Presale Condos have become increasingly popular among homebuyers in Vancouver Island as well as other locations in North America. With investing and renting made easier, predictable costs, and as little as 5% to 10% deposit benefit, there’s no doubt this type of real estate property is so compelling.
But the thought of buying a presale condo can be intimidating due to the unconventional process it follows. If you are new to buying properties or new to presale condos, here’s a simple guide based on collated FAQs. This basic manual will give you a better view of the whole process, which will eventually narrow down your options in finding the perfect condo to call home.
What is a presale condo?
The simplest way to explain this is to distinguish “built” from “presale” properties. From the word itself, built properties pertain to properties that are already constructed. These are tangible properties for sale. On the other hand, presale properties are properties that are yet to complete but are already marketed. The rights to own the soon-to-be-built homes are already being sold by the developer to the buyer.
Also known as the “cooling-off period”, is the 7 to the 10-day period right after a presale buyer enters a Purchase and Sale Contract with a developer. This is the time when the purchaser has to perform his/her due diligence on the presale property that he/she is purchasing. Within this time, the buyer is given the right to withdraw from the contract in case he/she has a change of heart. British Columbia has already mandated a cooling-off period for presale developments.
Deposits and Schedules
The first thing to do when purchasing a presale condo is to place a deposit down on the property. After a rescission period, a small initial deposit followed by a 5% to 10% (and usually at the most 25%) deposit is placed. A series of deposits shall be made from here up to the date of completion.
Let’s take an example with easy numbers: Say you bought a downtown condo in 2021 scheduled for completion in 2023. You will pay $400,000 for the condo and pay $40,000 upfront. After the rescission period, the remaining 10% of the purchase price is due. Another 5% of the purchase price will be due a year after the offer has been written. An additional deposit of 5% of the purchase price will be due 6 months after this date.
By this time, a total of 20% deposit has been made. You shall now be ready to secure a mortgage and move to the unit at the completion of the property. A trust account will be holding the deposit until the completion of the transaction. The developers do not have access to these funds until construction is fully completed.
A critical element that can enhance your presale home buying journey is knowing how to navigate your mortgage. The only time that a presale purchaser should secure a mortgage is when the property has been completed and fully registered, and when the right of ownership is already transferred to him/her.
A lock-in rate or rate lock is most likely when buying a presale property that will be completed in less than a couple of years. This stipulation means that your interest rate won’t change between the offer and the closing of the contract, provided that you close the deal at a particular period without any changes in your application. This comprehensive financing solution can be an option that you might want to discuss with your lender. A commitment letter is essential to lock in rates if you’re trying to secure a mortgage at today’s rate.
One obvious reason why developers presell developments that are set to be completed at a later date is to enable them to finance the construction of the project. They are one of the key players in a real estate transaction and should be treated as a major factor when purchasing a home. They manage the necessary financing and public approval like zoning laws and building codes. They have the power to change the completion date or to cancel the project entirely. Researching the developer’s background will give you a better view of what the future of the project will be. A good developer is a company with a reputable track record.
The biggest advantage of hiring an agent, particularly those specializing in presales, when buying a presale condo is that it can help you select the most reputable and well-funded developer. Aside from having an intact client base, realtors have a network of developers and know the negotiation process with them by heart. Their connections with other agents as well as with their clients will be highly beneficial to you.
During the transaction process, as opposed to consulting with the development’s sales team, realtors will give you honest market knowledge without skipping over the negatives.
Taking the burden of tedious paperwork and dealing with financial transactions is apparently the obvious reason why hiring an agent is a must especially for purchasing a presale property.
But the craziest thing about using a buyer’s agent is that they’re literally FREE!
Apart from the aforementioned low-priced deposit, here are other advantages of buying a pre-construction condo:
You can save money by opting for presales instead of resales. Add-on fees like closing fees and inspection fees are usually part of the cost when purchasing a resale property. These additional carrying costs are avoided with pre-construction condos.
There’s an opportunity of profiting from a possible uptrend in the market price if the price of your condo rises after the completion of the construction.
Choose from a set of layouts that matches your taste. Talented designers are usually part of the development. They conceptualize color schemes and finishes to give you options to match your taste.
New homes in British Columbia are mandated by the government to register in the 2-5-10 Home Warranty. This insurance program covers extensive protection for presale homes. It covers three different aspects of property development: 2 years on labor and material, 5 years on the building envelope, including water penetration, and 10 years on the structure.
There is no backing out once you’ve signed a contract. If you do, things can get ugly and will definitely result in financial and even legal complications. Buying a presale needs a hundred percent certainty that you can complete the purchase. While realtors and other sources can give you a forecast of what the market would look like in the next couple of months or so, predictions for the next few years are uncertain. The market can be highly volatile at times, and there are only two possible outcomes by the time your pre-bought condo is completed – its value dropped or increased.
So, that’s pretty much what a presale condo is. Once you get a full understanding of its basics, the next step is to know the whole process. A Presale condo is a great investment, but the return could be greater if you are well-equipped with its know-how before entering the transaction.