Pre-sale condos are sold before construction begins. Purchasing a pre-built or presold condo has its own advantages and disadvantages. In a rising market, one can end up buying a condo at a discount. But what if we are facing a declining market or a flat market? Is it still a good idea to buy a pre-built condo?
You are really betting on the market and hopefully if you are forecasting a rising market and you are accurate, the outcome could be in your favour.
Purchasing a pre-sold condominium is a lot riskier than one that is completed and built already. The market on its own should not be the only concern. There are other risks associated with buying a pre-sale.
Here's a list some of the important factors to consider before making that decision:
• One of the most important factors to consider is the reputation of the builder/developer. Real Estate Agents are the best source to advice you on that. Especially in a recessionary economy when most companies are trying to just survive, the ability of the builder to be able to finish the project is very important.
We have seen in the past years how some real estate projects have gone through bankruptcy. Some of the development projects that filed for bankruptcy are Pointe of View Developments (Squamish) and Tobiano Resort (Kamloops).
• The other factor to consider is how your personal and financial situation will be when the completion date approaches. Will you qualify for a mortgage? The buyer's ability to secure a mortgage before completion is very important.
Almost no one can complete the transaction without needing mortgage financing. Again, in a recessionary market the buyer has to be confident that he/she will be employed and in good financial position to be able to be able to secure mortgage financing.
• The interest rate itself is a very important component to consider. The higher the interest the more difficult it can be to secure mortgage financing. You have to do some speculation on interest rate and be very accurate in doing so. To be on the safe side consider adding 1.00% higher mortgage rate than the current rate to protect you from any fluctuation. Doing so will insure that if the rates are higher at the completion date.
You can still qualify for a mortgage at a higher rate than the current rate. Additionally, if you are getting ownership of your home in the next two years, you should be well prepared for any interest rate hike and also higher monthly payments attached with that.
• As mentioned above, the overall market is an important fact to consider. Any slowdown in the market can negatively affect the price and the value of a pre-sold condominium. If by completion date the value drops by 5-10%, the buyers have to come up with more cash as down payment. The formula that the bank uses for lending on a property is a percentage of market value and/ or purchases price, whichever is lower.
Here is an example to better explain the scenario.
Mary bought a pre-sold condominium for $200,000.00 She made a deposit of $20,000.00 on it. The bank promised a mortgage of 90% of the value, so in this case Mary is pre-approved for a mortgage of $180,000.00. Assuming the market value is the same as purchase price, Mary would be OK by completion date (20K+180K=200K purchase price) If the value drops 10%, and then the condo would worth 180K and not 200K. The bank promised Mary that they would give her 90% of the value, or the purchase price whichever is lesser. So, when they appraised the property by completion date and they value is only 180K, Mary can only get a mortgage of 162K. She paid 20K in deposit and now she can get a mortgage of 162K (162K+20K=182), She is short 18K to complete the transaction at closing date. The only way that one can insure that they are protected from market fluctuation is to have additional funds ready in case the value dropped.
On a positive note, your deposits on pre-sale condominiums are protected, as they will be held in in trust accounts. Additionally, the Real Estate Development Marketing Act (REDMA) allows buyers to cancel the contract within 7 days after you entered into a purchase agreement. So, if you think you found a bargain, you can jump in and make an offer and you have seven days to do your due diligent and research. If you decided not to proceed, you have to give written notice to the developer within seven days and your deposit is fully refundable.
REDMA also allows a buyer to withdraw from the transaction if there has been a breach of The Act. If there has been a breach by the developer buyers can cancel their contracts and get their deposits back. The Act says บ้านมือสอง the developer has the right to change anything that affects the price, and value or use of the property, but they must file and deliver an amendment to the disclosure statement right away and point out to those changes.
If the developer complied with the above rule, the buyers don't have a cancellation right. They must complete the transaction even if they don't agree with the amendment. Receiving a disclosure statement does not give the buyer the right of rescission, not receiving it will.
In some court cases breaches of REDMA have resulted in buyers being able to cancel their contracts and get their deposits back.
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