Understanding Pre-sales

Buying into a pre-sale development was a sure thing when the market was all hype. People were lining up for days just to be the first to buy the next hot development. Needless to say, many do not even have the time to clearly read and understand the terms in which they agree upon. Yet novice investors that had no idea what they were doing were looking and sounding like savvy investors. Self serving Realtors were pushing pre-sales as the gold standard of real estate investment, preaching about the 2-5-10* warranty, without really knowing what that the warranty covered. No one was complaining, at least not when new assignees were in abundance and so were profits.

Some investors thought they were above the game, choosing to cut out buyer’s agents and go direct to the developer’s sales people, many of which are not even licensed realtors. With fancy promotions and logos, buyers were tricked into believing that they were getting special offers. Suddenly, mega marketeers like Bob Rennie become epitome of the successful real estate investor. Many think that they can be like Donald Trump only to find themselves left holding the bag so to speak when they can’t assign their contracts. They will have to complete, and depending on how many pre-sales they wrote contracts on, their closing costs could be multiplied, plus they’ll be on the hook for GST on the purchase price.

With the exception of the few investors who knew what they were getting into, most pre-sale investors fail to see the associated downfalls. You enter into a two year or so contract with no certainty that the project will be on time or even completed. For late deliveries, all you can do is wait. If the project collapses, all you get is your deposit back(no interest). There is also no certainty that the product will turn out the way the showroom portrayed it to be with many developers cutting corners to save profits especially with escalating costs and slowing market. The only thing guaranteed in a pre-sale contract is the developer cannot change the agreed upon sale price. GST is payable on all brand new property. This is extra cost that is hard to get back in a flat or down market.

So, it is not surprising to see a lot of pre-sale buyers walk away and give up their deposits. They are basically in breach of contract and will be liable for any losses incurred by the developers as a result. However, in the case that it goes to court, the judge will ask for the actual losses incurred excluding lawyer fees and consider the deposit to be paying for the losses. Even if the developer does win, the compensation amount he receives will often be too meagle to make hiring a lawyer an option. So pending a market collapse of over 20% market value, it is actually advisable to walk away now instead of getting stuck with a property at the start of the down cycle.

* 2-5-10 Warranty was developed as the minimum home warranty insurance for new home constructions not being built by the home owners themselves. The two year portion covers the labour and materials of the home. In general, this includes electrical, plumbing, heating, ventilation, air conditioning etc. The 5 year portion covers the building envelope against unintended water penetration. The 10 year portion covers the structure of the home.