Purchasing Pre-sale Properties
Are you considering to buy a pre-sale condo or townhouse? There are many pre-sale development suites available in Vancouver and Richmond, some with very good incentives. (Take a look at my Pre-sale Developments section). Buying a pre-sale suite means you are entering into a contract for the right to receive and an obligation to pay for a finished condo or townhouse at a point set in the near future. There are many opportunities and risks that go along with buying pre-sale.
There are many advantages to buying pre-sale properties. You can pay your deposit in installments during the building process, save money while it’s being built, then pay the remaining balance of your purchase when you move in. Different deposit structure varies with different developments.
You can also customize finishes, design elements and even your layout in some cases. Because you’re buying a brand new home, you won’t have to worry about doing costly repairs for at least another decade. Plus your unit will be covered under the BC government’s 2-5-10 Home Warranty Insurance program (2 years on electrical and plumbing, 5 years on building envelope, 10 years on the structure), so if there are any deficiencies, you are covered.
Another advantage to buying pre-sale arise in a rising or hot real estate market. By the time you move into your completed condo, it could worth more than what you agreed to pay initially.
But there are also risks and unique obligations that need to be considered before you sign on the dotted line and hand over your deposit. In a softening market, by the time you complete the sale, you might already have lost money. If you’re relying on a mortgage, lenders may only cover the market value of the property at the time of completion, leaving you scrambling to raise more cash for the difference.
The mortgage climate can change without warning as well. Many people who purchased before the federal government administered tighter mortgage rules found they no longer qualified for the amount they were pre-approved for by the time they are due for completion. So what happens if you can’t raise enough cash needed to complete the sale, or your unit is worth less than what you owe when it’s time to pay up? Unless the developer violates the terms of your agreement, you are legally obligated to complete the sale or forfeit your deposit.
|Choose your preferred design, layout, décor upgrades, and even parking configuration.||You might not get exactly what you wanted. Check the fine print with your Realtor and lawyer.|
|2-5-10-year warranty program covered by the BC Government.||Not all banks will fund pre-sales. Some lenders will only cover the value at completion, which could be less depending on market conditions. And if your financial picture changes, you may not qualify even if you were pre-approved.|
|Minimal replacements or repair costs and work for 10 to 15 years.||Once you’re all in with a signed contract, you’re in for the long haul or you forfeit that deposit.|
|New energy-efficient homes mean lower utility costs, lower maintenance fees, and minimal chance of paying special assessments for repairs.||Properties can take up to several years to build. And unexpected delays may have you hunting for temporary living situations until move-in day.|
|In a strong market, the value of your unit could be higher upon completion than when purchased, gaining instant equity.||In a weak market, by the time you move in, you may owe more than your condo’s worth.|
Besides market changes, there may be other unknowns, from unexpected construction delays to condos that don’t get completed or even get built at all. So how can you mitigate some of the potential risks?
Review the Developer’s Disclosure Statement
Before signing a pre-sale contract, all prospective pre-sale purchasers of strata properties with five lots or more should receive a Disclosure Statement from the builder or developer, as required under the Real Estate Development Marketing Act, and must be given a reasonable opportunity to read it. The Disclosure Statement describes the property that is being sold and the purchaser’s right to cancel the pre-sale contract within seven days of signing it. (In the case of a strata property, the Disclosure Statement also includes a summary of the project’s common property features and amenities, its governing documents and its budget for the first year after registration.) Check the small print before you sign!
Pre-sale purchasers will be asked to enter into a pre-sale contract with the builder or developer, and to make a deposit. The deposit may be held in trust or protected by a policy of deposit protection insurance. Typically the contract will stipulate when the unit will be constructed and completed and the fixed price for the home as well as any changes or substitutions that the developer may make under the contract.
Once the contract is signed by both parties, it is legally binding. For your protection, seek the advice of a lawyer experienced in pre-sales agreements before you sign the contract. The contract provides you with the right to purchase the unit in accordance with the terms and conditions of the contract; however, there may be exemptions and reservations that could significantly change what you thought you were buying.
You have a seven-day rescission period from the time you receive a copy of the signed contract or the time you acknowledge receiving the Disclosure Statement (whichever comes first) in which to finalize the sale or withdraw your offer.
Contracts for residential units purchased on a pre-sale basis are sometimes sold or “assigned” to another purchaser even before construction has been completed. This contract assignment is a legal sales transaction where the second purchaser takes on the rights and obligations for the new home contract from the original purchaser. The original pre-sale contract with the builder or developer will stipulate if assignments are permitted, if a fee must be paid for the assignment and any other terms or conditions. In all cases, the builder or developer is the legal owner of the home purchased on a pre-sale or property assignment basis until a legal transfer of title has occurred.
Buying pre-sale has some unique rewards, but the process can be far from simple. Enlist me, a mortgage broker and a lawyer to help safely guide you through the process and into your new, custom home.