Pre-Sales: Is “Buying Off the Plans” a Good Idea in Vancouver?

New ConstructionRecently a conversation on pre-sale properties was a hot topic for discussion by our Andruff Team members. We have clients looking to purchase brand new properties and get into the property game. There are many variables to be aware of in advance of this type of purchase.

There is a pre-conceived notion that there is a savings or perhaps a deal to be had from buying pre-sale condos. However, say for instance two years later when the project is now built and ready for occupancy, the market price to sell it really all depends on the real estate cycle and whether prices will be up, down, or the same …Supply versus demand is so important. Currently, we are seeing developers complete construction without being fully sold and the deals are to be had once the buildings are up as developers need to move unsold units.

Did you realize when buying off the plans, the purchasers are not buying a condo at the point of pre-sale but an agreement and the agreement can change anytime through the process to completion?  Square footage is not guaranteed and finishing’s beautifully displayed in the show suite may not be available in a few years when the developer is actually building.

Along with this process is the very real possibility of a developer going bankrupt! A buyer could lose buying power in the market if a developer cannot go ahead to complete the project, and if no other developer wants the risk of taking it over, then the project fails.  In the case of The Sophia (in the Soma Area, ie South Main), the Eaton Group went bankrupt and another developer did take over the project but buyers were asked to either pay an additional deposit on top of what they had already paid, in order to go ahead; or, had the option to walk away. The market is always in various phases and typically the builders will build until there is an over-supply. Sometimes things get messy, for example the economic downturn in 2008 when some developers were in a most unfortunate credit crunch.

When you buy a brand new home, a premium is paid for new and new may not mean perfect.  New buildings can have just as many issues as old ones unfortunately.  Recently a client moved into a new building downtown. During his first week of residency, one elevator had already broken down and new residents were still moving in. Shortly after this the storage locker room flooded.  “Stuff” can happen and new construction is no guaranty of things going perfectly (although one expects the warranty will cover these challenges!)

Be prepared with new construction for the opportunity of only one deficiency review and sometimes surprisingly there can be significant damage to your suite before you even move in to it. Some developers agree to fix up the deficiencies no problem…and some will really fight you on fixing things, using ignore tactics to delay, hoping eventually you and your complaint(s) will just go away. Here is a case example: Our clients could not move in for a week, even after paying their final payment and receiving their occupancy move-in date…because the home was so badly damaged (floors badly scraped, needing removal and replacement, damaged walls, damaged mouldings, doors and door jambs, painting touch ups). Imagine the shock and disappointment when it’s supposed to be your brand “new” home, not to mention the hotel bill for a week while waiting!

As a buyer, buying in a new development, flexibility is very important in your current housing arrangement as the developer may delay the occupancy date several times, and could be months and months delayed. Recently, a client was supposed to have occupancy in February and move-in but was delayed until September; and because of this almost lost their favourable mortgage rate-hold with the bank. The bank granted an extension, luckily, after the numerous delays on the completion and occupancy. When trying to contact the developer to get any idea on time-lines it was next to impossible to get in touch with anyone from the development. Sometimes clients have needed to sell, then vacate their current home in order to buy the new home … leaving them stranded without a place to live, moving twice, with extra storage fees, and having to live at hotels or with family and friends for extend periods of time since the expected completion dates failed to happen.

Once a new project is occupied, be aware that strata fees start out very low but jump up after a few months due to things like the expenses of commencement of regular garbage/recycling/waste removal, warranty reviews and security upgrades. Typically, builders only put in the basics, and trouble makers will test out any security weaknesses in newly constructed buildings.  Be security minded as much as possible as you enjoy your new home, as there may be multiple break-in attempts for about six months or so, until all of the weak points are found and addressed.

Looking at the overall big picture and into the future …consider your needs over the long term. Think carefully about your time-lines and expectations. Often you will have to wait some time (say two years) for the construction of the building, and then live there for at least one year (sometimes stipulated by the Developer’s contract). So, in order to realize enough lift to make a profitable sale price, or sometimes just even hold the property value, expect typically to hold on to your new place for a long period of time, at least 3 years and typically 5 years. Think seriously if a six-to-eight-year commitment is okay in your long term plan. There is a chance of taking a loss on your investment if your time horizon is less than this. Of course it could be a shorter or longer time frame too. This is just a rough guideline for buyers to have a realistic approach.

Here is an example of why this could be the case. Added to the purchase price of new construction are two major expenses for the buyer: The Property Purchase Transfer Tax (PPT) and the Goods and Services Tax (GST). (Note: GST is applied to “new homes.” It is not applied to re-sale homes, homes “lived in for more than one year.”)

Both of these expenses, the PPT and GST, are payable up front on the purchase side. Then, some time passes and at some point it becomes time to sell. This could be right away or after a few years. The property will have had to appreciate significantly to cover your sunk costs (taxes), plus the selling commission, to be able to sell and get your original investment money out.  So just be very aware that paying GST and PPT do nothing for your property value. It is money paid to the government and is never seen again. And secondly, your “new” property is not new anymore. It has depreciated …It is sort of like driving a car off the lot!

To use an example of the rapidly rising real estate cycle of the late 1990s, buyers were selling contracts or assigning them to other buyers prior to completion and occupancy dates. Yes, because the prices of condos were climbing up so fast! However, in our current environment of 2013, this is not as likely to happen as many pre-sale buildings are not even selling out before they are built.

Developers often use their own “Contract of Purchase and Sale (CPS)” as opposed to the standard BC Real Estate Boards’ “CPS,” a very commonly used Sales Agents’ form to purchase residential property. There is a very good reason for this. Developers want to do everything they can to protect their position and will stack the deck in their favour. This is not always a problem but you need to know what is in the fine print.

Some examples to be aware of are:

Deposits – Developers often require multiple advance payments, requiring more than only a single, typical, five percent down payment, with succeeding payments and amounts spread out over a specified time table.

There may be tricky clauses in Developers’ contracts such as: no rentals; or no sales within one year of purchase; and/or no Assignments of contracts (CPS). This is to protect the Developers’ interest to ensure the Developer can sell out the building. They don’t want re-sale competition against units in their buildings which have not yet sold after construction finishes.

As well, there can be other issues as to what is included or not included! Here’s a good one: there was no washer or dryer noted in the contract , and was deliberately left out. It turns out the builder was expecting to have the appliance package paid for separately. The buyer was not made aware of that detail or it was somehow missed. Representing our clients we made sure that this was included in the sale price (as we added the washer and dryer to the contract).

TIP: Here is an important suggestion. Developers have their side covered with their sales team, contracts and marketing. Make it known to the sales centre that you are working with your own realtor the minute you walk in the door! Make sure you let them know THE NAME of your agent and ensure YOU have someone on your side. An experienced realtor knows what to lookout for so you don’t get any surprises.

If you want to buy from a developer please give it careful consideration. Don’t get caught up in the hysteria that many marketers so expertly create. Stay calm! There are always more projects being built and more condos to buy! Be aware of the issues you may face up front. It can be a challenging and frustrating process but you can also move into a stunning home!

Before buying off the plans take a good look around and compare with other options. Look at newly built neighbouring buildings already constructed. Also view a home or building already built by the same developer. Due the research so you can see the quality of construction; or, perhaps look at one to two year old buildings nearby, which would already be through the start up period and hassles of crime, plus the seller already paid the GST!

Clients we have worked with on these types of purchases, plan to make their new purchase their home for life and not move out for a long time.  There is risk and reward when purchasing off the plans. So get some advice and do what is right for you. Although it may not be for everyone, it can still be a good move and very satisfying!

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