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Consumer Guide to Pre-sale Real Estate Purchases
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What Are Pre-sale Real Estate Purchases?
Real estate developers often begin selling units in their developments long before construction is complete. These not-yet-completed units are referred to as “pre-sale” units.
When you agree to purchase a pre-sale unit from a developer, you are purchasing the right to receive a completed unit at some point in the future. You are typically required to pay an initial deposit to the developer when you sign your pre-sale contract. You may also be required to pay subsequent deposits according to a schedule set out in your pre-sale contract. All deposits you pay will be held in trust by a lawyer, notary, or real estate brokerage. The remaining balance of the purchase price is due when the developer confirms your unit is ready to be occupied.
The Importance of Obtaining Independent Professional Advice
Seek professional advice from a lawyer, notary, or real estate licensee before entering into a pre-sale contract. A professional can help you understand your pre-sale contract, the disclosure statement, and the associated risks of purchasing a pre-sale property.
Risks of Pre-sale Real Estate Purchases
There are a number of risks to consider before purchasing the right to a unit that is not yet complete.
- Completion of the development may be delayed, or the development may never be completed. A developer may be unable to complete a development due to inadequate sales, delays in obtaining permits or financing, increased costs, unfavourable market conditions, or other unforeseen circumstances. If the developer does not complete the development, the developer is required to return your deposit to you but is not required to provide any additional compensation. If construction is delayed, you may be required to extend your current lodging situation or find short-term lodging.
- The developer may not allow you to assign your purchase contract. If you are unable to complete your purchase and the developer does not consent to an assignment, you may be in default of your pre-sale contract and at risk of losing your deposit. For more details, see: Pre-sale Assignments Explained.
- The developer may make changes to the layout of your unit, including reductions in square footage. Some pre-sale contracts will provide compensation to you if the unit’s size is reduced by more than a certain percentage, but this may not always be the case.
- Materials in your unit may not be the same as those displayed in the showroom. Typically, a pre-sale contract will allow a developer to substitute materials (cabinets, faucets, etc.) for those of a similar nature and quality.
- You may experience issues obtaining financing if your pre-sale unit’s appraised value has decreased upon completion. A lender may appraise your unit at a lower value than what you have agreed to purchase it for. As a result, you may no longer qualify for adequate financing and may need to increase your cash payment to complete your purchase. If you cannot increase your cash payment, you may then be in default of your pre-sale contract and at risk of losing your deposit. For more details, see: What if You’re Unable to Complete Your Purchase?
- The developer may require you to pay an increased purchase price in certain circumstances. This may occur when market prices have increased, and construction has been delayed beyond a date set out in your pre-sale contract. The developer may provide you the option to pay a higher purchase price or to cancel your contract and receive a refund for your deposit. For more details, see: What if You’re Unable to Complete Your Purchase?
Get to Know the Developer
It is important for you to get to know the developer you are purchasing your pre-sale unit from. You can do this by enquiring about the developer’s past developments, including whether the developments were completed on time, their communication with purchasers, and if purchasers are happy with their units. You may also want to look for online reviews to see what past purchasers think about the developer and their developments. Doing your research early will help inform your decision to make a pre-sale purchase and may also help you avoid potential issues with the developer.
Read Your Disclosure Statement
A developer is required to provide you with a disclosure statement before selling you a pre-sale unit. The disclosure statement, which includes the Summary of Pre-sale Risks and Buyer Rights form, contains an in-depth description of the development you will be buying your pre-sale unit in. You should carefully read the disclosure statement and any disclosure statement amendments prior to signing a pre-sale contract. These documents contain important information about the development, such as:
| Estimated construction dates (section 5.1 of your disclosure statement) | Estimated strata fees (if applicable) (section 3.8 of your disclosure statement) |
| Your rights and obligations under your pre-sale contract (section 7.2 of your disclosure statement) | Your right to cancel your pre-sale contract in certain circumstances (section 7.2 of your disclosure statement) |
| Strata bylaws (if applicable) (section 3.5 of your disclosure statement) | Parking rights and availability (section 3.6 of your disclosure statement) |
Your Seven-Day Right to Cancel Your Pre-sale Contract
The developer is required to provide you with a reasonable opportunity to read your disclosure statement before you sign your pre-sale contract. You have a period of seven days to cancel your contract with no penalties after the later of:
- The date you sign your pre-sale contract; and
- The date you provide the developer with an acknowledgement that you had an opportunity to read the disclosure statement.
Understand Your Pre-sale Contract
The pre-sale contract sets out your contractual rights and obligations for your pre-sale purchase. It includes information such as the purchase price, deposit amounts, contract cancellation rights, assignment terms, and much more. You should carefully read your pre-sale purchase contract and make sure you understand its terms and conditions. Since a pre-sale contract is a legal document, it is strongly recommended that you seek professional advice prior to signing.
