Pre-Sales: The Pros and Cons

Dated: October 8 2021

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Over the last month we have had several inquiries about Pre-Sales. A Pre-Sale is a home that is purchased either prior to construction commencing or during construction with a delay in closing for up to 4 years. Deposits are required for these purchases usually ranging between 10% to 20% of the purchase price and are often required in stages as the construction continues. Before you sign on the dotted line, here’s some advantages and disadvantages you may want to consider:

The Pros:

· Selection – When the market is super hot, pre-sales are a nice option as you have more selection and usually without multiple offers on a specific unit. In addition, within a complex or building, you can often select from multiple floor plans and levels. 

· Rescission Period – All pre-sales are legally required to include a 7-day rescission period. Once the contract has been signed, this period allows a purchaser to do their due diligence before committing to the purchase. After the seven-day period, the contract becomes firm and binding, and the deposit is due. 

· More time to save – Another benefit of a presale is that while you are waiting for your purchase to complete, you can continue to save for some of your down payment and your closing fees. You will hopefully also benefit from your income increasing so that you are in a stronger position to qualify for a mortgage.

· Building Equity – As you are waiting for your property to close, you can potentially be building equity. As housing prices rise over the course of the construction period, the value of your home can also rise. This return on investment is why pre-sales are so popular with investors. 

· Warranty – As with all new builds, there's also warranty protection. Pre-sale homes come with a 2-5-10 warranty which includes 2 years on labor and materials (some limits apply), 5 years on the building envelope, including water penetration and 10 years on the structure of the home.

The Cons:

· Patience – Very often developments are delayed by months if not years, so what started out as a three year timeline for completion can turn into a four year timeline. This can be difficult to manage depending on your circumstances.

· Mortgage Approval - A mortgage can't be finalized until you are close to completion because any approval will be conditional on an appraisal of the new property. This can be unnerving to some buyers as they don’t know for sure they will be able to secure financing when they sign the original purchase agreement. 

· Tax - 5% GST is required on top of the purchase price provided by the developer, which is payable upon completion. Often a portion of the GST can be rolled into the mortgage. 

· Real Estate Market/No Guarantee - A key point to remember is that though the market can go up, it can also go down. Pre-sales are a popular form of making a profit in a rising real estate market, but there's no guarantee that the market will continue to rise in the period between purchasing and completion of the building. Moreover, if at the time of appraisal, the property is valued less than the purchase price, the purchaser will likely be responsible for making up the difference.

· Floor Plan - Purchasing pre-sales requires a bit of imagination and vision. There could 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 documents. Having a realtor represent you in the purchase from the developer will assist you in deciphering what variants on finishing and square footage may apply. 

Pre-sales aren’t for everyone, but they can be great options for some buyers. If you have more questions, please ask us. We’re here to help!

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Move Okanagan Group – serving Kelowna – Lake Country – Vernon – Silver Star

www.moveokanagan.com

 

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Annette Denk

Annette has been in Real Estate since 1994. Her determination to uphold a tradition of trust, integrity, and expertise has earned her a long list of satisfied clients who recommend her at every opp....

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