A pre sale is a home that’s available to purchase prior to being ready to move in. Pre sales can be made available for purchase before construction or at any period from start to finish of the building.
New construction is the term for move in ready new builds.
Pre sales are regulated by REDMA (Real Estate Development Marketing Act). This act provides the pre sale buyer with some protections.
THE DISCLOSURE STATEMENT
REDMA requires that a disclosure statement be prepared by the developer and shown to proposed buyers. The disclosure statement includes proposed and filed bi laws, common, unit and storage property information and allocations, descriptions of appliances furnishing and finishes. There will be estimated construction start and finish times and they must keep the purchaser up to date on development progress and material facts that might affect value.
SEVEN DAYS TO END A SIGNED DEAL
REDMA allows seven days from when the buyer and developer sign the deal for the buyer to rethink and end the deal. This ensures that the buyer has enough time to speak with a lawyer regarding the disclosure statement as well as the purchase contract and get adequate advice on how to proceed.
DEVELOPER SALES STAFF
A developer will hire an in house sales team that works out of a sales centre or they may hire a marketing company to handle their sales. They will use their own contract that will have protections built into it for the developer. They will also have no fiduciary duty to look after the interests of a buyer and there will be no negotiating on price (otherwise they have to negotiate with everyone).
There will be a buyers Realtor’s commission given though which means the buyer will not need to pay for expert help with the purchase. Using a Realtor to help with the purchase and a real estate lawyer to go through the disclosure statement and developer contract will help to make a good decision on how to invest.
THE BENEFITS OF PRE SALES
There are some features that make a pre sale an appealing investment.
For an investor if a pre sale is going to go up in value by the time it is built and move in ready there is a very big up side.
Small Deposit: For as low as 10-20% down you can secure a unit. Generally there is an initial deposit of 5% followed by two to three more 5% deposits at set periods. The deposits are held in a trust account and will be returned if the developer goes bankrupt.
If the value of a $500 000 unit increases to $700 000 then a 10% $50 000 down payment investment just rose 400% and you have gained $200 000 in equity.
2-5-10 Warranty: New builds come with a two year labour plus material warranty on defects in most aspects of the build. A five year warranty on the building envelope and a ten year warranty on the structure.
New Materials: New buildings mean new technology and amenities. Generally the building and appliances are more energy efficient and have less break downs. The costs to repair and maintain are less.
Higher Rental Value: Being new the building hasn’t taken the wear of age, has more modern conveniences and thus is more sought after by renters. Renters are willing to pay extra to live in new buildings.
No Bills: While the unit is built you only have to pay for the down payment. You get a mortgage pre approval but you don’t have to secure the mortgage till you take possession.
Selling Your Pre sale: Developers have their own rules about selling your contract (assignment). If the developer hasn’t sold all of their units they might be concerned about competition. Possibly the sales contract will stipulate that buyers aren’t allowed to sell their pre sale until the developer has sold out, or the developer might put fee’s on selling and restrict how it is marketed such as not allowing it to be sold on the MLS. However, it is often possible to take advantage of a lift in the market and assign your contract for the present market value.
Customization: Some developers will allow for some customization of the unit. Perhaps appliance upgrades or chosen colour schemes. What can be done will depend on the developer and at what stage they are at in the build.
POSSIBLE PROBLEMS WITH PRE SALES
Falling Market: By the time the pre sale is built and it is move in ready the market may have fallen. The buyer is legally required to complete on the sale. If the buyer requires a mortgage the lender will lend on the appraised market value and not the contract rate- the buyer will have to come up with the difference in order to complete.
Change In Lending Circumstance: Possibly the buyers credit or work situation changes and they no longer qualify for the mortgage they need to close when the time comes. Possibly the lending rules change or interest rates change. If the buyer can no longer be approved for the loan they need at a favourable rate they may have to sell (assign) their contract.
Completion Date: It isn’t a certain thing when completion will be. The developer will give a completion date estimate and an outside completion date estimate (which may be extended in some cases as well).
Unit Changes: Most pre sale contracts contain a 5% margin of error in size and allowance for structural, materials and finishing changes. There is also a “no warranties and representations” clause that means that promotional material and verbal promises cannot be relied on. Whatever the buyer or buyers Realtor negotiates will need to be in writing and put into the contract.
GST: 5% GST is applied on completion. There is a rebate of 36% of the GST for contracts of $350 000 or less and a partial rebate from $350 000 to $450 000.