Buying a Presale home is very different than purchasing a traditional re-sale (used) home. The risks and rewards are also very different. We’ll walk you through the differences here, but don’t hesitate to reach out if you’d like more information on whether a Presale is right for you!
What is a Presale?
“Pre-sale” refers to a real estate development that’s being sold before it has been completed – sometimes years before construction even begins! Developers can conduct pre-sales for new condominiums, townhouses or detached homes.
Why do Developers have Presales?
Developers usually have to raise money for construction, either from a bank or from investors. Often, those lenders will insist that the developer prove that demand exists by pre-selling some percentage of the homes to be built before funding is provided (60% is a common requirement).
Developers generally build a sales centre, where you can view a mock-up of the homes to be built, and hire a marketing company to conduct the pre-sale. The sales staff are very helpful but, make no mistake, they work for the developer! That’s why it can be very helpful to bring your own Realtor with you when considering purchasing a Presale.
Developers will require that purchasers pay a deposit. The deposit is held in trust and cannot be used to fund construction, but it proves the existence of real buyers to the investors in the development.
Why buy a Presale?
The most common reasons people buy presales are:
- Potential increase in value before completion: The buyer is locking in today’s prices on a new home! If prices are going up, this allows the buyer to secure a home with only a deposit and watch the home increase in value before even having to complete the sale, take on a mortgage, condo fees or property taxes. Many investors in Vancouver have done very well financially buying into presales during our rising markets and selling them just before completion.
- Brand new home: Many buyer’s are drawn by the appeal of living in a brand new home! That new home smell…. mmmm! 🙂
- Choice – your home, your way: Purchasing at the presale stage allows you to choose from a range of floor plans, unit sizes, number of bedrooms, flooring choices, the floor you’re on, views, outdoor spaces, colour schemes and more. By comparison, when buying a resale property, all those choices have been made for you, and you have to select from whatever is available.
- The newest trends & technologies: New buildings tend to be on the leading edge of the interior design trends, construction trends, environmental building techniques and more.
- Time to save up: Many first time buyers, in particular, have watched in frustration as markets rise faster than they can save up the down payment. Presales allow the buyer time to lock in the price of their new home while they save up! Developers often help by keeping the deposits fairly low, and allowing them to be paid over time.
What are the Risks of buying Presales?
- Delays in Completion: Developers provide timelines for when construction will be completed, but don’t count on them! When purchasing, you need to be flexible with your completion needs and aware that it may be earlier, or more often later than you’re expecting when you make the purchase. We are familiar with one development on New Westminster’s Quay by a VERY prominent developer which is already 3 years late – the development slipped a year for each year that passed! It definitely happens.
- Deposits are locked up: Your deposit money is held in a trust account and legally protected by the Real Estate Development Marketing Act (REDMA) that developers must follow. Your money is safe, but if the development fails to go ahead, you will have lost the opportunity to invest the money elsewhere.
- Changes in the Purchase Contract: Most developers try very hard to deliver on their promises and keep a good reputation, but you should expect changes resulting in the final home being slightly different than originally presented. Presale contracts protect a developers right to change interior materials, appliances, common areas (such as amenities) or even small changes in the size of the home you purchased. Having your own qualified Realtor and/or lawyer review the contract & disclosure documents will help make you aware of potential changes that may occur.
- Loss in Value before Completion: Do you believe that real estate prices only go up? They don’t. While real estate has been an outstanding investment, real estate prices can come down for a number of reasons – recessions, rising interest rates, … Just as leverage allows you to make a large profit from presales when the market goes up, leverage can also cause you to have a large loss if the market is down when you have to complete. Remember, you will still be responsible to complete the sale at the agreed upon price!
- Developers asking for more money: This scenario is, fortunately, pretty rare in the Vancouver pre-sale market, but it has happened. The developer claims that their costs have risen more than expected, and demand that pre-sale buyers either agree to a higher price, or give up their right to a unit in the building, despite the original agreement. Reviewing the background of the developer and their reputation with past purchasers can help safeguard against a potential situation like this, and your Realtor can be very helpful here. Also remember that the Contract was written by the Developer’s lawyers and is most emphatically not in your favour. While developers won’t generally agree to change the terms in the contract, your realtor can at least make you aware of the potential areas of concern before you purchase.
What is the Rescission period?
