Presale Condo Ownership Pitfalls: 5 Traps You Should Avoid
So you’ve been hearing from all your friends and family how great of an investment pre-construction condos are. You’ve even made up your mind to look into the presale condo market and get started with your first presale!
But with every great investment, come risks that one should be aware of before they dive in.
Risks are part and parcel of growth, but having accurate and useful information about them puts you in a good position to make wise buying decisions.
All financial investments involve some degree of risk. A smart investor understands these risks and makes decisions to actively minimize them and have a good financial outcome.
Similarly, the risks involved in buying presale condos can be seen as opportunities for smart investors. Having a good knowledge of how to avoid them is something that puts you ahead of the curve.
The Presale Contract
Pre-Construction Condos, as the name suggests, are condominiums that have been approved for development but have not started construction yet. There are many benefits of this type of sale: extensive warranty protection, mortgage not starting until completion day (usually a few years into the future), and the value of property appreciating into the future.
The Real Estate Development Marketing Act (REDMA) is a government agency that governs all presale projects in British Columbia. REDMA permits developers to engage in marketing and sales activities of pre-sales prior to obtaining a building permit or in some cases, even the financing.
An important thing to note is that REDMA does not prescribe any particular form of contract as how it is with the residential tenancy act in British Columbia.
This means that most developers have their lawyers draft up a contract that may not be in the best interest of both parties – the developers AND the buyers.
This nature of the contract is where most of these risks come from, and understanding this is the first step in securing your success in presale investments.
5 Main Risks of Buying Presale Condos:
Risk #1: Market Value of Property Going Down
The first major risk comes from the volatile nature of the market itself. We can never tell if the market value will be the same as that when you signed the contract.
No matter how closely we study the market, it is nearly impossible to predict with any certainty what the price of a property will be 2 to 3 years from now.
A presale agreement is essentially a futures contract in the real estate market. The buyers must carry this risk of market fluctuations and face losses if the market goes down.
This risk goes considerably down when you choose an experienced realtor to help you with the presale buying process. That is the IPC (ipresalecondos) advantage you get when you use our services:
With over 20+ years of experience selling pre-construction homes in the lower mainland, the ipresalecondos.com team knows how the market has functioned historically. We take a consultative approach and not only suggest the most attractive projects to you but also warn you about the properties that would be bad investments based on our experience.
Risk #2: Not Being Calculative about Future Interest Rates
Just like market value, another fluctuating parameter that can have a major impact on your buying decision is Interest Rate.
Do you know what the interest rate is going to be 2 to 3 years into the future? Will the current prime rate climb up or fall in the future?
These uncertainties present a risk that you, as a homebuyer must address as your future mortgage payments depend on it.
Predicting interest rates may be a more challenging task than predicting the market value as there are many more factors that contribute to it, mainly economic and political which are entirely out of our control.
A good practice to stay safe from fluctuating interest rates is to ensure that your outlined budget can handle some rise in interest rates before signing the contract.
With trigger rates kicking in currently, we all know how important it is to stay future-proof when it comes to investing in a presale property.
Risk #3: Not Preparing for Closing Costs & Mortgage
Getting a good financing option is integral to the success of your presale condo investment.
Even though a buyer may qualify for a mortgage at the present date, here are some of the reasons that they may not be approved for mortgage 2 years from now:
- The interest rates have gone up and the buyer can no longer afford the mortgage based on the lender’s guidelines.
- The property value has gone down. In this case, the bank will lend only on the basis of the current reduced market value and the buyer has to make up the difference.
- The buyer or their partner is laid off or is unable to bring in a stable income.
When you choose ipresalecondos.com, you not only get experienced realtors to help you find and buy the best properties, but we also work with mortgage experts from top banks like BMO, TD, RBC, and CIBC. This way all our clients can secure mortgage approval now, and the banks will keep them on file until completion.
Read more: Your Complete Guide to the Mortgage Approval for Presale Real Estate
Risk #4: Delays in Completion Date
Most presale contracts provide buyers with an estimated completion date which is usually 2 or 3 years into the future. But almost all contracts will also state that this completion date is subject to change.
In this case, the developers are within their rights to delay the completion date beyond the date that you as a buyer might have set as your move-in date.
These long delays not only pose financial risks to the buyers but can also bring down the morale when you’ve been eagerly waiting for your dream condo to be finished and ready to move in.
While this seems like an issue that is out of your control as a homebuyer, there are good practices that can help avoid these unexpected surprises.
Choosing a reputable developer with a good track record can solve most of your developer woes.
If you’re buying from a well-established developer, there’s a good chance that they have ironed out the kinks and will be delivering the condo development on time.
Ipresalecondos.com only works with developers that have a successful history of the building and delivering high-quality presale condos. We look at the location, the product mix, floor plans, and the developer’s pricing strategy to source the best and most credible deals for our clients.
Risk #5: Unsatisfactory Finished Product
This last risk is pretty simple to understand. For example, if I told you to give me $100 now for a meal that I would give you 1 month from now, you would, of course, be a little skeptical about this deal.
Buying something that is not physical and tangible brings up many questions about the quality and closeness of the finished product to what was promised.
The track record of the developer is something that can give you an indication of the quality of the finished product.
Additionally, when you work with ipresalecondos.com, we do regular events at presentation centers so you as a homebuyer can physically walk in a display home and get a feel for how the layout and floor plans will look.
Good Practices to Mitigate the Risks of Buying Presale Condos
1. Find a Realtor that puts YOUR interest before everything else
When you buy a presale condo. Realtors bring in valuable information and years of experience being in the market and handling hundreds of transactions. With ipresalecondos.com you are not only signing up to get guidance from experienced realtors, but also an in-house legal team, property managers that help you find and manage tenants for your rental properties, and even expert mortgage brokers with top banks.
2. Purchase agreement & the disclosure statement
After you sign the contract, make sure you bring your purchase agreement & the disclosure statement to your lawyer for review. This is very important to be looked at in a timely manner, as REDMA gives buyers a 7-Day Resiccion Period. This is a 7-day period where buyers can exercise their right to back out of the deal if they change their mind after reading the fine print with your legal team.
3. Always retain your own lawyer to represent you for closing
Many developers offer a “recommended lawyer” for closing with a discounted fee or included in the package. It is always a good practice to hire your own legal advice in these matters so that you know that your lawyer would keep YOUR best interest in mind.
Closing Thoughts
Any big financial investment comes with its own share of risks and warnings. This does not mean one should be wary of these investments, because risks usually give way to bigger rewards.
The mantra for investing in pre-construction condos should be “Look before you leap!”
If you keep a track of all these risks and address them in a timely manner, your presale buying experience can be smooth as butter.
Good preparation and a strong and experienced team behind you can result in a successful investment and that is the center point of our business. Guiding and educating first-time homebuyers and investors so you get the best prices and the best units.
At ipresalecondos.com Our goal is to provide you with an enjoyable and seamless buying experience. To that end, we’re constantly working on improving accessibility to the latest presale projects in the city of Surrey, Vancouver, Burnaby, Richmond, Port Coquitlam, New Westminster, and the rest of the lower mainland.
If you want to learn more about what kind of market we are in currently and how to get the most out of it, get in touch with Ravi Bhindi, who has 18+ years of experience in real estate and pre-sale condos. Please call or text at 604-825-8881 or email at info@ipresalecondos.com
