I am proud to have represented some of Canada's largest developers over the last 4 years. Buying new construction can be stressful in several ways. From writing the initial contract, to waiting, to finally closing on the property. Use an experienced Realtor to make sure your interest are being taken care of and the transaction goes as smoothly as possible. See below FAQ about buying a presale property:
What is a Presale?
The term Presale generally refers to real estate developments being sold before the completion of construction. In Vancouver, this is typically new condo or townhouse developments being marketed and sold by Developers or marketing companies hired by the Developers. Presales are also often referred to as “pre-construction” or simply “new condos”.
Completed buildings that still have homes unsold are also often referred to as Presale since they’re still being purchased brand new and directly from the Developer.
Why buy a Presale?
Buying a presale has both risks and potential rewards. The most common reasons people buy presales are:
-Potential increase in value before completion: This allows the buyer to put down only deposits and potentially watch the home increase in value before even having to complete the sale, take on a mortgage, condo fees or property taxes. Many people in Vancouver have done very well financially buying into presales and selling them after they’re built in markets where home values have been increasing.
-Brand new home: The appeal of having a home that is brand new and never lived in is a big draw for Presales.
-Wider selection of choices: A good building, in a good location, by a reputable developer will always have relatively strong demand for it. Purchasing at the presale stage allows you to choose from a wider selection of available floor plans, size ranges, views, floors of the building, outdoor spaces, customizations & more.
Waiting until the building is finished and purchasing on the resale market will not present as much selection and you will have to pick from the listings available at any given time, which may not be your ideal choice in the building were you to have more selection.
-The latest trends & technologies in the building: The newest developments tend to be on the leading edge of the newest interior design trends, construction trends, environmental building techniques and more. Buying into a new presale instead of an existing building may simply give you more “new stuff”.
-Time to save: Being able to pay deposits in spread out installments, and not having to start payments for mortgages, condo fees & taxes often allows a buyer to ease into home ownership when buying a presale. This works particularly well for first time buyers currently living at home, as it gives them an excuse to save up and time to plan out all of the details.
Risks of Presale?
There are various risks involved with purchasing a Presale development. Weighing the potential risks vs rewards should be done to decide of buying a Presale is right for you.
- Time delays: Presale developments come with estimated timelines and can vary a lot. 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.
-Deposits being held up: Your deposit payments are held in trust accounts and legally protected by the Real Estate Development Marketing Act (REDMA) that developers must follow. Although they are protected by this, it’s still money not in your pocket, and should the development not go through you will get it back but will have lost the opportunity to have used it elsewhere during that time.
-Changes from the original terms: Although most developers try very hard to deliver on their promises and keep a good reputation, there are times when things can change and the final home will be slightly different from what you expected. Presale contracts generally protect a developers right to make some changes to items such as interior materials, appliances, common areas (such as amenities) & even the overall size of the home you purchased. Having a qualified Realtor and/or lawyer review the contract & disclosure documents will help make you aware of potential changes that may occur.
-Loss in Value: Despite what some people may tell you, prices do not always go up. Just as you can make a large profit from buying a presale, you can also take a large loss. If the value you agreed to goes down before the completion of the development, you will likely still be responsible to complete the sale at the agreed upon price. Although there have been situations where developers have agreed to lower prices and adjust to current market prices, they are not obligated to do so and a buyer should expect that they will be paying the price they agreed to when purchasing.
-Developers asking for more money: This has been a rare existence in the Vancouver Presale market, however there have been some developments where developers have under budgeted for their costs and ask purchasers for more money 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.
Frequently Asked Questions
Why are homes sold as Presales?
Developers sell presales in order to help secure the financing they need to complete construction. Although the deposits held in trust aren’t directly used for development costs, they are shown as collateral to the project financiers who supply the money for building. Most developments need a certain minimum % of sales before they can get their financing and start building.
What is Rescission?
The Real Estate Development Marketing Act ensure that each buyer is given a 7 day right of rescission. This is cancellation period that is legally mandatory for the developer to give each buyer. Any deposits paid are fully refundable if the rescission is exercised within the 7 day period.
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.
Not all Presale contract allow assignments, and those that do will usually have restrictions and fees associated with them.
What is the New Home Warranty?
