Buying a pre-sale home over a resale home comes with advantages and risks to the purchaser. It is essential to understand what you are getting yourself into before you sign any contract! Today we cover what to know before you purchase a pre-sale home in British Columbia based on the guidance of the Government of BC with Understanding Pre-Sale Purchases.
What is a pre-sale?
Developers in British Columbia commonly “pre-sell” residential units such as strata-titled apartments and townhouses (often referred to as condominiums or condos) prior to constructing the units. Purchasing a pre-sale is not the purchase of an existing physical property, but rather a contract for the right to receive, and an obligation to pay for, a finished unit at a point in the future. Consumers should be aware of this difference in order to make an informed decision about purchasing a unit in a new development.
What is an assignment?
Most people enter into a pre-sale contract with a developer directly while some may do so through an “assignment”. By definition, an assignment is a legal sales transaction whereby the Original Purchaser (the “Assignor”) of a property sells, and thereby transfers, their rights and obligations under the original contract to a new Purchaser (the “Assignee”)”
A contract assignment occurs when a buyer transfers the contract to buy property to someone else before the completion date. The original purchaser can transfer the contract for any price, even for a higher price than they paid for the property. Some purchasers assign or “flip” the units to other buyers before construction has even started.
Typically, developers enter into contracts that provide for units to be built within two years at a fixed price (although construction completion can take longer) and require deposits to be paid by the prospective purchasers. The deposits are held in trust by a lawyer, notary public or real estate brokerage, unless deposit protection insurance is obtained, in which case the deposits may be released to the developer.
Disclosure Statements for Pre-Sales
Prior to selling a pre-sale development unit, developers are required by law to provide interested purchasers with a disclosure statement. The disclosure statement explains what the developer is selling and describes the purchaser’s right under the Real Estate Development Marketing Act to cancel the pre-sale contract within seven days of signing it. A purchaser should carefully review the developer’s disclosure statement. The Real Estate Development Marketing Act provides that a developer must not enter into a contract to sell a development unit unless a copy of the disclosure statement has been provided to the purchaser and the purchaser has been given a reasonable opportunity to read it.
Things to consider with a pre-sale contract
Delays may occur in the development process
A development may be delayed for many months, or may not proceed at all. This can occur for a variety of reasons including: inadequate sales; delays in obtaining financing or building permits; higher than expected costs for construction materials; and an inability to hire skilled construction workers due to labour shortages.
Development delays may lead to termination, extension or new contract
If a development is delayed beyond the completion date set out in the pre-sale contract, the contract may provide that it is terminated unless both the purchaser and developer have agreed to an extension. If market prices have increased during a delay in construction, a purchaser may be asked to pay a higher purchase price in order to extend the original contract or obtain a new contract. Keep in mind that the developer may not agree to an extension or new contract and instead sell the unit to another purchaser.
Clarify deposit refund terms in case of termination
If a development does not proceed and the purchase contract is terminated, purchasers are usually entitled to have their deposit money repaid. Unless the pre-sale contract requires interest to be paid to the purchaser, the purchaser may not receive interest on that deposit. This is something that a purchaser will want to clarify at the time that they enter into a contract.
Substitutions and adjustments during construction
Substitutions and adjustments are often made during construction. A pre-sale contract may allow the developer to substitute equivalent materials or make adjustments to the layout of the unit or the development.
Selling your existing home
Timing the sale of your existing home in the event of a development delay. Delays in development may require prospective purchasers to arrange temporary accommodation or delay moving from their existing homes. As delays that occur in a rising or falling market may also be accompanied by price increases or decreases, prospective purchasers should consider when best to sell their existing home and prepare for the possibility of a development delay
Purchaser may be obligated to pay the agreed price, no matter future market value
Real estate prices may decline in the future. If the developer completes a pre-sale contract within the time set out in the contract, the purchaser may be obligated to complete the purchase at the agreed price, even though the market value of the unit purchased may have declined.
Restrictions on Contract Assignments
Depending on the specific terms of a pre-sale contract, it may not be assignable at all or may only be assignable with the developer’s consent. The contract may also require a substantial assignment fee to be paid to the developer. The risks associated with pre-sales also apply to a new purchaser who is assigned a pre-sale contract. Depending on the specific terms of an assignment, if the assigned contract is not completed the new purchaser may not be able to recover any payments made to the initial purchaser and the initial purchaser may not be able to recover any assignment fee paid to the developer.
Things to Consider with Assignments of Pre-Sale Contracts
Is an assignment permitted under the purchase contract? Some contracts do not permit assignments. Others may require the developer’s consent and a substantial assignment fee.
Have you confirmed in the assignment agreement how the assignor will meet all of the requirements for a valid assignment, and set out what will happen if there is any breach of the assignment agreement or the pre-sale contract?
Have you obtained advice from a lawyer and/ or a licensed real estate agent prior to entering into an assignment contract?
Making an Informed Decision
It is important that prospective purchasers thinking about entering into pre-sale contracts appreciate the risks associated with them. The Office of the Superintendent of Real Estate has received complaints from consumers who have encountered some of the issues outlined in this brochure after signing a pre-sale contract. It is important to consider these issues before signing a pre-sale contract and to be aware of them while your unit is being constructed.
The Importance of Independent Advice
Purchasers should always obtain advice from a lawyer and/or a licensed real estate agent before entering into a pre-sale contract. This brochure is by no means an exhaustive list of all possible risks that exist for those considering entering into a pre-sale contract or an assignment of a pre-sale contract. Remember that lawyers and real estate agents have a duty to put the interests of their client first – so it is important to seek out their independent advice.