Shoreline by Polygon Homes in South Vancouver
Thinking of buying a pre-sale condo? You might be tempted by the tantalizing array of pre-sale development units available in the Lower Mainland, some with attractive incentives.
Here’s how it works. When you agree to buy a pre-sale unit, you’re actually entering into a contract for the right to receive—and an obligation to pay for—a finished condo at a set point in the future. This forms the basis for some of the unique opportunities and risks that go along with buying pre-sale.
There are definitely advantages to buying pre-sale. You can pay just a small deposit now, save money while it’s being built, then pay the balance of your deposit when you move in. Or you can pay your deposit in bite-sized increments during the building process.
You can also customize design elements, finishes and even your layout. Because you’re buying a brand-new home, you won’t have to worry about doing costly repairs for at least another decade. And your unit will be covered under the BC government’s 2-5-10 Year Home Warranty Insurance program, so that if something does go wrong, you won’t have to pay for it.
But there are also risks and unique obligations that need to be considered before you sign on the dotted line and hand over your deposit. Here’s what you need to know: your rights and responsibilities under the Real Estate Development Marketing Act (REDMA).
Though there are advantages to buying pre-sale in any market, the greatest opportunities arise in a rising or hot real estate market. That’s because, by the time you move into your completed condo, it’s already worth more than what you agreed to pay for it.
In a softening market, on the other hand, by the time you complete the sale, you might already have lost money. If you’re relying on a mortgage, lenders may only cover the market value of the property at the time of completion, leaving you scrambling to raise more cash for the difference.
The mortgage climate can change without warning as well. Many people who purchased before the federal government administered tighter mortgage rules found they no longer qualified for the amount they were pre-approved for by the time they had to pay up.
So what happens if you can’t raise the cash you need to complete the sale, or your unit is worth less than what you owe when it’s time to pay up? Unless the developer violates the terms of your agreement, you are legally obligated to complete the sale—or forfeit your deposit.
Besides market changes, there are other unknowns, from unexpected construction delays to condos that don’t get built at all.
So how can you mitigate some of the potential risks?
Lay the groundwork
Long before you’re ready to sign anything, find out everything you can about the builder of each development you’re considering. Do they have a reputation of building on time? Talk to your Realtor and to homeowners who’ve purchased from them in the past. And if you’re a first-time buyer with a small down payment, consider sticking with pre-sale units that are already close to completion to eliminate some of the unknowns.
Talk to an independent mortgage broker as well, to find out what you can afford and to make sure your credit is in shape before you go in. That way you’ll be financially ready.
Review the developer’s Disclosure Statement
Before you sign a purchase contract, you have the right to review a Disclosure Statement prepared by the developer, according to Section 21.2 of REDMA. The Disclosure Statement lays out everything you will be buying—including proposed and filed bylaws, common property and storage allocations, and descriptions of appliances, furnishing, and finishes.
Under REDMA, it also has to include an estimated construction start and end date, as well as any “material facts” that could “reasonably be expected to affect, the value, price, or use of the development unit or development property.”
The developer is obligated to keep you up-to-date on amendments to estimated dates and material facts. This is important because building a new development is a long and complex process, and things often morph as it progresses.
Take time to review the statement carefully and make sure you understand all the terms set out in it. This step is best tackled with an experienced lawyer specializing in residential real estate and, of course, your Realtor (not the developer’s).
Check the Pre-sale Contract
After you’ve thoroughly reviewed the Disclosure Statement, look over the Pre-sale Contract with a fine toothcomb. Here are a few things to look for:
- Deposit: Besides the obvious (how much, when it’s due, and how it should be paid), look to see who gets the accrued interest during the construction process. It can be either the buyer or developer, and this should be stipulated in the contract. Generally your deposit is held in trust until it becomes part of the purchase price at completion, but REDMA allows the developer to get insurance allowing them to use your deposit in the interim. This should also be stated in the contract.
- Forfeiture clause: This clause gives the developer the right to claim your deposit if you breach your contract. It usually includes the wording that the deposit will be considered a genuine pre-estimate of damages and not a penalty, giving them a better chance of hanging on to your deposit if you try to back out and end up in court.
- Right to terminate the contract: Developers may need to walk away from a project for various reasons, including being unable to get skilled trades or permits. The contract will usually outline this right to cancel the project, at which point your deposit plus interest would be returned to you.
- Right of rescission: The contract will also cover when you can terminate the contract without losing your deposit. UnderREDMA s. 21.2, once you sign the pre-sale contract, or a receipt acknowledging you’ve had time to review the Disclosure Statement (whichever comes later), you are given a 7-day “rescission period” where you can serve written notice to the developer to terminate the contract. Also, if you receive an amended Disclosure Statement outlining material changes to be made to the layout and size of your unit or to the common facility because of the issuance of a building permit, you’re entitled to another 7 days to rescind your contract (REDMA Policy Statement 5).
- Allowable unit changes: Contracts usually give the builder the right to change the size, certain design features, or substitute comparable materials. The contract should also outline any adjustments to the purchase price that would be made if the finished size varies by more or less than 5% than planned, say. The contract should also allow you to cancel the contract if the difference is extreme.
- Assignments: This section covers whether or not you can sell and assign your contract to a third party before completion, what fees would be involved, and what would happen to your deposit.
Buying pre-sale has some unique rewards, but the process can be far from simple. REDMA legislation leaves room for interpretation and is being shaped by a number of ongoing court cases. So it’s a wise move to enlist an experienced Realtor, mortgage broker and lawyer to help safely guide you through the process—and into your swanky, custom home.
Other Thing’s you Would Want to Know
- Greater customization: Choose your preferred design, layout, décor upgrades, and even parking configuration.
- Warranties: 1-year developer’s warranty to cover issues before building is complete but after you’ve put down a deposit. 2-5-10-year warranty program covered by the BC Government.
- No mortgage guarantee: Not all banks will fund pre-sales. Some lenders will only cover the value at completion, which could be less depending on market conditions. And if your financial picture changes, you may not qualify even if you were pre-approved.
- Low hassle: Minimal replacements or repair costs and work for 10–15 years.
- No way to back out: Once you’re all in with a signed contract, you’re in for the long haul—or you forfeit that deposit.
- Low cost of ownership: New energy-efficient homes mean lower utility costs, lower maintenance fees, and minimal chance of paying special assessments for repairs.
- Terms of contract may change: You might not getexactly what you wanted. Check the fine print with your Realtor and lawyer.
- Must have patience: Properties can take up to several years to build. And unexpected delays may have you hunting for temporary living situations until move-in day.
- In a rising market: The value of your unit can be higher upon completion than when purchased, giving you instant equity.
- In a soft/falling market: By the time you move in, you already owe more than your condo’s worth.
Read more: http://www.rew.ca/news/buy-home-pre-sale-tips