One of the benefits of buying a brand new Presale, is getting the complete New Home Warranty. This 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 should come with all Presale developments; although covered by different companies.
What’s the difference between Concrete and Wood Frame?
Both offer different construction techniques that come at different costs. Wood frame buildings are limited to 6 stories in BC, but most are 4 or less. Wood frame is cheeper to build than concrete so it should come at a lower price. Concrete offers a more sound proof and durable construction method that typically last longer with less upkeep; however it is also priced higher. There’s no right or wrong answer on which to buy, as it depends on the needs and priorities of each individual buyer.
What are Trust Accounts?
A trust accounts holds money with one party, in the interest of someone else. They are used to protect the buyer from losing their deposits altogether if something goes wrong. Usually, they trust accounts are held with a law firm and the deposits are not released to the developer until the completion of the building and sale.
Do I get interest on my deposit?
Some trust accounts are set up to pay interest to the buyer, while others are not. This varies from Presale to Presale and review of the contract and disclosure statement are needed to find out.
What are condo fees? Can they change?
Condo fees are payments made to cover the common expenses of the strata building. They cover items such as common area electricity, gas, amenities, landscaping, garbage removal, building insurance and more.
When purchasing a Presale, you are given “estimated” condo fees only as it’s not possible to determine the exact costs of a building that is not built. When the development is complete, the final condo fees can be different than what you were told at the time of purchase.
Reviewing the estimated budget, and taking a closer look at the type of costs in the building such as amenities & utilities will help estimate whether the development is likely to have high condo fees later.
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 you 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.
Can I use a Realtor®?
The vast majority of Presale developments will allow you to purchase with the help of your own Realtor®. In fact, many go out of their way to accomodate Realtors® because they value the constant source of business an agent active in the Presale market will bring. It’s not uncommon for Realtors to have VIP access for their clients, specials event and even special promotions.
Who pays my Realtor®?
Your Realtor’s commission is paid 100% by the Developer (seller). 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.
Will I get a better deal without a Realtor®?
No. Although you save the developer money because they don’t have to pay a commission, competition acts for BC Real Estate make it difficult for the seller to exclude Realtors from the sale if they’ve already made it clear they cooperate with Realtors and offer commissions.
In addition to this, most developers know the value of repeat business and the assistance a qualified Realtor gives to the buyers, so they’re more than happy to work with Realtors and don’t want to discriminate against them by offering no-Realtor discounts. In the long term, it is in their interest to have strong relationships with Realtors that will continuously bring them buyers.
Is the sales person my Realtor®?
No. The sales person at a Presale represents the Developer (seller). On some developments, they may represent both sides (dual agency) but this prevents them from being able to legally aid in the negotiation process.
Many sales people are not licensed agents, as they are not required to be if they work directly for a developer. Sales people working for marketing companies hired by the developer tend to be licensed agents.
Although the sales agents are required to supply certain information to you, they are legally required to represent their client (the developer) to the best of their ability. This means they can not negotiate on your behalf.
This is not to say they are not helpful and honest people; just that they simply are not there to represent you. If you wish to have agent representation, you should acquire the help of a qualified Realtor on your side.
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 HST since they are brand new. This differs from resale real estate which does not charge HST if you’re not the first owner.
How much is HST?
HST is charged at 12%, made up of a 5% federal portion & a 7% provincial portion. Rebates are available for both portions depending on the price of the home and the qualifying terms of the buyers. Some developments will adjust for these rebates at closing time, so you don’t have to pay them out in the first place. Others, you will have to pay the 12% and apply for rebates which can take a few months to come back.
Most buyers of Presales will qualify for some level of HST rebate. For homes under $525,000 there is very little change from before HST was implemented. Contact us for a more details breakdown on exactly how much rebate you may qualify for, and steps in the rebate process.
How much is Property Transfer Tax (PTT)?
Property Transfer Tax (PTT) is equal to 1% on the first 200,000 of the home value; and 2% on the remainder. For example the PTT on a $400,000 home is $6000. First time buyers are eligible for PTT exemptions on homes up to $425,000; and partial exemptions for homes $425,000 – $450,000.
PTT is the same on Presales as with traditional resale real estate.
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.
*Article courtesy of Vancouver presales