Welcome to Part 1 of my Home Buyer Series!
Today we’re going to dive into all the things you should know before purchasing a presale; and for those of you who don’t know, a presale is a property that has not yet been constructed (or is in the middle of construction). Read on for my list of everything you should know before signing a presale contract!
- You pay tax. In B.C., you pay GST on the purchase of a new property. This means for a property that is $300,000 you will need an additional $15,000 to cover the tax.
. - You need a larger deposit. On residential properties, the deposit can often be as low as 5% of the sale price, due within 24 hours of committing to the purchase. Deposits for a presale property typically require a deposit between 15%-25% depending on the developer and the property. Unlike a resale property, this deposit is due in different amounts at different times. Here’s an example of how a presale deposit schedule could work:
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$5,000 upon writing an offerRemaining 5% of the purchase price within 7 day rescission periodAdditional 5% due at the 6-month markAdditional 5% due at the 12-month mark* Protip: An experienced Real Estate Agent can often times negotiate a lower deposit or a more favourable payment schedule to suite your needs.
. - Mortgages aren’t guaranteed. Although you may be pre-approved for a mortgage on your pre-sale when completion time comes there’s still a chance your mortgage won’t get approved. Because of fluctuating markets and interest rates, the bank can’t guarantee that at the time of your purchase you will be approved for the mortgage when the project completes. * Pro tip: Speak to a mortgage broker early in the process. They will be able to prepare you and your finances ahead of time so when it comes time to complete on your purchase you will know what to expect even with changing rates and market fluctuation. Click Here For More Information On Mortgages.
. - Assignment of the contract. If you find yourself unable to complete on your presale you may choose to assign the contract (resell the unit). This can be difficult unless the presale has significantly risen in value. Developers often have restrictions on the assignment of the contract, so make sure to double check just in case. Also, some developers won’t let you assign the contract until they have sold all the units within the development. If the real estate market drops significantly since your purchase, you may be forced to complete. If you can’t, it means lawyers, court, and judges! *Pro tip: Developers will often times charge an assignment fee which means if you sell before it’s completed a part of your proceeds will go to the developer. An experienced realtor knows to look for such clauses so if you think you might sell before it completes it’s important to let your agent know. (psttt. It can sometimes be negoiated out of the contract)
. - You can’t back out… but sometimes you can. While it’s true that you may assign the contract to another purchaser, Legally, you must complete on the purchase of the property regardless of changes in the market, unforeseen circumstances, etc. If you’ve purchased a presale and you are unable to complete on it, and the developer won’t let you assign the contract to someone else, you are in a scary position! If the market has caused the unit to significantly increase in value, the developer may let you out of your contract only because they would be able to make more money by letting you out and letting someone else in at the current, higher price. You shouldn’t rely on this however as it is rare and can still mean you lose out on your deposit!
. - If the market goes down, you may have overpaid. There’s no guarantee that a presale can be a profitable investment. If you’re purchasing a presale as an investor and are hoping to gain a profit, it’s important to do a lot of research on the real estate market in which you’re purchasing.
. - Project delays are a thing. Ahh yes. I have seen far too many project completion dates go way past the originally promised deadline. Some building projects have even completed a full calendar year after the original completion date! If you purchase a presale in the hopes of moving in as soon as completion, make sure to have a plan if the project doesn’t complete on time!
. - Know what you’re signing. A presale contract is not a standard Contract of Purchase and Sale. Presale contracts are drafted by developers and their lawyers who understandably protect their own interests. For this reason, ensure you understand all the terms set out within the contract, and don’t hesitate to have it reviewed by a lawyer if you don’t fully understand it! An experience agent will be familiar with these type of contracts and be able to make better sense of it all for you.
. - You can negotiate. A lot of people don’t know that there is room for negotiation when purchasing a presale. Last year, I helped my client negotiate the price down on her presale, negotiate the down payment, and negotiate an extra parking stall into her contract – (a parking stall that had a resale value of $35,000!). Often, developers or sales center representatives will give the impression that if you don’t “Sign here right now, you’ll never get this deal again!” So, if negotiation isn’t your thing, consider hiring a Real Estate Agent to do that for you. (Did I mention that I’m a Realtor?) *Pro tip: As a buyer you don’t pay commission. Commission is paid by the seller or in the case of presales the developer. Often times they might promise you a better deal by going direct but that’s just because they don’t want to pay an agent that will negotiate in your best interest not theirs.
If you’re looking for a presale in your area, you have nothing to lose by contacting a real estate agent! They often have more information on specific presales than what you can find on the web and can help you figure out whether or not it’s a good investment. Best of all, they can help ensure you get the best deal possible – the cost to you? Nothing!
If you’re thinking of investing in Real Estate make sure to check back for PART 2 of my Home Buyer Series!