- What does it mean to buy “presale” or “pre-construction? Buying presale means entering a contract with a developer to buy a property before it’s been built. Typically you put down a deposit when you sign the presale contract. In return, the developer promises to build the property to the agreed-upon specifications, and by a certain date in the future.
- Can you give me an example of a presale arrangement? An example would be entering into an agreement to buy “a 500 square foot one bedroom apartment in Burnaby for $600,000 which will be built in the year 2022.”
- What are some benefits to buying presale compared to buying a home that’s already been built? Buying presale gives you a range of features and benefits:
- You don’t need to pay the full purchase balance until the property is completed, just a deposit.
- If you want to invest in real estate, but you’re not sure if you want to become a landlord.
- You can lock in today’s prices with potential future upside at time of completion.
- It’s an alternative investment to stocks and bonds (remember asset allocation / diversification includes real estate as a class of investments).
- You can participate in a future community.
- You can plan your family’s future cash flow and budget.
4. When I take possession is my property guaranteed to be worth more than I paid for it? No, remember while the long term trend in real estate prices in Vancouver is growth, the housing market sometimes goes down. There is always a possibility your investment will be worth less on completion than the amount you agreed to pay when you signed the presale agreement. Similar to any investment there is always an element of risk.
5. How much is the deposit on a presale? The deposit requirements depend on the developer and each development is different. As of 2019, it’s common to see 5% at the time of writing the agreement, or some dollar amount ($5,000), and followed up with 5% increments to a total of 20-25% over the duration of the project.
6. When is the full cost payable? Once you take possession and complete on the property the full balance is payable to the developer via your lawyer/notary.
7. How is the price of the presale determined? The price is locked in when you sign the presale agreement/purchase agreement, even if the completion date may be several years in the future.
8. Is buying a presale similar to condo flipping? Isn’t that a bad thing? Condo flipping is a term that gets thrown around a lot. It is a speculative activity to get rich quick. This often requires some element of luck where you buy cheap and sell for more in the very short term. If you’re thinking of investing in real estate, I recommend thinking in the longer term. You may want to buy a presale with the goal of taking ownership to live in the property yourself, or to become a landlord, or perhaps to sell before the development is complete so you can re-invest elsewhere. Whatever your financial goals are, buying presale provides you with more flexibility than buying an existing property.
9. What happens if the developer goes bankrupt before the development is finished? Deposits are held in trust by a lawyer whom the developer has selected to use. There are requirements under the Real Estate Development Marketing Act (REDMA) that require deposits only be released when certain milestones are met such as:
- Strata Plan registered at the Land Title Office;
- The approval of an occupancy permit has been obtained;
- Proof of purchase by the buyer has been registered in the Land Title Office
However, even with these legal protections, it is possible the developer could reach these milestones and then go bankrupt. This might mean the buyers lose their deposits and the property remains unfinished. A much more likely scenario is that another developer steps in and completes the development and the buyer is unaffected. Working with a real estate agent who specialises in presales can help you select a reputable and well funded developer.
10. Do I have to pay property taxes while it’s being built? No, property taxes are paid since there is nothing registered with Land Title and it is still owned by the Developer. The Developer pays during the entire construction period.
11. What are the rules around getting a mortgage for a presale? There are no official rules. Some financial institutions and credit unions provide “hard approvals” on mortgages up as far as two years prior to the estimated completion date. We recommend you obtain your mortgage hard approval as soon as possible since an individual’s financial situation can change. Your financial institution or a mortgage broker can help you with your borrowing needs.
12. If you buy ‘presale’ do you have to live in it when it’s built? No, there are no rules that require you to live in it. There are many options, you can sell it, rent it out, or give it to an immediate family member. Consult with your Accountant and/or Legal Counsel for any tax and legal implications.
13. Can you sell your investment before it’s built? Yes, this is called re-assigning the purchase rights to another buyer. Each development is different, and the terms outlining the rules of an assignment are clearly outlined in the disclosure statement and purchase agreement.
14. Are there any penalties or taxes if you sell before it’s been built? Yes, there are potential tax implications and the CRA will look at original intent as to why you first purchased the presale. Consult with your Accountant for any tax implications. Every development is different so make sure you read the contract carefully. An ‘assignment fee’ will be outlined in the purchase agreement and the disclosure statement. As of 2019, these fees range from 0-3% (or minimal admin fee) of the new purchase price. If this is important to you, make sure it is clear from the developer what the fees will be. Typically prior to re-assignment of the agreement, consent will be required from the developer.
15. Do I need mortgage insurance when I buy presale? No, since it’s a presale and there is no hard physical asset, no mortgage insurance is required or available to be purchased. However, once you complete on the unit and take possession you may be required by CMHC or Genworth to arrange mortgage insurance, depending on the size of your mortgage relative to the purchase price.
16. Is there any home insurance I need when presale? No, there is no home insurance required to be purchased for a presale. Nothing to claim!
17. What happens if there are delays in the construction project? Delays in the project if significant will allow a buyer to walk away from their initial purchase agreement. Delays are common and in order for a buyer to walk away and get their deposit back certain criteria must be met. These criteria are specific to the development and outlined in the presale agreement. Typically an ‘outside date’ is provided and if the unit is completed outside this date, the buyer can opt out. However, the buyer also gives up any increase in value by walking away.
18. How do I purchase presale? Do I need a realtor? The short answer is no, you do not need a Realtor. However, there are several benefits to using a Realtor to help you make this important purchase decision: a Realtor can advise you on purchase value, give an opinion on the reputation and track record of the developer, lead purchase negotiations with the developer, identify any unusual clauses in the presale agreement that may require further consideration, and look out for your best interests. Remember the sales staff at the presentation centres work for the developer, not you.
19. How long does it normally take from the initial purchase to taking ownership? It depends. The size and type of property being built will help determine the duration of a project, from the initial purchase to completion and possession. Wood-frame projects under 100 units can take up to two years to build and complete. 300 unit concrete high rise projects can take up to three years to build and complete. Master-planned communities that have significant amenities and commercial real estate attached to the project can take five to six years to complete or longer.
20. How do I choose a Realtor? Choosing the right Realtor is an important decision. Whomever you choose, they should take the time to understand your needs and work to find the right home or investment for you and your family. If you’d like to buy presale, or you’re just interested in learning more, I recommend you speak to someone who specialises in presales and has a proven track record they can share with you. Just remember a Realtor that has skin in the game believes in the product they are marketing and selling.
ABOUT THE AUTHOR:
Brian is a Real Estate Consultant and a Chartered Accountant (CPA, CA). He has over a decade of experience delivering on various audits and risk advisory engagements with both public and private organizations. Brian also was a Product Manager at a local software company and ran his own consulting business prior to converting his side hustle and real estate passion of 16 years into work. He has personally lived and breathed how a person buys and sells a home more than the average person does in a lifetime. Brian is born, raised, and schooled in Vancouver. Brian is a resident, owner, and investor. Brian is happily married to his wife Katharine and has a daughter.
Disclaimer: This communication is not intended to be and should not be used as investment advice. If you want advice please seek a licensed professional for investment advice. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official position of Oakwyn Realty Downtown Ltd.
