what most people see as "market value" because after meeting with a municipality, I know their plans and may be able to re-zone. You can check OCP (Official Community Plan) to see if your particular street is in the path of densification. What does this mean, it means that if your house sits on a the land that has higher density, it's worth more. A block away may be a whole different zone and Market Value 1/2. Hope this makes sense.
3. Is the developer buying a row of houses? I assume this is the case. Then meet with neighbours and work together.
4. If your house is orphaned and development is possible without your house, then your value will drop after the rest is assembled.
5. What is the closing process? I often buy subject to re-zoning, meaning I only put a deposit down and then a year later, after we get zoning, I pay the rest. Money today is worth more... as you know.

I'd need more info to have better advice.

One thing is for sure, lawyer is NOT the right person to guide you here. Only after you decide what to do, you can use lawyers to get paperwork sorted out.
 

ljean

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If you can get them to commit to buy it at a crazy price, try to get a few bonus concessions:

1. After they pay you, let you live there rent free until its time to actually redevelop. That can take forever during which you get free rent.

2. Get a right of first refusal in case the development doesnt work out and you can buy the house back at market value.
 

biophase

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2. As a developer, I often pay 1.5 to 2x from what most people see as "market value" because after meeting with a municipality, I know their plans and may be able to re-zone. You can check OCP (Official Community Plan) to see if your particular street is in the path of densification. What does this mean, it means that if your house sits on a the land that has higher density, it's worth more. A block away may be a whole different zone and Market Value 1/2. Hope this makes sense.
5. What is the closing process? I often buy subject to re-zoning, meaning I only put a deposit down and then a year later, after we get zoning, I pay the rest. Money today is worth more... as you know.

When you do subject to, is your deposit non-refundable? Basically an option to buy that expires?

We definitely don't know if enough about the OP's developer offer to make a decision. But it doesn't sound like it would be a clean deal with a quick close. The OP's parent's house could get tied up for many years with them not being able to move because they can't sell their house or nobody else would buy it.

To me, if the developer isn't willing to close quickly (<6 months) even a 1.5x may not be a good deal if the market catches up to the price in 1-2 years.
 

Antifragile

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I’m clearly biased. And I think there is a great reason to sell to developers.

My deposits are conditional and refundable in case we cannot achieve rezoning. To get through the process, I’ll have spent significant amount of our own cash. For larger projects it can be 7 figures - not including deposits. Why so big? Because consultants are expensive - I’ll be spending soft costs all the way through the process to redone. Failure to achieve rezone is likely bad news for both seller and developer!

To your point @biophase - assuming the market goes up, owners may indeed at some point get market value or less. Meaning - not a good deal for the owner/seller. But if the market doesn’t, then they had a deal that paid them more money. They should be able to turn around and buy a nicer home. Hence the 1.5x - 2x from current “market value”. Often, it really is a good deal to sell to developers. And those who ask for too much sometimes regret it later…

Why?

The worst outcome for people on the assembly block is to be orphaned. These things happen to greedy people, they ask developer for too much. Developer only pays what can make sense from a pro-forma perspective. Numbers don’t lie. And often what happens is that I have 5 lots in a row and want 8. The owners of lot 6 don’t sell. 5 is more than enough for a good project. On the other side, another developer buys lots from 7 to 12 (leaving lot 6 to either of the two developers, but neither one MUST have that lot).

Developer builds a multifamily project right next door to you and now your property is sterilized and worth less. Why? Because people who pay premium for single family lots want to be next to quiet great other single family lot neighbours. By the way, this example works on 3 lots too, for smaller developer.

The 2nd worst thing for owners on the assembly block is to think in isolation. If you don’t communicate with your neighbours, you may get a smaller offer than others. Humans are greedy. It happens all the time, your neighbours will ask for more money and promise the developer “I won’t tell them, just pay me more”. Some developers will play that game. I don’t. I do palms up program where each contract is tied to the rest of the assembly. Meaning that if I make you an offer, I’ll make the same offer to every lot on the assembly line and tell you about each in my offer. You’ll know everything. But like I said, not all developers choose to act this way and we generally get a bad rep because of them. So be sure to talk to your neighbours.

I agree with @biophase that there just isn’t enough information to actually give advice or help in this case.

