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Major Mistakes Presale Buyers Continue to Make
What is a Presale Contract?
When a presale contract is signed, the purchaser is given the rights of buying a development unit upon completion of the development.
Such an agreement can be signed during the development’s construction phase, months or years before the project is due to be completed. Contracts of this type are typically long and contain jargon, making them difficult to be construed. The developer may purposely choose to devise it that way, since in the construction phase there may still be a lot of questions unanswered about the project. There are attempts made to use the contract to address the various aspects that are unknown during the period between the sale of a unit to the purchaser and the actual completion of the project.
These presale contracts are deemed to be fair to both the purchaser and the developer, provided the former reads the contract and interprets it accurately. However, if the purchaser does not read the contract or has construed it inaccurately, and consequently cannot gauge the risks they are accepting by signing the contract, several problems may emerge. In actuality, the purchasers can protect themselves from any potential problems and comprehend what they are getting into by looking at a few primary aspects.
In this article, we will offer 7 tips for those who are looking to sign a presale contract.
#1 Know what you are purchasing: a contractual interest
There is undoubtedly a stark difference between a presale contract and a standard purchase and sale agreement for a development that has already been constructed. When the latter deal gets shelved, it is possible for the purchaser or the seller to use ‘specific performance’ and sue the other to ensure that the deal is back on track.
However, signing a presale contract will only provide you with the contractual right of buying the property. However, the deal isn’t done before the property is constructed. Therefore, under such a contract, you can only sue for damages in case of a deal falling through, the value of which will rely on any increase in the market prices during that period.
Moreover, sometimes purchasers may not be able to go through with a deal for a variety of reasons. For instance, let us assume that a purchaser entered into a presale contract and agreed to pay $1,000,000 in two years’ time. Now, the contract may have required them to pay a deposit of 10%, which would amount to $100,000. If in the two years’ time, for some reason their affordability decreases, they will not be able to purchase the property upon completion. However, they will have to let go of their deposit. Moreover, they may have to pay for the damages as well. That is, if the developer does not find a purchaser willing to pay $1,000,000 and their best offer was $800,000, then the purchaser will have to pay for the difference, which is $200,000. Therefore, walking away from the deal would cost the purchaser $300,000 in total, when their affordability is already low.
Therefore, although the timeline of a presale is good leverage for your money, if things don’t go as planned, they can cut a hole in your pocket.
To protect yourself from getting into such a position, here are a few things you can do:
• Thoroughly go through the documents
• Make sure to have your own realtor, without any connections to the developer
• Every contract comes with a 7-day rescission period. During this time, go through the document more carefully and ask your lawyer to explain anything that may seem ambiguous or risky to you. During this period, you can back out of the deal without any repercussions.
• Conduct some background research regarding the developer’s reputation
#2 – The project may not be completed within the stipulated time
Typically, a presale contract includes two components pertaining to the timeline of the project, which includes an estimated completion date and an outside completion date. As the name suggests, an estimated completion date is the date when the developer is expecting to complete the project, provided everything goes seamlessly. However, sometimes unforeseen circumstances can delay work that has to be done to complete the project. Taking this into consideration, the outside completion date is integrated into the contract stating the date up to which the project completion may extend.
Therefore, if you are looking to move in by an exact date, a presale contract may be problematic for you. Therefore, one must not entirely rely on the estimated completion date while making major life decisions, as a construction period stretches over 2-3 years and unexpected delays are common in such a case.
The developer is obligated to inform the purchaser about any recent developments pertaining to the project on a consistent basis. In case the purchaser is not informed about such material changes, they have the opportunity to sue for damages, including rent costs for the deferred time period. However, if a purchaser plans on legally addressing the issue, it is a good idea to compute the costs and ensure that it is a significant amount since legal battles are costly affairs too.
It is also important to know that the developers are allowed to give a mere 10-day notice of project completion therefore, it is a good practice for purchasers to have their sources of financing ready so they can complete the deal of a presale contract even within a short period of time. Moreover, you must be prepared to take the necessary steps based on the estimated date of project completion, including applying for a mortgage.
#3 – The final project may not align with your expectations
Many presale projects come with a short pre-closing inspection period. Most of the time, as a purchaser, you are handicapped when it comes to the changes made to the property. That is, you may have expected the kitchen to look a certain way, but it does not. What can you really do about it? A presale contract offers the developer the freedom to alter the size, layout and other aspects of a project. Thus, there may a stark contrast between the property that you had viewed 2 or 3 years and the one in reality.
