Folks considering buying a condo presale or preconstructed homes should consider the risks and ensure they have financing in place and are aware of changing interest rates before signing on the dotted line.
Buying presale refers to putting down a deposit and signing a contract on a house or condo that has yet to be built. You agree to pay the balance after the property is built to the agreed-upon specifications by the closing date.
For years, given rapidly rising real estate prices, presales have been a fairly safe bet. By paying a deposit, buyers could lock in a purchase price that was likely to be well below market by the time construction was finished and the sale completed.
CHANGING VALUES
However, over the past year, declining condo values and high interest rates are making it difficult for people to finance and close on deals. In some cases, the unit has lost so much value buyers can no longer afford the mortgage and may have to forfeit their deposit.
TD Bank recently predicted that average Canadian home prices could fall by as much as 10% in 2024 due to increased supply in housing stock and high interest rates. That could leave presale buyers at risk as their investment depreciates.
“Given the current real estate climate, if you have any concerns whatsoever about qualifying for financing, even at a higher rate, you’re likely better off purchasing something on the market today where you know you will qualify,” according to Vancouver real estate lawyer Keith Barron of Clark Woods LLP.
Since banks will only loan money on the current value of a property, if a buyer agrees to pay $1 million and the value property drops by the time it is completed, the bank will only approve a mortgage for the current, lower value. That leaves the buyer to find the rest of the money on their own. And if they can’t, they may lose their deposit, which may be tens or even hundreds of thousands of dollars.
COOLING OFF
In B.C., presale purchasers have the right to cancel presale contracts within the first seven days, allowing consumers time to think through their decision.
However, beyond the one-week cooling-off period, a presale buyers options become much more limited.
It is sometimes possible to get a deposit back. When a developer allows a contract to be re-assigned, a fee of 1-3% of the sale price is usually charged to the original buyer and they remain legally liable to complete the purchase if the new buyer fails to do so.
However, reassignments can be difficult to negotiate, and developers can refuse to consider a reassignment option, Barron cautioned.
“Developers definitely have the advantage in this process.”
Are you looking to buy or sell a home? The legal experts at Clark Woods LLP are happy to assist with your real estate and conveyance needs. Call 604-227-9153 today to setup a consultation or visit our real estate page for more information.