With that in mind, consider that each municipality is there to serve their people. This means that you can go to your municipal hall and just ask for help with this offer. A planner might be open for a visit and will tell you all about the ”big and small picture” for your neighbourhood.

Good luck.
 

Antifragile

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Edit: caught up to a few edits from the OP and the rest of the thread. So…

1. Large Developer.
2. Toronto (super hot market)
3. 2x FMV (based on what?)
4. Guessing as to what the developer wants to do, maybe a high rise.
5. 10 lot assembly. Your parent’s house is #5.

Questions:
1. Reputation of the said developer? Can they be trusted? What have they done recently nearby? Who can you check with for their way of doing business?
2. What’s the closing date? Is the offer conditional? What are the conditions?
3. How are you deriving the FMV?
4. Ask the developer directly to explain their plans to you. Why wouldn’t they? I do this.
5. Is your houses needed for their project or could they do it with the rest and leave yours orphaned? This will be important for price negotiation. See my post above.
 
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Roli

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My parents called; a large developer have given them an offer-to-purchase-letter that developer willing to pay significantly large amount of money (about 9X the money my parents paid in 2005) to buy their house. Developer is buying total of 10 houses on the street and we are the 5th house right in the middle. (Location: Toronto, Ontario, Canada)

**
current market value is about 5x from the price my parent initially bought the property for; if we looking at based on current market value the developer is offering 2x current market value.
**

My parents are retired and have no reason for selling it now; they love the area and if they sell they have to move to new area because the current area is very expensive. What should we do?

If they are not that bothered either way, I'd advise that they hold out right to the end. However I would first find out what the developer plans are. Because living right in the middle of a bunch of construction sites will not be fun.

A relevant little story before I go:

Fairly close to me there is a furniture shop that held out against some mega developers. They told the shop owner that they wanted to turn the near by tube (subway) station into a major connection for the Eurostar (I live in West London), so that you could go straight from there to Paris.

They bought everything they needed to but the furniture shop owner held out, they offered him way over market value and he said no. In the end they just moved on and the plans were scrapped.

I always smile when I walk past that shop, for me it's symbolic of the fact that sometimes the little guy wins.
 

jasonrego

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Mar 22, 2018
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Busy day here... but I'll chip in. Thanks for tagging me. I am a developer who does this, so speaking as "insider", consider the following:

1. Market value for a house is not the same for someone buying it to live there and a developer. I buy on a per square foot buildable. You buy on comps for similar houses.
2. As a developer, I often pay 1.5 to 2x from what most people see as "market value" because after meeting with a municipality, I know their plans and may be able to re-zone. You can check OCP (Official Community Plan) to see if your particular street is in the path of densification. What does this mean, it means that if your house sits on a the land that has higher density, it's worth more. A block away may be a whole different zone and Market Value 1/2. Hope this makes sense.
3. Is the developer buying a row of houses? I assume this is the case. Then meet with neighbours and work together.
4. If your house is orphaned and development is possible without your house, then your value will drop after the rest is assembled.
5. What is the closing process? I often buy subject to re-zoning, meaning I only put a deposit down and then a year later, after we get zoning, I pay the rest. Money today is worth more... as you know.

I'd need more info to have better advice.

One thing is for sure, lawyer is NOT the right person to guide you here. Only after you decide what to do, you can use lawyers to get paperwork sorted out.

thank you for the response! It really sound like what you have commented above.

1. I agree, comps are only if someone wants to live in the house not tear down and build high-rise or commercial. I believe developer is planning on building high-rise; there are few places in close distance have proposed high-rise.

2. you are correct; developer offered 2x-2.5x of the current market price. There are few conditions for research and studies being completed. I assume they are planning on developing high-rise,

- I am going to call the city and find out if my parents house is in the the rezoning or high-density zone.

3. yes the developer is buying row of 10 houses in total; also part of a portion of the park beside the houses form the city. I have seen some machinery making deep holes and testing soils.

4. we are in the middle of the row of houses, we are the fifth house in middle of 10 houses; unlikely developer will be able to assemble anything without buying our house.

5. closing a year from now; there are few conditions have to be met in order to complete the transaction otherwise it falls apart.

My guess, counter-offer of 2x the current offer would be a reasonable ; which would be 4x the current market price.
 

jasonrego

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Mar 22, 2018
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When you do subject to, is your deposit non-refundable? Basically an option to buy that expires?