In case you have involved your lawyer in this project, you can claim for damages in case the final product is very different from what was promised in the contract. However, a presale contract typically includes provisions for the developer to make any necessary changes to the layout and other aspects. However, if what was expressed in the contract is altered in reality, you may be able to sue for damages. However, as stated already, litigations can be a costly affair. So it is important to assess if pursuing a case is worth the costs.
In simple terms, the final property may be different from what is expected, and purchasers must be ready to take that risk.
#4 – Once in a blue moon, the project is never completed
Although this is a worst-case-scenario, it can still happen. In the past, there have been scenarios wherein developers cancelled presale projects. Consequently, all the purchasers teamed up to sue the developers and claim damage in the form of increased property prices within the construction period spanning over a few years. While this will enable such purchasers to attain some money as damages, the downside is that they will not own that unit.
This is especially problematic since, with presale projects, the waiting period is about 2-3 years, which is the construction period. Moreover, they could no enjoy the money they put down as a deposit. Therefore, apart from losing out on a lot of time as well as their dream unit, purchasers will have to begin the process of looking for a property all over again. Though this is a highly unlikely problem to emerge, it is important to be aware of the possibility.
#5 – Several restrictions are imposed for walking out of the deal
Oftentimes, people jump into problems by focusing more on the look of the units such as pictures and other adverts, as opposed to closely looking at the purchase and sale agreement and the disclosure statement. So eventually if they do decide they want to walk out of the agreement, they will be met with the unfortunate reality that they can’t.
However, as stated above, contracts come with a 7-day rescission period. This is the time you have to walk away from the deal without any consequences. Once this time period elapses, purchasers may have to find an Assignment if they are looking to walk out. There are two common ways of Assignments. Firstly, people may assign a personal contract to their wholly-owned company. Otherwise, they can sell it to another party that is willing to seal the deal.
However, selling to a third party can be quite challenging due to the following reasons:
• You must seek the consent of the developers to assign a contract
• A few developers impose constraints regarding your choice of marketing of an assignment to prospective purchasers. This may include a prohibition of the usage of the developer’s name, building address, etc.
• Moreover, usually, developers seek an assignment fee, that is calculated as a percentage of the price of sale of an assignment
You may find it easy to get out of a good deal through an Assignment. However, in case your deal is not attractive, it may be quite challenging to assign it.
In short, once the 7-day rescission period elapses, the purchaser must be prepared to stick to the deal. While assigning the property or forfeiting y0our deposit are still feasible options, it is best to try to avoid getting into such situations by entering a contract only when you are sure about it.
#6 – Upon completion, expect some growing pains
The biggest perk of buying a presale property is that it is entirely new and hence, you may not encounter any serious problems for a while. Even if you do, you will have a warranty for a minimum of two years. However, when you enter a new condo property, you will experience some growing pains.
Some examples include:
• There is a need to develop the building culture
• Potential break-ins into new properties may demand an upgraded security system
• Strata must be initiated and the strata fees typically surge rapidly after it is set by the developer, so as to cover the operating costs as well as the hike in insurance deductibles for water
It is important to be aware that such growing pains are common to new establishments, so they are not overwhelmed by it later.
#7 – If the circumstances are ideal, a presale is a great purchase
When the market is rising or on the verge of rising, presales is a great investment. Usually, presale contracts require purchasers to deposit about 10-20% of the overall sales price of the property, which warrants the entering into a contract. In case within the 2-3 years of construction period the market prices rise significantly, equity can be built by the purchasers for a small percentage of the future purchase price. For instance, if your deposit was 10% of $1,000,000 condo property and within the construction period, market prices surge by 10%, you are making a 100% return on your deposit, by saving $100,000.
However, the market price may not always go up. In such a case, it may be more lucrative to buy a built property and start paying your mortgage. Moreover, you can also sidestep the 5% GST on new construction and can shift to your property much sooner. Therefore, you must consider all your alternatives.
In particularly two situations, the purchase as a presale may be a better alternative. Firstly, if your personal situation is flexible in terms of when you need to move to the property. If it is flexible, some delay will not affect you. Secondly, you are just investing and are not planning to shift into the apartment. In such scenarios, presale purchase is a great option.
Get Expert Advice!
The above-mentioned tips will help you avoid major mistakes in buying a presale home. However, since all the projects and conditions are unique, it is always very important to get expert advice in your plans to buy a presale home. Jovi Realty is here to help you make the best decisions in your investment plans.
There you’ll find a wealth of information, however, if you can’t find what you’re looking for, give us a call today on 604.202.2929 and our friendly team will help you with any of your real estate-based queries.
Thanks for reading, we’ll be back with more real estate hints, tips and guidance next time. Until then, stay safe and happy house hunting!
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