What is pre-sale? How to buy something that hasn’t been built yet?
The situation on the real estate market today.
When you buy real estate, especially for the first time, you obviously have to take the task quite seriously since the purchase of a house is one of the most significant purchases in our lives. It is important to prepare and protect yourself from all the possible mistakes buyers can make. On the other hand, you also don’t want to turn the process of buying a home into a long and painful experience.
You have started looking for a house and you do not feel completely comfortable because:
you are unsure if you will be able to make monthly mortgage payments right away
you don’t like the quality or the finishing of the old houses that you’ve seen
you are not in a rush to move out and would like to make sure you are well prepared, and the process involves as little stress as possible
In this case, you might like to consider the option of buying a property that is still in process of development. This is called pre-sale. Here’s how this process happens:
A developer (who is usually not a single person, but a group of investors working together) buys a piece of land and develops a project, for example, a townhouse complex or a high-rise. Developer then needs to get the project approved. After that an office and a showroom is built, demonstrating what the final result will look like. Then a project is broadly advertised.
It’s a good idea to find information about the developer, as well as to check their background and history related to other sales. One also needs to keep in mind that there’s a certain risk associated with the wait time. You have to understand that there is a certain risk, in a long period of time (from 1 to 2 years), while the complex is being built, the financial situation may change and affect the execution of the project.
It’s always a good idea to do some research on some of the developer’s older projects- 5 to15 years- by which point the warranty has expired and you can better find out about the quality of materials and construction.
Your next task is to select the unit. With a house that hasn’t been built this is not an easy thing to do. You will need to use the plan or the proposed model of the house to find out where the windows will be facing, how much light the place will receive, how noisy it might be, and how practical the layout is, etc.
Your best bet will be to consider a few different units with different advantages and setbacks and choose the one that suits your needs the most.
Price is negotiable.
Usually, at the beginning of the advertising campaign, the developer has already decided on the pricing and staff in the office simply follow the prescribed policy. Every document or slightest change in the contract has to be signed by the developer. This means that you won’t get a discount just because it’s a nice day and the salesman is feeling generous. Furthermore, since the company has to sell the entire complex of units, the pricing needs to stay consistent for all clients.
This means that the price for the place itself is not going to change, but you may be able to get discounts. You may be able to negotiate some type of materials, the amount of deposit that you have to pay or some other parts of the contract, – that will make Your purchase more attractive.
Every contract will have its own timeline that will change depending on circumstances. Here are a couple of examples:
Say that today you’ve decided to Pre-sale buy a 2 or a 3 bedroom apartment. You are now in the office where you’ve visited the showroom and you’re signing the contract and leaving your deposit of 5% of the purchasing price (which can be paid by a personal check). This reserves in your name the unit for a week. The check is kept as a guarantee of your interest, but is not cashed. During this week your task is to find a real estate specialist to help you and study all the materials provided by the developer, which include the contract, plan of the unit and disclosure statement and then make a decision.
Here comes the hardest part: the disclosure statement is a document of about 40-80 pages, where the developer describes the building and organization of the complex in every detail. You will find the address, requirements, boundaries, the different phases of building process, number of units, the size of each one, rules for voting, by-laws, insurance, etc. This is a lot of information out of which you will need to filter the details pertinent to your own unit. Like how many parking stalls you can get and where they will be situated, where the entrance to the building will be, what additional amenities (sauna, pool, etc.) the complex will have, will there be a playground or park, etc. You will also need to know what the budget for building is and how much the monthly maintenance fee will be. You should be able to find all this in the disclosure statement.
Unfortunately, the developer always keeps the right to make changes in the disclosure statement and then simply send you- the buyer- those changes while the building is still being completed. It happens that Buyers receive from 3-6 addendums to the statement while waiting for the completion of the unit. For example, the developer in the process of construction finds out that it would be extremely expensive to supply gas for the units and decides to switch the heating system to electric. You can then either approve the changes or decide that you are unhappy with the change and terminate the contract.
Paying the deposit
The developer usually asks about 5-15% of the complete purchase price for the deposit of a unit that is being bought as pre-sale. Most often this deposit is paid in parts, 5% when you sign the contract and another 5% within the first 30 to 60 days of signing the contract. If you’re buying in a very prestigious area, another 5% may be required around the first 60-90 days of signing the contract.
At that point you have the contract and just have to wait 1-2 years while the complex is being built.
Keep in mind that you’re still not the official owner of your unit and it still belongs to the developer. This means that you don’t have the right to sell it. But what if you have a job offer out of town a year into the building process and there are still at least 6 months left until the complex is finished What are the options?
Since you are not the owner, all you can do is re-write the contract in another person’s name, which is called assignment of contract. There are certain rules for that procedure and most likely you will need to get it approved by the developer. Developer has the right not to approve it, since it disadvantages them to allow you to sell your unit before they have sold all of their units. The developer may also require an administration fee of 1-1.5% for the assignment of contract.
It is important to keep in mind those expenses when you are studying the contract in every individual case.
Inspection before move-in
Don’t forget in about 2-3 weeks before the unit is ready and before the sale is complete you will need to inspect the unit. It is recommended to make an appointment with the developer and come in with your real estate agent to check the unit for deficiencies that need to be fixed before the unit is occupied. A document describing the results of the walk-through inspection is then completed and signed by both sides.
According to the contract, the developer has to fix the outlined defects. It is recommended again to ask for an expert opinion to avoid later disappointments.
Completion date the final sale- happens after the building has been completed and the developer obtains an occupancy permit from the city council.
By the point of completion date you will have had to secure financing for the purchase. You will then need to make an appointment with a lawyer or a notary and sign the sales contract. The bank then pays the rest of the money owed to the developer and the next day you are the registered owner of your new house. You may now move in!
Additional tax – GST
As soon as you buy real estate directly from the developer and become the first official owner of a unit, this tax is added to the purchase price. As of January 1, 2008 this tax is 5%. If your estate costs less than $450,000 and you are going to live in the place that you are purchasing (as opposed to renting it out), then you are entitled to receive a New Housing Rebate on the tax that you’ve paid. For example, if your estate costs below $350,000 the rebate is at a maximum rate and returns about 36% of the money paid. A special formula is used to calculate GST for purchases between $350,000 and $450,000 where the amount of the rebate proportionally decreases as the purchase price grows.
Usually your lawyer or notary will provide the exact amount of your GST amount on the day of the completion of the sale. Moreover, you have the right to file an application for a rebate within two years of the completion of the sale.
What is my recommendation
Clearly, buying something (pre sale) that you can see with your eyes, you can touch and evaluate is much safer. Everyone understands that. However, if you have checked all the conditions and you see your advantages, the risk is worth taking.
Think about moving into a brand new house the feeling is priceless. Most of us dream of buying a brand new car instead of driving a used one. The wait and anticipation for the moment when the building process is completed and you can move in to make it even more beautiful and uniquely yours is incredibly exciting.
This is why I support both ways to purchase real estate, since everyone has their individual preferences.
For prospective buyers all the consultations and services are free, since it’s the developer who pays the commission to the agent for finding clients.
Your Real Estate Agent – Antonina