Risks in Buying Presales People Don't Talk About...

Risks in Buying Presales People Don't Talk About...

Pre-construction homes or presales can be a great way to enter the real estate market if you are not 100% ready to move-in. You put down a deposit and wait on a timeline that fits your needs. Previously we discussed about purchasing a presale home and the great opportunities in the presale market, so if you haven’t yet read that blog, we would recommend reading that first. This time, we are taking a 180 degree turn and looking at the possible risks of buying a presale.

1) Finishes – When you buy a presale, you are essentially buying the rights to owning the finished product. You are buying the home “unseen” because it has not been built. This carries significant risks as the developer is only held accountable to the building code which means there is a great range of unknowns that you need to be prepared for. Reading the disclosure statement thoroughly and gathering information from the building regarding any details that are not described clearly in writing can be a source of protection to mitigate the risks, but this is something to be aware of!

2) Price – you are legally binded to all the details in the contract, including the price. Real estate prices are always on the move affected by numerous local and macro-economic factors. This means that you are stuck with a fixed price in a moving market. If the market is above the fixed price when it is time to complete on the purchase, then you hit the jackpot. What happens if the prices have come down, but your fixed price is above the market? You may not qualify for the amount for the mortgage, meaning your only recourse is to back out of the deal and surrender your deposit or “top up”. This means that you must come up with the difference in the value of the home from the time of purchase to the completion date. Uncertainty is a risk, and the market is full of uncertainties!

3) Mortgage rates – Just as the price moves up and down, so too does the interest rates. Bond yields and lending rates are subject to change without much notice and often caused by factors outside of anyone’s control. If the rates were hovering around 2% at the time the agreement was signed, it could end up at 3%, 4% or higher by the time you must complete the purchase. This change may mean that you no longer qualify for a mortgage on the property. You can hedge this risk by getting a preconstruction pre-approval which comes with a higher rate and long-term hold, but this is subject to the banks approving the property.

4) Lifestyle change – Presales often are long term contracts that take between 2-5 years to materialize. Lots can happen during this time and may cause a change in plans if the home no longer suits your needs. A change in job/career, starting a family, or geographical changes to the area may make this home no longer ideal for your lifestyle. A thorough plan that includes your vision of your life in 1-3-5-10 years is your best hedge against this risk.

5) Delays – I personally don’t know anyone with a crystal ball that works, and I doubt one even exists. Things always happen that are outside of anyone’s control and developers are not immune to this. Presale contracts allow for delays of up to 365 days after the completion date. That’s all great for the builder but what about you? If you are renting, this means associated living costs that are not going towards your own mortgage. Was this extra expense factored in?

6) Tied up funds – Lastly, when you buy a presale, you are often asked for a deposit as part of the agreement. This deposit can be as high as 25% and will be held in trust with the developer’s lawyer until the completion date. You do not have access to these funds under any circumstances. Any interest gained by the developer is paid to the Real Estate Foundation, which is a philanthropic organization that supports land use and real estate practices, as directed by the regulations of the Real Estate Services Act. This means that you are losing money, by virtue of inflation, by having your money tied up in a long-term contract for the rights to purchase the home later.

As you can see, buying presales does carry with it some risks to consider. While most of the time, everything will work out just fine, we at Happy Homes Vancouver believe that knowing what can happen and accepting the consequences before you decide is the greatest hedge against any stress that potential outcomes may bring. Knowing the risks will help you plan against it and that is how we can help. If you are interested in buying or selling real estate, reach out for a discussion and we will be thrilled to help with your planning!


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