The Disadvantages and Risks of Buying a Pre-Construction Condo in Vancouver
In Episode 2 of How to Buy Vancouver Condo Presales, we talked about the advantages of condo presales for Owner/Occupiers. In Episode 1 we discussed the advantages of pre-construction condos for investors in Vancouver.
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Today we’re going to discuss the disadvantages of pre-construction or presale condos in Vancouver for both investors and owner occupiers and what to watch out for with this kind of property.
Rights and Obligations with Presale Condos
When buying pre-construction condos Vancouver in Vancouver, its easy to overlook the potential negative aspects of this type of purchase or investment (especially for first time home buyers!)
Purchasing a presale condo is not the actual physical purchase of a tangible property. It is actually a contract for the right to receive an obligation to pay for a finished condo at a set point in the future, irrespective of market conditions or the buyer’s financial situation.
What are the Risks & Disadvantages of Presale Condos in Vancouver?
If you’re thinking of buying a presale condo in Vancouver it’s also important to be aware of the potential risks and negatives (for some people) which could include the following:
- GST and PTT is payable on Presales! – Yes! Federal Goods and Services Tax (GST) and BC’s Property Transfer Tax (PTT) is payable on all new properties in British Columbia. These taxes are payable when a presale property completes. Do keep in mind there are rebates available for qualified buyers on both the GST and Property Transfer Tax. Please consult with your accountant for more details on any rebates available. To get a rough idea as to how much tax will be payable on a presale (Again consult with a qualified accountant to confirm any tax information), I have a great GST/PTT Tax Calculator for New Homes in BC.
- Buyers Can’t Back Out If Market Falls! – If real estate prices in Vancouver fall and the value of the presale condo at the time it Completes is below what was originally paid for it, the Buyer is still required to complete! The Buyer cannot back out! If the Buyer does back out on the purchase of a presale, very bad things can happen that involve lawyers, courts, judges, and lots of money spent. Make sure if you’re buying a presale, you’re 100% certain that you can complete on it!
- No Guarantee of a Mortgage! – In most cases, it is possible to get a mortgage on a pre-sale property. BUT there is no guarantee. Consult with your lender, bank, or mortgage broker before purchasing a presale. Check out this great video on Mortgages and Presales for more info.
- Buyers May Not Get Exactly What They Paid For! – In the contracts to buy presales (which are drafted by the Developers and are not the standard Contract of Purchase and Sale), Developers protect themselves in the fine print, just in case this happens. Make sure to buy from a reputable Developer (Contact me for more info on this!) and read the contract for the presale in detail and don’t be afraid to have a lawyer review the contract!
- Buyers have to Wait and be Patient! – We live in a society of instant gratification. With presale condos, in most cases, the finished product is not usually ready for at least a year and sometimes to up to 4+ years from when the presale is purchase. Very often, especially when there are a lot other buildings being constructed, pre-sold buildings do not complete on time and completion can be delayed significantly. I bought a presale several years ago that was completed a year late and I was required to rent a property for several months. These delays are common can make planning difficult and it is advisable to have alternatives planned in advance.
- NO GUARANTEE OF PROFIT! – Making money from investing in condo presales in Vancouver has been very popular. In many instances, investors have made significant profits from investing in Vancouver presale condos. In a rising real estate market, presales can be profitable, but there is no guarantee of profit as there is no guarantee prices will rise and if the market falls, the buyer is still required to complete on the presale. (see above)
- Difficult to Sell the Presale Before Completion (Assignment of Contract) – In the absence of a rapidly rising real estate market, condo presales can be difficult to re-sell (known as an assignment of contract) as Developers will often not allow the buyers of presales to assign (sell) their presale until the developer has sold out the development. Furthermore, Developers will very often put significant restrictions on the marketing of assignments, including not allowing them on Realtor.ca
- Leverage Can Work Against You – Real estate prices go up, but they also go down, If the value of the presale condo goes down below what you paid for it, you still have to complete on it (see above) and you cannot back out. If you need to get a mortgage on a presale condo that is completing and it is worth less than you paid, you may have to find the money to make up the difference between the contract price on the presale condo and the actual market value of the condo when it completes. Be sure when you are buying a presale condo to always consult with a mortgage broker or lender to see about getting a mortgage on the property if prices go down.
Remember Folks! When you’re looking to buy a presale condo in Vancouver ALWAYS consult with your Realtor, Lawyer, Accountant, and Mortgage Lender!
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