PRO’S AND CON’S OF BUYING A PRE-SALE HOME

Pro’s

• Brand New Home
• 2-5-10 Year Warranty
• Customization
• Time to Save/ No mortgage payment until completion
• Upside of a Rising market

Con’s

• GST is payable on New Construction
• Some developers are better than others
• Developers can make substitutions and alterations
• Delays on possession
• Deposit money is tied up
• Financing may change

What this all Means

Brand New home with Warranty
All new construction in BC done by a licensed builder has to have 2-5-10 year warranty or something that exceeds that coverage. So, when you are buying a pre-sale home you will have this coverage when you take possession.

Customization

If you put your deposit down on a pre-sale home in the early stages you can usually choose color schemes, types of flooring and usually some upgrades like AC or higher end appliances etc.

Time to save

Most developers take the total deposit in increments, so you can save up more money before the full deposit is due from the time of signing the purchase agreement. If the total deposit is less than 20% you can also use this time to save for a bigger down-payment. If you can save up enough to have 20% down-payment before completion you will save thousands on mortgage insurance.

GST Payable

5% GST is payable on the purchase of brand new homes. You must pay this at completion as stated in the Purchase and Sale contract. There is a rebate of 36% of the GST payable on properties that are $350,000 or under. There is also a scaling rebate for properties that are between $350,000 – $450,000

Rising or Falling market

Buying a pre-sale means you are agreeing to buy a piece of real estate at todays market value, but you aren’t paying for it (except for your deposit) until completion which could be 1, 2, or even 3 years away. No one has a crystal ball to predict where the market will be when you take possession of your new home. If the market has gone up since you initially bought, then you have already made money on the home without paying a penny in mortgage payments. If the market goes the other way, then unfortunately you will be over paying for your home in comparison to the market at that time. That being said if you are talking long term, real estate has always increased in value.

Developers

When buying a pre-sale home, you want to do your due diligence on the developer or use a REALTOR who will do this. Things you want to know about the developer are: How long have they been in business? What is their reputation for quality of work? Do they pay their subtrades on time? Have their past projects completed on schedule or were they delayed?

Substitutions, Alterations and Delays

The sale contracts are written by the Developers lawyers and written in their favour and allows for them to make changes within certain parameters during the construction of the project. During construction, alterations may be necessary that may make changes to your floorplan. Usually the contract will have a variance allowance of the unit size (usually +/- 3%) without compensation. The Developer may also have the contractual right to substitute appliances and building materials at their option and as necessary. It’s highly advisable to have your Lawyer read both the pre-sale contract and the disclosure statement. Also, in the contract they will have an estimated completion/possession time, this can and most likely will change from delays in the construction of the project. This can be a problem if you have a tight timeline for switching homes, from your current home to your new home.

Deposit money is tied up

Your deposit money is tied up until completion when it makes up part of the purchase price, until then you usually aren’t earning any interest on it.

Financing may change

Financing can change because of two things, property values and interest rates. If the interest rates rise your payment amount could rise, or the amount you can qualify will go down, which would mean you need a bigger down-payment. If property values decreases, the amount the bank will loan against a property will decrease, which again means a bigger down-payment will be required.

There is a lot to know when it comes to buying a pre-sale home, if you have any more questions or are interested in buying a pre-sale you can contact me.