What if You’re Unable to Complete Your Purchase?
If you can’t complete your purchase, you will be at risk of losing your deposit and may face other risks. For example, if the market value of the pre-sale unit is lower than when you signed your contract, a developer may commence legal action against you to require you to pay additional amounts, such as:
- The difference between the purchase price in your pre-sale contract and the final sale price (paid by a new purchaser);
- The developer’s legal costs; and/or
- Related administrative fees.
If you believe that you may be unable to complete your purchase and will be in breach of your pre-sale contract, you should immediately seek legal advice to help you consider your options and make an informed decision.
BCFSA Pilot Program for Large Developments
If you are purchasing, or have already purchased, a pre-sale unit, your unit may be in a project with an extended early marketing period.
BCFSA is currently offering real estate developers with large projects (100 or more development units) the opportunity to participate in a pilot program that extends the early marketing period from 12 to 18 months. Participation in the pilot program is optional for developers. Normally, developers are permitted an “early marketing period” of 12 months. Developments that have been approved to participate will be permitted to market for an extended early marketing period of 18 months.
Buyers can confirm if their development is participating in the pilot program (and therefore has an 18-month early marketing period) by referring to the disclosure statement they received from the developer. The disclosure statement discloses the deadlines by which the developer must obtain both a building permit and a satisfactory financing commitment. If this deadline is 18 months after the date the developer’s disclosure statement was filed, the development is participating in the pilot program.
After April 1, 2025, buyers will be able to confirm the length of the early marketing period by reviewing the Summary of Pre-sale Risks and Buyer Rights form. The dates are listed under the Contractual Rights and Obligations section. If this deadline is 18 months after the date the developer’s disclosure statement was filed, the pre-sale unit is in a development participating in the pilot program.
See here for more information on the pilot program for large real estate developments.
Pre-sale Assignments Explained
Seek independent professional advice before entering into a pre-sale assignment agreement.
A pre-sale assignment occurs when you transfer your pre-sale contract to another person before the contract’s completion date. This transfer may be in the form of a sale for a higher or lower price than you had initially agreed to pay the developer for the pre-sale unit. The seven-day right to cancel the pre-sale contract does not apply to the new purchaser(s) through the assignment.
Review your pre-sale contract to confirm whether:
- Assignments are permitted;
- You are required to obtain the developer’s consent prior to assigning your pre-sale contract; and
- You are required to pay an assignment fee.
A developer may have the right to refuse to consent to an assignment. A developer can refuse their consent even when you have found a willing person to sell your pre-sale contract to.
If a developer refuses to consent to an assignment, you may be required to complete your purchase. If you are unable to complete your purchase, you may be in default of your pre-sale contract and at risk of losing your deposit and being liable for other costs or losses suffered by the developer. For more information, see: What if You’re Unable to Complete Your Purchase?
In cases where the developer does allow assignments, your pre-sale contract may require you to pay an assignment fee before the developer consents to the assignment.
Typically, if the person you assign your pre-sale contract to is unable to complete their purchase, you will remain liable to the developer to complete the purchase.
Other Considerations
Planning for Costs of Ownership
After you complete your pre-sale purchase, some ownership costs will likely be higher than you anticipated.
Higher than expected strata fees. While developers try their best to accurately estimate strata fees, changes to items such as strata insurance premiums or labour costs can significantly increase your monthly strata fees.
Increasing ownership costs over time. Typically, strata fees, home insurance, and property taxes increase over time. If you have stretched your budget too far, you may not be able to pay all the costs of owning your unit.
Increased financing costs. If you have not locked in your mortgage interest rate when you were approved for financing, there is a possibility that interest rates may go up. As a result, your monthly mortgage payments may be higher than you anticipated.
Parking Arrangements
You should confirm if parking is included in your purchase. If parking is not included, the developer may require you to pay an additional amount to use a parking space.
If parking is available, you should ask how your parking space will be allocated. Parking spaces are typically allocated in one of two ways:
- As limited common property (i.e., the parking space will be for your exclusive use as noted on your strata plan); or
- By parking lease agreement (i.e., the parking space will be for your exclusive use, but through a lease agreement).
Your rights will differ depending on whether the parking space is allocated to you by limited common property or by a lease. If you are unsure of the difference, consult a professional for advice.
Informed Decision-making
While a pre-sale real estate purchase offers the exciting prospect of owning a brand-new home tailored to your preferences, it is important to know the associated risks. By seeking independent professional advice and thoroughly understanding your disclosure statement and purchase agreement, you can make an informed decision on whether a pre-sale purchase is right for you. The journey to homeownership is a significant investment, and knowing the risks empowers you to enjoy the rewards.