Do You Know the Risks and Benefits of New Home Presales and Preconstruction?
As anyone who lives or works in the Lower Mainland can attest, one thing that never seems to slow down is the preconstruction of new homes. From townhouses to condos and even single-family homes, there are several presales happening at any given time in Port Moody and Coquitlam. In particular, we are seeing multiple presales currently ongoing or soon to be launched in the Burquitlam and Moody Centre areas. As such, I thought it would be good to review for you what some of the benefits and risks of presales are, as well as what the deposit and tax requirements are for preconstruction buying.
One of the biggest advantages comes with the fact that, for many, you can select your home, layout, and early access to a building when buying a condo. You can scoop up that desired corner unit or top-floor condo, especially for those at the beginning of a presale. Another benefit comes with what is called the seven-day rescission period. For seven days after accepting the contract, you can do your due diligence to read your disclosure statements and ensure that this is the right purchase for you. After seven days, however, the contract becomes binding. Know your rights – this seven-day rescission is legally required by the Real Estate Development and Marketing Act (REDMA).
Did you also know that many homes can increase in value during the building process while in a hot market? That means that another potential benefit is that what you purchase at one price can gain you a greater return on your investment by the time the construction is completed. This ability to build up equity right from the start is what makes presales so popular. Moreover, since you also get to delay the initiation of your mortgage until the construction is complete, you will also have extra time to save for your down payment and closing costs. With the additional advantage that preconstruction homes often come with 2, 5, or 10-year warranties, you can see that there are several potential benefits to buying a presale home.
Many of the risks associated with buying a presale are the flip side of the potential benefits, and patience is key, as presale homes might take 2-3 years (some could even take longer) to be move-in ready and some of the risks might take as long to be shown. For example, although your unit could increase in value, the opposite could happen, and value could decrease despite the best projections by the BCREA. You must be willing to accept the risk of real estate market fluctuations and financial market changes and be ready to accept potential losses.
Although you sign a contract to buy a particular size and specific home, presale homes also run the risk of not being exactly what you envisioned or thought you were getting. Materials and finishings may change and the quality and workmanship of your home may not be up to the standard that you expected. Size is allowed to vary by as much as a 5% decrease before the developer has to compensate the buyer with a price decrease, so you could be locked into getting a home smaller than you thought you were buying. Pre-closing inspections generally take place only two weeks before completion, meaning that by the time you actually walk in to see your unit, it is usually too late to take any action.
Finances can cause massive upheavals in the time your home is being built. What if you lose your job? Or the value of your home goes down and the bank will only lend you on the current market value, meaning you get less than you expected?
Perhaps most concerning for some is the moving target that is the completion date. Developers can move the goalposts depending on the construction progress. There are usually clauses in the contracts to allow for extension after extension and the buyer is generally powerless to do anything except wait.
Taxes and Deposits of Presales
Generally speaking, you are expected to put down a 5-10% deposit after the seven-day rescission when the contract is firm, and then make incremental deposits of up to 20% for citizen buyers and up to 30% for foreign buyers. These deposits are put towards your down payment at closing.
In Canada, 5% GST is charged on presale homes (never lived in homes) and is due upon completion, so that is something important to remember when thinking about your total cost. If you are first-time homebuyers, you may qualify for a partial GST rebate of up to $6,300 on homes with a fair value of $450,000 or less.
You might be wondering how the Property Transfer Tax (PTT) does or does not apply to preconstruction sales. If the buyer is a Canadian citizen or permanent resident and the home is the principal residence for the first year, homes under $750,000 are exempted from PPT (partial exemption for homes $750,000-$800,000). Otherwise, you’ll be assessed 1% on the first $200,000 of your purchase price, 2% on the balance up to $2M purchase price, and 3% on anything above $2M. Given the high cost of real estate in the Tri-Cities and Lower Mainland, you can certainly expect the 2% tax to be applied.
As you have seen in this post, there are several financial and practical considerations when purchasing a preconstruction home. From ensuring that you read your contracts carefully to working with a professional Realtor, plan ahead and do your due diligence when contemplating a presale. Of course, you are always welcome to contact me, Jessica Chen-Sargent, with your real estate questions.