Two alarming stories have surfaced from (shocker alert) Toronto over the last little while regarding developers who’ve skirted their end of deals, and with what looks like a lack of intention to fulfill them from day one. These aren’t the first, nor will they be the last; but if you’re considering a condo purchase, it’s important to know the signs.

The first story of note comes from Centrium Condos- a North York hotel/condo/commercial development whose CEO and his lawyer allegedly conspired to con buyers out of their deposits by releasing funds that were to be held in trust until closing. Ultimately, the 140 pre-construction buyers’ deposits amounted to somewhere in the neighbourhood of $12-$14 million dollars. The lawyer released these funds to the developer who ultimately sold the land the project was to be built on and subsequently took off to Korea without looking back.

The purpose of the funds being held in trust is so that neither party, buyer or seller, has permission to access these funds; but they do provide leverage for the developer to secure financing from a third-party if required. It also provides a form of tender to solidify the transaction. Therefore, when the lawyer does shell it out well before she’s supposed to, she gets tossed in jail and slammed with 25 counts of fraud over $5,000, 25 counts of possession of property obtained by crime and 25 counts of breach of trust.

Before I go any further, this is ultimately nobody’s fault except for the company’s owner and the lawyer who aided in the scheme. I’m not about to suggest that anyone else is to blame here.

However, given the nature of the pre-construction condo industry and the relative lack of regulation; one of the most important due diligence items that a buyer can do is to research the developer. In this case, this was Centrust Development Group’s first and only development. They had no previous development experience whatsoever. Far from a Menkes, Tridel or Empire, which are among the closest to a sure thing Toronto will offer; these folks bought in hand over fist to a shelf company with absolutely no track record.

To put it in context, two products I’m fortunate enough to sell most are those done by two of the most reputable builders out there: Reid’s Heritage Homes & The Tricar Group. One is arguably the most recognized builder in the area, and the other was Tarion’s High-Rise Builder of the Year for 2013. Companies like that, with deep roots, ample capital and gleaming reputations aren’t the kind to take off with uninsured deposits. In fact, Tricar only requires $20,000 deposits for a number of their builds. Why? Because that is the maximum insured by the Tarion New Home Warranty Program. Meaning that if anything ever did happen to them financially, rendering them incapable of completing the build, buyers would never be on the hook for a shortfall, and never out so much as a dime. At Centrium, lost deposits ranged from $40,000 to $700,000; all of which is now being sheltered overseas, never to be seen again.

If you were buying a new car, you’d probably test drive it. Worst case, you could rely on third-party testimonials, reviews or the brand itself. What you wouldn’t do, is look at the marketing handout with all sorts of unfounded claims and pretty CGI pictures of a car that doesn’t exist and cut the dealership a cheque on the spot. And yet, that’s what 140 people did. It’s not rocket science. If ever there was a “buyer beware” industry, pre-construction condo development would be it.

The second story is equally gutsy, but less explicitly wrong. It’s about a developer exercising one of those pre-construction purchase agreement “weasel clauses” that allow developers to make reasonable changes to the plan. At Emerald City Condos, at Don Mills & Sheppard, building renderings in marketing materials depicted an “Emerald City” stairway leading up from the subway tracks and some of the brochure copy referred to “easy underground access” to the transit.

You can guess what happened next.

Move in day came for a young buyer named Wendy Ji, and only then did she discover the lack of a tunnel to the subway. Odds are it was never in the plans, since the developers denied that such claims were never made, and promises never broken.

This is the website for Elad Canada Inc., the developer of Emerald City Condos. You’d think a with any semblance of a reputation could do better.

Terrible, and yet wholly predictable (See photo/earlier paragraphs).

Now, the buyers feel they should be entitled to a rebate on the purchase of the condo to account for the value or lack thereof pertaining to the tunnel having never been constructed.

The $30-million class-action lawsuit that Wendy and others launched is demanding 10-15% back, per unit, to account for the discrepancy in price between Emerald City units and comparables in other buildings with a lack of direct transit connection.

Personally, this seems like an entirely reasonable compromise for a developer who clearly tried to pull the wool over buyers’ eyes. You can’t sell a condo with materials that read, “the lower level lobby is connected directly to the subway, allowing you the convenience of going anywhere you like on the TTC without having to go outside,” without getting burned for not doing it.

Ontario has made progress to curb these types of raw deals by instituting a 10-day cooling off period for buyers to review agreements of purchase and sale, along with disclosure statements. In spite of that rule, it’s still a challenge for buyers to gauge risk; especially when they shouldn’t have to in the first place. If every developer just held up their end of the bargain, these stories wouldn’t blow up. But they do. And it hurts the developers who build an honest building & play by the rules.

The point I’m trying to make isn’t, “never buy a pre-construction condo”; but rather “know who you’re buying your pre-construction condo from”. There’s a lot to be said for buying something at its 2014 value and paying for it in 2017 with devalued currency and instant market appreciation. Just don’t get hosed. Buy from a developer who has done it a million times, and plans to do it a million more. Their name is on the line, their future rides on success, and they want the building to do as well as you want it to.