WHAT IS PRESALE?

A presale is a home that’s available to purchase prior to being completed with the completion date usually scheduled 3-5 years in the future. Presale homes are a great way to get into the market as a first-time buyer or as an investor. During a competitive market, the returns from presale can be quite profitable as the home increases in value during the construction phase. On the other hand, it can also be a big gamble if the market swings the other way.

BENEFITS OF PRESALE

1. LEVERAGE

You often can secure the purchase of a presale for as little as a deposit of 5 to 10%. Should the property increase in value before completion, you could see a significant return for very little money actually invested. For example, you decide to buy a $300,000 condo home with a planned completion date of 5 years in the future. To secure the property, you make a 10% deposit of $30,000. Due to an increase in the real estate market, your condo is worth $360,000 2 years later and you decide to sell the property (this is known as selling the assignment of contract). You walk away with your $30,000 deposit along with the value-added to the property – that is, 60,000 or a 200% return on your initial investment.

2. TIME TO MAKE UP THE DOWN PAYMENT

When purchasing a presale home, you will make smaller, staggered deposit payments, allowing you to save additional money to put towards the down payment prior to completion of your home. Some financial institutions may guarantee and hold the interest rate for as long as 36 months. If the rate increases by the time you close on your home, the rate is still protected, acting as a safety net.

3. NEW HOME WARRANTY

In accordance with the Homeowners Protection Office (HPO), homes built by Licensed Residential Builders are covered by a mandatory third-party home warranty insurance — the 2-5-10 Home Warranty Insurance Program as it is sometimes called. 2-5-10 New Home warranty insurance includes a minimum of two years on labor and materials, five years on the building envelope, and ten years on the structure of the building. In a resale situation, you may not have any warranties, which increases the overall cost.

4. DELAY OF MORTGAGE

No mortgage payments until completion of the building. This allows for more time to save for the down payment and closing costs. There's still the ability to have a rate hold from a partnering lender with the development. If rates go up, the rate hold applies. If rates go down, the lesser amount would be the rate for the mortgage term.

DISADVANTAGES OF PRESALE

1. NO GUARANTEED PROFIT

You often can secure the purchase of a presale for as little as a deposit of 5 to 10%. Should the property increase in value before completion, you could see a significant return for very little money actually invested. For example: you decide to buy a $300,000 condo home with a planned completion date for 5 years in the future. To secure the property, you make a 10% deposit of $30,000. Due to an increase in the real estate market, your condo is worth $360,000 2 years later and you decide to sell the property (this is known as selling the assignment of contract). You walk away with your $30,000 deposit along with the value-added to the property – that is, 60,000 or a 200% return on your initial investment.

2. PURCHASING OFF A FLOOR PLAN

Purchasing presale requires a bit of imagination and vision. There can be changes to the floor plan during construction. A slight variance allowance will be indicated in the Contract of Purchase and Sale and the disclosure statement by the developer. Having a realtor represent you in the purchase from the developer will assist you in deciphering what variance on finishing and square footage may apply. It's essential to purchase from a reputable developer to ensure a quality product.

3. GST AND PTT PAYABLE ON PRESALE

Yes! Federal Goods and Services Tax (GST) and BC’s Property Transfer Tax (PTT) is payable on all new properties in British Columbia. These taxes are payable when a presale property completes. Do keep in mind there are rebates available for qualified buyers on both the GST and Property Transfer Tax. Please consult with your accountant for more details on any rebates available.

4. LEVERAGE CAN WORK AGAINST YOU

Real estate prices go up, but they also go down, If the value of the presale condo goes down below what you paid for it, you still have to complete on it (see above) and you cannot back out. If you need to get a mortgage on a presale condo that is completing and it is worth less than you paid, you may have to find the money to make up the difference between the contract price on the presale condo and the actual market value of the condo when it completes. Be sure when you are buying a presale condo to always consult with a mortgage broker or lender to see about getting a mortgage on the property if prices go down.