What is a presale?
A presale is a home that is available to purchase prior to being move-in ready. You can choose to purchase either before construction starts or during construction. There are times when the construction has been completed and the home is move-in ready but it has not been sold yet—this is referred to as a “new construction.”
What are the benefits to buying presale?
- Selection of a home and early access to a building;
- Delay of mortgage until completion of the building;
This allows more time saving for the down payment and closing costs. There is still the ability to have a rate hold from a partnering lender with the development. If rates go up, the rate hold would apply. If rates go down, the rate for the mortgage term would be less.
- Building of equity;
As housing prices rise over the course of the construction period, the contract on the home also rises in value. There is the potential to see profit even before completing your home. The ROI is why presales are so popular with investors.
- Warranty protection;
Presale homes come with 2,5 or 10-year warranties, which offers to new owners minimal costs upon moving in.
In this fast-paced market, one key benefit to purchasing presale is:
- Seven-day rescission period.
Legally required by the Real Estate Marketing Act, there is a seven-day period from an accepted contract to allow a purchaser to do their due diligence of reading the disclosure statement. This is the assurance that they have made the best decision based their individual needs, before committing to the purchase. After the seven-day period, the contract becomes firm and binding.
What do you need to know about buying a presale?
Deposit: Each development will have its own deposit structure and amount required. Typically 5-10% is required when writing the contract and incremental deposits will be required up to 20%. The deposit is put towards your down payment at closing. The balance of the funds is due at completion.
GST: Federal tax is required on new construction and will be payable at the time of completion. If applicable, the buyers’ lawyer or notary will submit the GST rebate on the purchasers’ behalf. In some instances, the developer will charge the rebate amount on the GST and wait for the rebate from the government.
Property Transfer Tax: Presale homes under $800,000 are exempt from property transfer tax, as long as the purchaser is a Canadian citizen or permanent resident living in the home for a year. See if you qualify here.
First time buyers are also exempt from PTT when purchasing under $450,000 and with a slight rebate under $575,000. Details on First Time Home Buyer Exemption can be found here.
Otherwise, property transfer tax of purchases under $2 million are 1% of the first $200,000 and 2% on the remainder. There is a 3% increase on the purchase price amount over $2 million. You can find further explanations on the provincial website.
Presale purchases are not for everyone. It requires patience during the construction period, which can last between 2-3 years. It also requires faith in purchasing off a floor plan and risk management when purchasing in one market and potentially closing in another.
What are the disadvantages of presale?
- Federal Tax;
5% GST is required on top of the purchase price displayed by the developer. It is payable at completion.
- Real Estate Market fluctuation;
The market can go up and down. Despite market conditions, purchasers will still have to complete on the property. Traditionally, real estate is a long-hold asset. To cover your bases, hope for a quick flip, but prepare for holding the property as a rental or a moving in possibility.
- Mortgage Approval;
A mortgage cannot be granted until completion. Therefore, when you are purchasing a presale, lenders can provide a pre-approval. However, another assessment will have to be fulfilled upon completion to ensure lending for the property. If at the time of completion the property is valued at less than the purchase price, the purchaser can be responsible for making up the difference.
- No Guarantee of Profit;
Even though a popular form of making profits in a rising real estate market, there is no guarantee that the market will continue to rise in the period between purchasing and completion of the building. It is recommended for the purchaser to be able to navigate the risk to complete on the home. This relates to the market fluctuations elements stated above.
- Purchasing off a floor plan.
Purchasing presale requires a bit of imagination and vision. There can be changes to the floor plan during construction. A slight variance allowance will be indicated in the Contract of Purchase and Sale, as well as in the Disclosure Statement offered by the developer. Having a Realtor represent you in the purchase from the developer will assist in deciphering what variance on finishing and square footage may apply. It is essential to purchase from a reputable developer to ensure quality product.
Contact us today to determine if purchasing a presale home is the best option for you!