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Are Pre-Sale Properties Still a Good Investment?

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Written on December 4th, 2018

Are Pre-Sale Properties Still a Good Investment? 

For the last several years, we would line up around the block at presentation centres across the city with bank drafts in hand, hoping we would be lucky enough to get the opportunity to purchase a suite. If we were one of the fortunate few, we could sit back and relax while our investment grew 10% – 20% a year, and often either sell these “assignments” prior to completion for huge profits, or end up completing on a suite which by today’s market we had grossly underpaid.

Although the frenetic pace of Pre-Sales has slowed considerably, this doesn’t mean there aren’t still some great opportunities for the right Buyers. When deciding if this is the right type of real estate investment for you, it’s important to understand not only all the benefits but any potential risks as well.

Benefits of Pre-Sales: 

Delayed Mortgage Payments – while most pre-sale projects require a deposit in the 15% – 25% range (which goes towards your down-payment), mortgage payments don’t begin until the property has completed. This can provide valuable time to help save more money to make a larger down payment. Purchasers with unique income scenarios could find this advantageous as well – for example if you’re certain your financial picture will look different at the time of completion, you could purchase something more expensive than you would be able to qualify for today, as mortgage qualification wouldn’t be required until much closer to completion.

Capital Appreciation – historically we have seen the Vancouver market consistently rise year on year. While I think it’s doubtful we enjoy 15% – 20% annual increases over the next couple years, more conservative growth is very realistic. As property values rise you can often reap a good return on your investment even before it’s completed.

Brand New Property – you would be the first to live in the home, and with all new construction in BC, you would enjoy the benefits of the 2-5-10 New Home Warranty.

Customization – many developers offer varying levels of customization for your new home. This can range from color schemes and flooring types to in-home technology or unique accessibility needs if required.

Lower Strata Fees – typically new homes have lower strata fees as the repair and maintenance needs are usually much less than older buildings.

Save on the PPT – if your purchase price is under $750,000 you may qualify to receive an exemption on the Property Transfer Tax, which could be a savings of as much as $13,000.

Grandfathered Bylaws – as an original owner you will be grandfathered in on any subsequent bylaw changes. This could be especially important should you be purchasing an investment property as you will always reserve the right to rent it out even if these rules are changed down the road.

Potential Downside of Pre-Sales: 

Capital Loss – at the time of completion, you will owe the amount you agreed to pay at the time of signing the contract. In the event of a market downturn, this could potentially be more than the present-day value of the property.

One-Sided Contracts – pre-sale contracts are written by the developer. They are designed to protect the developer as much as possible, and make the buyer’s needs of much less concern. Ensure you fully understand all terms of the contract.

Buying Sight Unseen – when buying off plans, imagination must be used to interpret things such as potential views, room exposures, the “flow” of a suite etc.

Layout and Floor Plans – developers often reserve the right to make changes to layouts, room sizes and finishings. Ensure you fully understand how these items are addressed in the contract.

Delays – completion dates can often be significantly longer than originally anticipated. Some flexibility with your current living arrangements may be required should you plan on making the new home your principal residence.

Interest Rates – make sure your budget can handle any potential interest rate increases. Remember that when the time comes to complete in several years, mortgage rates could be higher.

Financing – while you may qualify for a mortgage today, that doesn’t guarantee you’ll qualify at the time of completion. There are several factors that could change this, including:

  1. The rates have gone up and you can no longer afford the payments under the bank’s lending guidelines.
  2. The property value has gone down, in which case the bank will lend only on the current reduced market value and you would have to make up the difference.
  3. A significant change in employment.
  4. A significant change in your debt ratio or credit score.

GST – the 5% Goods and Services Tax is applicable to all new construction in BC.

How Do I Buy Pre-Sales in Today’s Market? 

1. Work with an agent who has experience with pre-sales. The pre-sale market is VERY different than the resale world. Remember the nice people in the sales centres work for the developer, not for you. Ensure you have an experienced professional on your side. Your agent gets paid by the developer, so there’s no extra cost to you.

2. Market Evaluation – have your Realtor carefully compare the new development’s prices to what similar re-sale properties in the neighborhood are selling for. In today’s market you should be paying as close to current market value as possible. If you’re purchasing as an investment have your agent research current rental values and vacancy rates as well.

3. Get In Early – many developers raise prices several times throughout the sales period. Being one of the first to buy often ensures the lowest price.

4. Negotiate, Negotiate, Negotiate – while often difficult to negotiate the price, try for everything else. Extra parking and storage, free upgrades, interior design bonuses, the ability to assign the contract, having the developer pay the GST etc. In today’s market it may even be possible to negotiate the deposit amount.

5. Realtor Incentives –more and more we’re seeing developers offer substantial bonuses to agents who help sell their projects. Find out if this is the case on the project you’re interested in, and if so I suggest negotiating with your agent to get back some if not all of this bonus back.

6. Always get Independent Legal Advice – after signing the contract you have 7 days to decide whether or not to proceed with the transaction. During this time, always have a lawyer review both the contract and the disclosure statement in detail to ensure you’re protected.

7. Research Neighborhoods – I always recommend buying near public transit and amenity, especially Skytrain routes. Try to find up and coming neighborhoods, where infrastructure and liveability could be significantly improved by the time the development completes.

8. Research the Developer – carefully examine the developer’s building history in Vancouver.

9. Buying with the End in Sight – speculative buying was very popular over the past decade, with purchasers often having neither the intent nor means to be able to complete on these transactions if required. Always purchase with the intent and ability to close on the completed product.

Hopefully this helps to provide some clarity on Pre-Sale investing – I would love to hear from you if you have any further questions or comments.

Wishing you a Happy and Relaxing Holidays,

Kevin Banno – Dexter Realty