We definitely don't know if enough about the OP's developer offer to make a decision. But it doesn't sound like it would be a clean deal with a quick close. The OP's parent's house could get tied up for many years with them not being able to move because they can't sell their house or nobody else would buy it.

To me, if the developer isn't willing to close quickly (<6 months) even a 1.5x may not be a good deal if the market catches up to the price in 1-2 years.

closing year or two from now!
 

thechosen1

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Personally I think it's a lucky break when someone offers you 2x your home's market value. Offer what you want to try and go bigger but remember that these opportunities don't come around every day and you could potentially be left with no money, the house, and be surrounded by high rises.
 

jasonrego

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Mar 22, 2018
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I’m clearly biased. And I think there is a great reason to sell to developers.

My deposits are conditional and refundable in case we cannot achieve rezoning. To get through the process, I’ll have spent significant amount of our own cash. For larger projects it can be 7 figures - not including deposits. Why so big? Because consultants are expensive - I’ll be spending soft costs all the way through the process to redone. Failure to achieve rezone is likely bad news for both seller and developer!

To your point @biophase - assuming the market goes up, owners may indeed at some point get market value or less. Meaning - not a good deal for the owner/seller. But if the market doesn’t, then they had a deal that paid them more money. They should be able to turn around and buy a nicer home. Hence the 1.5x - 2x from current “market value”. Often, it really is a good deal to sell to developers. And those who ask for too much sometimes regret it later…

Why?

The worst outcome for people on the assembly block is to be orphaned. These things happen to greedy people, they ask developer for too much. Developer only pays what can make sense from a pro-forma perspective. Numbers don’t lie. And often what happens is that I have 5 lots in a row and want 8. The owners of lot 6 don’t sell. 5 is more than enough for a good project. On the other side, another developer buys lots from 7 to 12 (leaving lot 6 to either of the two developers, but neither one MUST have that lot).

Developer builds a multifamily project right next door to you and now your property is sterilized and worth less. Why? Because people who pay premium for single family lots want to be next to quiet great other single family lot neighbours. By the way, this example works on 3 lots too, for smaller developer.

The 2nd worst thing for owners on the assembly block is to think in isolation. If you don’t communicate with your neighbours, you may get a smaller offer than others. Humans are greedy. It happens all the time, your neighbours will ask for more money and promise the developer “I won’t tell them, just pay me more”. Some developers will play that game. I don’t. I do palms up program where each contract is tied to the rest of the assembly. Meaning that if I make you an offer, I’ll make the same offer to every lot on the assembly line and tell you about each in my offer. You’ll know everything. But like I said, not all developers choose to act this way and we generally get a bad rep because of them. So be sure to talk to your neighbours.

I agree with @biophase that there just isn’t enough information to actually give advice or help in this case.

With that in mind, consider that each municipality is there to serve their people. This means that you can go to your municipal hall and just ask for help with this offer. A planner might be open for a visit and will tell you all about the ”big and small picture” for your neighbourhood.

Good luck.


good point! will try to get best deal out of it, don't want to be the orphaned house!
 

jasonrego

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Mar 22, 2018
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41
toronto, canada
Edit: caught up to a few edits from the OP and the rest of the thread. So…

1. Large Developer.
2. Toronto (super hot market)
3. 2x FMV (based on what?)
4. Guessing as to what the developer wants to do, maybe a high rise.
5. 10 lot assembly. Your parent’s house is #5.

Questions:
1. Reputation of the said developer? Can they be trusted? What have they done recently nearby? Who can you check with for their way of doing business?
2. What’s the closing date? Is the offer conditional? What are the conditions?
3. How are you deriving the FMV?
4. Ask the developer directly to explain their plans to you. Why wouldn’t they? I do this.
5. Is your houses needed for their project or could they do it with the rest and leave yours orphaned? This will be important for price negotiation. See my post above.

1. reputation of the developer is not known; I googled them and can not find website. googled the address and found they have same address as a capital-management company which deal in real estate space. Website shows a recently completed project more then 1000 units. ( no idea if they are partners or developers)

2. closing year from now; 90 day for inspection and due diligent.

3. based on the current situation in my area; properties have gone up significantly in the area and more and more high-rise are springing up around us.

4. I have not talked to developer yet; only have the letter of intent / offer to purchase.

5. We are the 5th house; and I assume it would be a large development; chance of getting orphaned is slim.
 

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