GUIDE TO BUYING PRE-SALES

What is a pre sale?

A presale is a home that’s available to purchase prior to being move-in ready. You can choose to purchase either before construction starts or during construction. There are times when construction has been completed and the home is move-in ready, yet has not been sold—this is referred to as “new construction.”

A presale is when a condo developer sells the suites of the development before it has been completely built and often before construction has even begun. You, the buyer, purchase the right to the future property. While ultimately you are responsible for paying the full purchase price, you do not have to take out a mortgage on the property immediately but are only responsible for a deposit. This deposit usually ranges from 5 to 10% of the purchase price at the time you buy, with another 10 to 15% paid in installments over the course of construction. The developer does not gain access to this deposit money, which is held in a trust account, until completion. If the developer does not follow through with the construction project, the full deposit will be returned to the buyer.

Buying a newly built condominium unit can involve complicated issues. Depending on whether the person is purchasing a pre-construction condo or one that has just been completed, a buyer may have to deal with an interim closing date, a final closing date, and occupancy fees. These arise because the new condominium project cannot be legally registered until the building is fully constructed. The builder also cannot give full legal ownership and title to the new buyers until registration. While buyers can move into units without full legal title, they cannot own their units or obtain a mortgage loan until after registration.

What are the benefits to buying pre sale?

Selection of a home and early access to a building.
Delay Of Mortgage until completion of the building. This allows for more time to save for the down payment and closing costs. There’s still the ability to have a rate hold from a partnering lender with the development. If rates go up, the rate hold would apply. If rates go down, the lesser amount would be the rate for the mortgage term.
Building Up Equity. As housing prices rise over the course of the construction period, the contract on the home also rises in value. Before completing your home there’s the potential to see profit. The ROI is why presales are so popular with investors.
Warranty Protection. Pre sale homes come with 2, 5 or 10-year warranties, which allow for minimal cost as a new owner upon moving in.

One of the key benefit to purchasing pre sale is:

Seven-day rescission period. Legally required by the Real Estate Marketing Act, there is a seven-day period from an accepted contract to allow for a purchaser to do their due diligence of reading the disclosure statement and ensuring this is the best purchase for their individual needs before committing to the purchase. After the seven-day period, the contract becomes firm and binding.

What do you need to know about buying a presale?
Deposit: Each development will have its own deposit structure and amount required. Typically 5-10% is required when writing the contract and incremental deposits will be required up to 20% (Foreign buyers can be expected to pay up to 30%). The deposit is put towards your down payment at closing. The balance of the funds is due at completion.

GST: Federal tax is required on new construction and will be payable at the time of completion. If applicable, the buyers’ lawyer or notary will submit the GST rebate on the purchasers’ behalf. In some instances, the developer will charge the rebate amount on the GST and wait for the rebate from the government. There are GST rebates available for homes that will be rented out as incentive for increasing the rental pool.

Property Transfer Tax: Presale homes under $800,000 are exempt from property transfer tax, as long as the purchaser is a Canadian citizen or permanent resident living in the home for a year. See if you qualify here.

First time buyers are also exempt from PTT when purchasing under $450,000 and with a slight rebate under $575,000.

Details on First Time Home Buyer Exemption can be found here.

Otherwise, property transfer tax of purchases under $2 million are 1% of the first $200,000 and 2% on the remainder. There is a 3% increase on the purchase price amount over $2 million. You can find further explanations on my blog or the provincial website.

Presale purchases are not for everyone. It requires patience during the construction period, which could last 2-3 years. It also requires faith in purchasing off a floor plan and risk management when purchasing in one market and potentially closing in another.

What are the disadvantages of pre sale?

Federal Tax. 5% GST is required on top of the purchase price displayed by the developer. It is payable at completion.
Real Estate Market fluctuation. The market can go up and it can go down. Purchasers will still have to complete on the property despite market conditions. Traditionally, real estate is a long hold asset. To cover your bases, hope for a quick flip, but prepare for holding the property as a rental or potentially moving in.
Mortgage Approval. A mortgage cannot be granted until completion. Therefore, when you’re purchasing a presale, lenders can provide a pre-approval. However, another assessment will have to be completed upon completion to ensure lending for the property. If at the time of completion the property is valued at less than the purchase price, the purchaser can be responsible for making up the difference.
No Guarantee of Profit. A popular form of making profits in a rising real estate market, there is no guarantee that the market will continue to rise in the period between purchasing and completion of the building. It is recommended that the being able to complete on the home is possible to navigate risk. This relates to market fluctuations state above.
Purchasing off a floor plan. Purchasing presale requires a bit of imagination and vision. There can be changes to the floor plan during construction. A slight variance allowance will be indicated in the Contract of Purchase and sale and disclosure statement by the developer. Having a realtor represent you in the purchase from the developer will assist in deciphering what variance on finishing and square footage may apply. It’s essential to purchase from a reputable developer to ensure quality product.
The best way to determine if purchasing a home presale is the best option for you is to weigh the pros and cons with your mortgage specialist and real estate professional.

