Purchasing a pre-sale or ‘off-the-plan’ property in Vancouver gives you the opportunity to purchase property that has not been built yet. It can give you more time and flexibility to finance the purchase, may reduce some taxes, and allows you to make customisations to your property before it is even built! However purchasing pre-sale comes with its own set of risks to understand, and here’s what you need to know.
What Does Pre-sale Mean in Real Estate?
Pre-sales are a common component of the Vancouver Real Estate market. In its simplest form, you are pre-purchasing a property that is yet to be built (or in some cases in the early stages of construction).
For a lot of prospective buyers, a pre-sale condo is the most cost-effective way to enter the property market, as there are a number of advantages offered:
More time to accrue/obtain finance. When purchasing pre-sale, you only need to have your downpayment available. Depending on the contract there may be other smaller payments along the way, based on the schedule of construction. Generally, however, the entire payment is not due until the building is completed, which may provide a few extra years to save, and lower your mortgage amount to boot.
Depending on the state of the property market in Vancouver, your property may appreciate over the time that it is built.
Your downpayment and deposits are held in a lawyer’s trust account. This restricts the developer from accessing the funds until the building is complete.
New properties are subject to mandatory home warranties and insurance. This gives you a minimum of two years on the labour and materials, five years on the building envelope, and ten years on the structure of the building itself. By comparison, purchasing an existing property may not come with these warranties, which could increase the overall cost if you needed to rectify an issue.
You get a brand new home! Being involved from the start may give you the opportunity to customise the layout, finishes, colour scheme and more to make sure the property you move into is the one you want, from day 1.
What Are the Risks With Pre-Sale Property in Vancouver?
As with any investment or large financial purchase, there are inherent risks. When it comes to pre-sale property, however, there are a unique set of risks to understand.
- Purchasing a pre-sale property as an investment is highly speculative. As these buildings can take years to complete, you are taking on the assumption that the property market will continue to appreciate, which may not be the case.
- Even though the property market may change, you are usually purchasing your pre-sale condo at a premium to those currently available. This is because most pre-sale developments price their condo’s on the assumption that property prices will increase, not decrease. As a result, you may pay up to 30% more for pre-sale than you would for an already completed property.
- Most pre-sale developments end up taking longer than expected. These delays can range from a few months up to 1-2 years. Regardless of whether the scheduling delays are caused by the developer or some external reason, there are usually clauses in the contract of sale which heavily favour the developer in these instances. This can make it difficult to plan a move-in date, and delay your own plans for your new property.
- If a developer needs to make changes to the floor plan, materials or other design elements to comply with building codes they usually reserve the right to make these changes without notifying you. As such, the purchase you agree to in a showroom 3 years prior to the finished product can be different from the property you actually receive.
- Your personal finances may change between signing the contract and the building’s completion. If you lose your job or something else impacts your income, you may not be able to access finance when the property is ready and lose your downpayment.
Delays in construction are common, and can be an inherent risk when purchasing a pre-sale condo
Can I Reduce My Tax by Purchasing Pre-Sale?
The property transfer tax (PTT) is one closing cost that often catches home buyers off-guard. It is based on the sale price of a property, at 1% of the first $200k, and a further 2% of the sale price from $200k-$2 million. As a first home-buyer, you may be entitled to a PTT concession, but only if the property is valued at less than $475,000, which isn’t very common in Metro Vancouver these days.
Purchasing a pre-sale property, however, can exempt the sale from the property transfer tax, provided the property is priced at $750,000 or less.
Whilst that is a win for the home-buyer, newly built properties are instead subject to 5% GST. This expense is usually in addition to the sale price of the property and should be accounted for when assessing your own finances.
If the property is to be used as your primary residence, there are opportunities to reduce your taxable capital gains in the future. However, this would be based on price appreciation, among other things.
How Do I Know I’m Purchasing the Right Pre-Sale Property?
Whilst there are never zero risks, there are a few things you can do to reduce the risks associated with a pre-sale property purchase:
- Do your homework.
Is the developer established and reputable? Do they have a good track record and happy clients? Is the property being built in an up and coming neighbourhood? Will there be access to services and other essentials?
It’s important to look at the development as a whole and what it can offer you, not just the condo you wish to purchase. - Use a buyers agent!
The best way to understand the property and neighbourhood is to use a licensed Realtor. They should be very aware of the area itself and new developments, including the positive and negative features of the development, and offer you industry-specific insights and advice.
In the same manner that you would assess the developer and development, choosing the right agent can make all the difference to your pre-sale property purchase in Vancouver.
It’s also important to keep in mind that a buyer’s agent does not cost you anything! Rather, a buyer’s agent is paid by the seller upon settlement of the property, so you have nothing to lose by letting the professionals help you.
If you’re interested in a pre-sale property, or another home purchase in Vancouver, the West Haven Group is here to help. Simply reach out to our professional team to schedule an obligation-free meeting.
-We look forward to working with you!