Thinking of buying a pre-sale condo? You might be tempted by the tantalizing array of pre-sale development units available in the Greater Toronto Area, some with attractive incentives. (Just check out our Pre-Construction Condo List section!) Here's how it works. When you agree to buy a pre-sale unit, you're actually entering into a contract for the right to receive and an obligation to pay for a finished condo at a set point in the future. This forms the basis for some of the unique opportunities and risks that go along with buying pre-sale.
There are definitely advantages to buying pre-sale. You can pay just a small deposit now, save money while it's being built, then pay the balance of your deposit when you move in. Or you can pay your deposit in bite-sized increments during the building process.
You can also customize design elements, finishes and even your layout. Because you're buying a brand-new home, you won't have to worry about doing costly repairs for at least another decade. And your unit will be covered under the BC government's 2-5-10 Year Home Warranty Insurance program, so that if something does go wrong, you won't have to pay for it.
But there are also risks and unique obligations that need to be considered before you sign on the dotted line and hand over your deposit. Here's what you need to know: your rights and responsibilities under the Real Estate Development Marketing Act (REDMA).
Though there are advantages to buying pre-sale in any market, the greatest opportunities arise in a rising or hot real estate market. That's because, by the time you move into your completed condo, it's already worth more than what you agreed to pay for it.
In a softening market, on the other hand, by the time you complete the sale, you might already have lost money. If you're relying on a mortgage, lenders may only cover the market value of the property at the time of completion, leaving you scrambling to raise more cash for the difference.
The mortgage climate can change without warning as well. Many people who purchased before the federal government administered tighter mortgage rules found they no longer qualified for the amount they were pre-approved for by the time they had to pay up.
So what happens if you can't raise the cash you need to complete the sale, or your unit is worth less than what you owe when it's time to pay up? Unless the developer violates the terms of your agreement, you are legally obligated to complete the sale or forfeit your deposit.
Besides market changes, there are other unknowns, from unexpected construction delays to condos that don't get built at all.
So how can you mitigate some of the potential risks?
- Long before you're ready to sign anything, find out everything you can about the builder of each development you're considering. Do they have a reputation of building on time? Talk to your real estate agent and to homeowners who've purchased from them in the past. And if you're a first-time buyer with a small down payment, consider sticking with pre-sale units that are already close to completion to eliminate some of the unknowns.
- Talk to an independent mortgage broker as well, to find out what you can afford and to make sure your credit is in shape before you go in. That way you'll be financially ready.
- Before you sign a purchase contract, you have the right to review a Disclosure Statement prepared by the developer, according to Section 21.2 of REDMA. The Disclosure Statement lays out everything you will be buying including proposed and filed bylaws, common property and storage allocations, and descriptions of appliances, furnishing, and finishes.
- Under REDMA, it also has to include an estimated construction start and end date, as well as any "material facts" that could "reasonably be expected to affect, the value, price, or use of the development unit or development property."
- The developer is obligated to keep you up-to-date on amendments to estimated dates and material facts. This is important because building a new development is a long and complex process, and things often morph as it progresses.
- Take time to review the Disclosure Statement carefully and make sure you understand all the terms set out in it. This step is best tackled with an experienced lawyer specializing in residential real estate and, of course, your Real Estate Agent (not the developer's).
- After you've thoroughly reviewed the Disclosure Statement, look over the pre-sale contract with a fine-tooth comb, and check the small print before you sign.
Buying pre-sale has some unique rewards, but the process can be far from simple. REDMA legislation leaves room for interpretation and is being shaped by a number of ongoing court cases. So it's a wise move to enlist an experienced real estate agent, mortgage broker and lawyer to help safely guide you through the process and into your stylish, custom home.