The Real Estate Development Marketing Act (REDMA) ensures that a buyer is given a 7 day “Right of Rescission”. This period was enacted into law to protect Buyers from high pressure sales tactics, and to give them a chance to change their mind within 7 days. Any deposits paid are fully refundable if the right of rescission is exercised.
This gives the buyer time to read all of the fine print, have the documents reviewed by their Realtor and/or lawyer and go over any other issued you need to before the sale is firm and legally binding.
What is an Assignment?
An assignment is the transfer, or addition to the purchase contract to another name before completion. There are 2 typical forms of assignments. One being an assignment without profit which is done when moving the contract into the name of your company or a family member. For example, a young buyer may assign the contract into their parents names because they buyer can no longer afford the complete the purchase.
The other is an assignment for profit which is like selling the home before it’s completed to someone else, and having them take over the terms of the contract and complete the sale when the development is ready. Investors typically use assignments to take their profits, which can be sizeable: consider a situation where a buyer has purchased a home with a deposit of $60,000, but then assigns the home for $300,000 more than the contract price because of the rising market. They have just made a 500% profit! The investor has also neatly side-stepped the Property Transfer Tax, Foreign Buyer Tax, etc. Note: tax rules are ever-changing, consult with your tax professional to determine the taxes that will apply in your situation.
Also note that not all Presales can be assigned and, even if they can, assignment typically requires the Developer’s permission and the payment of a fee.
What is the New Home Warranty?
The New Home Warranty is one of the biggest benefits to buying brand new construction! The warranty covers various construction issues for different lengths of time, with structural coverage of 10 years being the longest covered portion. The New Home Warranty in BC is one of the most comprehensive in North America, and is mandatory on all new homes.
What are Phased Developments?
Some larger developments are built and sold in phases. What this means is they’re selling multiple buildings, 1 or 2 at a time, and the overall development will consist of many. Phases sometimes share common amenities and condo fees, and other times don’t. This is important to be aware of, as shared phases can create unique situations. For example your condo fees may be paying for a workout gym that’s not built until 6 months later in the next phase.
Can prices change during the sales process?
Yes. Developers often change prices and promotions during the course of their sales programs. They need to adjust to changing markets, demands and competition so they reserve the right to change things. The price you agree to and the terms that go along with it (deposit requirements, upgrade costs, included items) are unique to your purchase.
Are prices negotiable?
Sometimes. Presales are generally less negotiable than traditional Real Estate listings, but that does not mean they are completely non negotiable. A good Realtor, familiar for the market & with strong negotiation skills may be able to identify when negotiating is an option. Sometimes if the price is fixed, optional items, upgrades or deposit terms can still be negotiated.
Who pays my Realtor?
Your Realtor’s commission is paid 100% by the Developer. It does not cost you anything extra to use the services of the Realtor, and in some cases can actually save you money if that Realtor can negotiate a better price, arrange discounts for their client due to large amounts of repeat business, or get red carpet access to developments with high demand for them.
Is the sales person my Realtor?
No. The sales person at a Presale represents the Developer. Many sales people are not licensed agents, as they are not required to be if they work directly for a developer. The sales agents are required to supply certain information to you, but they are legally required to represent the developer. This means they can not negotiate on your behalf, and they have no duty of care towards you.
What taxes are applicable?
Like all Real Estate sale in BC, property transfer tax (PTT) is payable on Presales. In addition to PTT, Presales are also subject to GST since they are brand new.
Most buyers of Presales will qualify for some level of PTT or GST rebate. Check our Real Estate Blog for more details.
Do I need a Mortgage Pre Approval?
If the Presale you’re purchasing is close to being completed (under 3 months), you will likely want a pre-approval to ensure you’re qualified for financing the purchase and have secured a desired mortgage rate.
If the completion of the Presale is further out, you will not need a pre-approval, but may still choose to get one. Since the mortgage will not commence until the purchase completes, you will not need to have financing arranged until that time. Having a pre-approval still may be advantages as it gives you a clearer idea of expected monthly costs and a secured rate for a period of time.
Most Presales will have onsite mortgage information that allows you to get a long term rate hold (up to 3 years) secured through those particular lenders. This safe guards you against potentially rises in interest rates during the construction period, and is a much longer rate hold than a typical mortgage broker, unassociated with the development can provide.
