Everything to Know about Presale Condo Risks
Published Tuesday, July 16, 2019
Presale and pre-construction condos seduce consumers with the promise of highly designed, sleek spaces but savvy home buyers need to assess the risks before they commit.
“Pre-sale is one of the most speculative real-estate investments you could make because you’re basically buying a floor-plan on a screen or piece of paper – you and your agent need to do your research,” says Christopher Bibby, sales representative, RE/MAX Hallmark Bibby Group Realty, who recently leveraged his 15 years of condo market experience to buy two pre-sale condos that his own kids will use when they reach university age in a decade.
When it comes to presale condos, home buyers have to do their homework. This includes hiring and paying attention to a reputable agent, lawyer, accountant and mortgage broker or lender with pre-sale condo experience to protect their interests.
New development condos are attractive home-ownership options for many reasons – but it’s important to consider the other side of the coin. Here are the possible risks and things to watch out for when looking at buying a pre-sale home:
Shifting Property Values
Appreciation: “Will it be worth more or less than you paid for it upon completion or a few years after you take possession?” says Mike Stewart, realtor, Vancouver New Condos, who has been selling pre-sale and resale condos in Vancouver, the Okanagan, Fraser Valley, Greater Victoria, Nanaimo, and the rest of B.C. since 2005. “We can’t predict or control the market and no one has a crystal ball.”
Value, Financing & Affordability: Lenders may disagree with the buyer’s and agent’s valuation, but even if they’re aligned, no one will give you a mortgage until the building is completed. Worst case scenario, you could lose your deposit/down payment and the unit if you can’t get financing or lose your job 10 days before closing. “Buy what you can afford right now not what you think you’ll be able to afford when construction is completed in two or three years,” says Stewart.
Construction Delays: Everything from financing challenges and home prices to weather, material shortages and errors can delay construction without the builder incurring penalties. Buyers that plan to live in the new units may be forced to make alternative living arrangements and investors’ returns will be postponed. “Anything can go wrong,” says Stewart. “For example, a builder bought windows that didn’t meet Canadian standards and the replacements cost an additional $20 million.”
Complete Cancellations: Developers rarely cancel a project or abandon construction, but it does happen. In most cases, deposits will be returned to the condo owners, but it may take time and require legal representation. “It’s stressful and buyers may find they’ve been priced out of the market – once they get their deposits back, they probably won’t buy as much as they would have a few years earlier,” says Bibby.
Quality (construction, finishes) and Floor Plans: Reputable developers do their best to deliver on their commitments because it’s good for business, but mistakes do happen. “Know that whatever you see in the sales centre and model units will look better than the finished product once they’re rolling out dozens or hundreds of units,” says Bibby, who has seen suites without features such as closets, windows and even minus a few square feet to accommodate building codes and mechanical such as HVAC.
Know your Presale Condo Numbers
Contracts: Developers depend on skilled, experienced legal teams to ensure the contracts protect the developers’ best interests. Go over every word in that contract with your agent and lawyer to find out exactly what your developer is allowed to do and change without incurring consequences or penalties.
Unexpected Fees: Read that contract! Developers have been known to charge up to $10,000 in additional fees to connect services (water, electric, sewage, natural gas, wifi). Buyers may even discover their hot water heater is leased not owned. “A woman had to cancel her own wedding to cover the unexpected closing costs, so buyer be aware,” says Bibby. While $1,500 to $2,000 may be standard in certain locations, some developers will cap fees at up $5,000. Know what you’ll be asked to pay at closing and negotiate before you sign.
The fact that pre-sale condos don’t actually exist yet and real estate markets, particularly in certain regions, are highly unpredictable, must be considered and accepted. As a result, more conservative, risk-averse people in the home buying market might be comfortable with a resale – not a presale – condo.
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