Here is Why You CAN’T Invest in That New Development!

By Robert F. McLeod

A REIN member recently had an experience that prompted her to ask me if developers can discriminate against an investor in a project sale. This is a great question and begs a deeper explanation.

First, the Canadian Human Rights Act protects citizens from 11 grounds of discrimination, such as: race, ethnicity, color, religion, race, age, sex, sexual orientation, marital status, family status, disability, and/or a conviction. Beyond this are discriminatory practices, such as refusals to employ, harassment, etc. which may tie into the REIN member’s experience.

On the basis of this question, can someone such as a developer refuse to sell a unit or units to an investor? That quick answer is, “Yes”. Does this answer shock you? You may think this would be grounds to contact a lawyer on discrimination (more here about the options), but the reality is there are many good reasons a developer may do this, and understand this: some reasons are not by their own choice.

Let’s start this off by looking at the developer.

When a developer starts to work with their lending team, a whole pile of risk and due diligence is run past and through the borrower, who in this case, is the developer. If a lender has an extensive background with the client, based on past successful transactions, the lenders may be more lenient with the developer on the grounds of equity, pre-sales, sales tests and a myriad of other hoops many developers have to jump through.

If the developer is new or in a new relationship with a lender, then the level of restrictions the lender may put on the developer can be even more cumbersome. The main question is always “who are the target buyer(s)?”

In most cases, lenders will cap the number of investor sales in a project, and by cap I don’t mean they’ll start turning down deals, but it’s up to the developer to equally sell the deals coming into the lender. In the last couple years, most of our projects have had caps in the 30-40% range. The lenders understand that in saying this, the bulk of the first deals may be investor deals by virtue of the developer providing some incentives such better pricing or that investors don’t mind the wait knowing hopefully there will be a good instant equity gain when they close.

So, if I’m marketing a typical 100 unit project, which is normally the size we work with, I may produce to my lender 20 deals in the first week, of which 15 might be investors. Yes, this is 75% investor weighted, but the lenders understand this will ease off once we start working our sales with the retail end users. Remember, as a private company they can refuse deals from anyone, at any time, the primary reason being lender requirements and risk.

So, if you’re an investor and wanting to buy units and the developer says, “No,” I’d certainly ask more questions. The short answer is if you showed up with all cash, I’m sure they’d bend the rules. I know I would! But the developer and lenders’ risks are that if the market turns during the construction phase, which can easily take 1-3 years depending on the project, historically investors will walk from their deposits if the market falls 10-20%.

Owner-occupiers are not buying on the same basis, they need a home, they are buying on the emotional needs and are much less of a “flight risk”. The other point is if you’re buying pre-sales and not near completion, the developer knows that more can go wrong and isn’t willing to risk investors who may bail, or investors who may taint the project.

All of our sales contracts cover off what buyers may and may not do. In some cases, those developers that don’t cover off do’s and don’ts, may run into investors’ pre-leasing suites, trying to assign or flip their contracts. These activities can run interference in a developer’s sales or leasing model. The more sophisticated the developer, the tighter the sales contracts they will have with their buyers.

There’s lots of real estate to go around, if you’re told no, don’t take it personally; the person on the other side of the desk has someone to answer to as well. Keep shopping, there’s always another deal.

Robert F. McLeod, CSI, CCC is the founder and CEO of McLeod Project Marketing, a boutique developer consultancy based in Edmonton, Alberta. He is also the Associate Broker for Re/max Real Estate Edmonton Ltd. Robert is a three time REIN Player of the Year winner and has been awarded the REIN Leslie Cluff Memorial Award. In 2011, Robert was an Edmonton Top 40 Under 40 with Avenue Magazine. See more about Robert at www.mcleodprojectmarketing.com.

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