Everything You Need to Know About Pre-Sale Homes

Presale homes are a great opportunity for first time home buyers, investors or folks making a family legacy purchase. When the Metro Vancouver home prices are rising the returns can be lucrative as property values increase with the sizzling market during the construction period. Pre-sale can also be a gamble if the market swings the other way.

What is a presale?

A presale is a home that’s available to purchase from the developer prior to being move-in ready. You can choose to purchase either before construction starts; during construction; or when newly completed. It all depends on the sales program and availability from the developer. There are times when construction has been completed and the home is move-in ready, yet has not been sold—this is referred to as “new construction.”

What are the benefits to buying presale?

Being able to choose from a selection of available homes. Working with connected Realtor can provide early access to a new construction launch which provides additional selection of homes and preferred pricing.

What are the benefits?

1. Exemption From Property Tax

A home buyer can save up to $13000 in the form of property transfer tax exemption on a newly constructed home worth $800,000 or below. However, the buyer can get this exemption if;

They are permanent residents or citizens of Canada, and

It has been their primary residence for a minimum of one year (starting from the date of purchase).

2. More Time To Accumulate Funds For Down Payment

When you buy a presale home, you only have to start with smaller deposit payments. This is not less than a luxury for buyers as they will have enough time to gather funds for down payments. In fact, many institutions are offering additional security and fixed interest rates for up to 36 months. That means, even if the interest rates go upward before the closing on your home, you will be protected from an increase in interest rates.

3. New Home Warranty Insurance Program

As per the HPO (Homeowners Protection Office), a third-party home warranty insurance must cover the houses built by Licensed Residential Builders; this insurance is also termed as the 2-5-10 Home Warranty Insurance Program. This insurance program covers;

5 years on building envelope

At least 2 years on material and labor

10 years on building’s structure

You cannot have this luxury in a resale situation.

4. A Brand New Home

Is there anything better than a new home? Surely not. Driving a brand new car is always exciting, so is stepping into your brand new home. You will be the first one to use the mechanical systems and appliances of the building. This also means that “everything” will have fresh/new warranties, and there is no fear of immediate repairs. Can you get this benefit in buying an old home? Probably not.

5. Personalized Customization

Presale purchases (during early construction stages) also allow you to request your buyer for customization. For instance, you can ask for a different color, change in design, or other customizations the developer offers.

What are the disadvantages of pre sale?

Presale purchases are not for everyone. It requires patience during the construction period, which could last 2-3 years. It also requires faith in purchasing a floor plan not a finished home. There is a level of risk management as the market can fluctuate or a change in government housing policy.

Federal Tax. 5% GST is required on top of the purchase price displayed by the developer. It is payable at completion.

Real Estate Market fluctuation. The market can go up and it can go down. Purchasers will still have to complete on the property despite market conditions. Traditionally, real estate is a long hold asset. To cover your bases, hope for a quick flip, but prepare for holding the property as a rental or potentially moving in.

Mortgage Approval. A mortgage cannot be granted until completion. Therefore, when you’re purchasing a presale, lenders can provide a pre-approval. However, another assessment will have to be completed upon completion to ensure lending for the property. If at the time of completion the property is valued at less than the purchase price, the purchaser can be responsible for making up the difference.

No Guarantee of Profit. A popular form of making profits in a rising real estate market, there is no guarantee that the market will continue to rise in the period between purchasing and completion of the building. It is recommended that the being able to complete on the home is possible to navigate risk. This relates to market fluctuations stated above.

Purchasing a floor plan. Purchasing presale requires a bit of imagination and vision. There can be changes to the floor plan during construction. A slight variance allowance will be indicated in the Contract of Purchase and sale and disclosure statement by the developer. Having a realtor represent you in the purchase from the developer will assist in deciphering what variance on finishing and square footage may apply. It’s essential to purchase from a reputable developer to ensure quality product.

The best way to determine if purchasing a home presale is the best option for you is to weigh the pros and cons with your mortgage specialist and real estate professional who specializes in presale development.

Other important things to note:

Deposit: Each development will have its own deposit structure and amount required. Typically 5-10% is required when writing the contract and incremental deposits will be required up to 20% (Foreign buyers can be expected to pay up to 30%). The deposit is put towards your down payment at closing. The balance of the funds is due at completion.

GST: Federal tax is required on new construction and will be payable at the time of completion. If applicable, the buyers’ lawyer or notary will submit the GST rebate on the purchasers’ behalf. In some instances, the developer will charge the rebate amount on the GST and wait for the rebate from the government. There are GST rebates available for homes that will be rented out as incentive for increasing the rental pool.

First time buyers are also exempt from PTT when purchasing under $450,000 and with a slight rebate under $575,000. Details on First Time Home Buyer Exemption can be found here.

Otherwise, property transfer tax of purchases under $2 million are 1% of the first $200,000 and 2% on the remainder. There is a 3% increase on the purchase price amount over $2 million. You can find further explanations on my blog or the provincial website.

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