New home purchase agreements

A difference when purchasing a new home is that the offer to purchase is considerably longer and more complicated than a resale Agreement of Purchase and Sale. In addition, the text is often written in very small print and there is not much space to make changes. For this reason, it is important to take the offer to a lawyer before signing it. Your lawyer will explain the agreement to you to ensure that it is acceptable. With your lawyer’s advice and assistance, you may also be able to delete or change terms that are heavily weighted in favour of the builder.

Is it safe to buy a condo that does not yet exist?

The presale market in the province of British Columbia is governed by the Real Estate Development Marketing Act and ensures a considerable level of protection for buyers. If you have concerns or questions about a specific developer, you can contact Mike at 604-763-3136 or get in touch with the Home Owner Protection Office.

Apart from a highly regulated marketplace, potential Buyers should be aware of 3 important facts about buying a pre-sale property.

You, the Buyer, have the right to cancel the contract to purchase the property for 7 days after the offer has been accepted. This right is part of provincial law and is known as the “7 Day Rescission Period.” It allows you to walk away from the purchase for any reason at all — you are worried about future financing, you fall out of love with the development, or you decide to bet your entire deposit on a Vancouver Canucks game. No matter the reason: you have the right to cancel the contract on the spot.
The developer does not gain access to your deposit until construction is complete. This money is placed in a lawyer’s trust account for the duration of construction, meaning that your deposit is returned to you if a problem with construction emerges or if the developer declares bankruptcy.
The developer must provide you with a Disclosure Statement and you should be sure to read it. This statement contains important information about the future property, such as what is included with your purchase, the size of your suite, and what the building will look like upon completion.

What are the advantages of pre-sale properties for investors?

Presales offer many advantages for investors. Below we outline six attractive features of the presale market.

1. Leverage
You often can secure the purchase of a presale for as little as a deposit of 5 to 10%. Should the property increase in value before completion, you could see a significant return for very little money actually invested. For example: you decide to buy a $300,000 condo home with a planned completion date for 5 years in the future. To secure the property, you make a 10% deposit of $30,000. Due to an increase in the real estate market, your condo is worth $360,000 2 years later and you decide to sell the property (this is known as selling the assignment of contract). You walk away with your $30,000 deposit along with the value-added to the property – that is, 60,000 or a 200% return on your initial investment.

Now say you decide to hold on to that same property and the price remains constant until your completion date. The property is still valued at $360,000 when you go to your broker to see about acquiring a mortgage. Because you have more than 20% in equity ($60,000 + $30,000 = $90,000 or 33.3% of your $270,000 mortgage) you can avoid costly CMHC high ratio insurance premiums that are required for properties purchased with less than a 20% down payment. In this case, you managed to have a 33.3% down deposit on your mortgage with only putting 10% down initially.

2. Low Hassle Investing
Presale properties follow real estate market trends, with prices rising and falling just as the existing property does. The difference between holding a presale and an existing property lies in the fact that an investor can benefit from the potential capital appreciation without the worry of tenants, the cost of property taxes, and the monthly maintenance fees.

3. Low Cost of Ownership
New condos built by reputable developers will usually not require costly repairs or maintenance on the part of an owner/investor for a considerable period after completion. The same cannot always be said for older buildings.

4. Warranty Protection
All presale construction receives BC’s 2-5-10 Year Home Warranty Insurance. This warranty does not begin until the building is complete and, in most cases, assures the investor low costs and low hassles for the duration of the warranty.

5. Newly Built = Popular with Tenants
Newer buildings are usually very popular with tenants for fairly obvious reasons — modern design, new fixtures, and appliances; no need for repairs or troublesome and costly maintenance; and the conveniences that come with many newer buildings, such as swimming pools, workout centres, saunas, hot tubs, concierge, etc.

6. Newly Built and Popular = Higher Rent
Very often tenants are willing to pay a premium to rent a recently constructed suite over an older unit for the reasons detailed above.