The pros and cons of buying pre-sale homes

Pre-sale homes may be a sound financial investment depending on the market variables. Things to consider include whether you are willing to wait a few months to a few years for the home’s completion, your comfort level for buying a home based on floor plans alone without seeing the final product, and your risk tolerance level in the chance that the property’s value does not appreciate upon the date of its completion. Let’s dive deeply into these elements to help you determine if a pre-sale home should be part of your next financial portfolio addition. 

What is a pre-sale?

A pre-sale refers to a residence that is offered for purchase before it is fully prepared for occupancy. Buyers have the flexibility to buy either before construction commences, during the construction phase, or upon completion, depending on the sales program and developer's inventory. Occasionally, a property may be fully constructed and ready for occupancy, but remains unsold; this is commonly known as "new construction."

What are the advantages of buying a pre-sale property?

1. PROPERTY TRANSFER TAX EXEMPTION - Newly constructed homes valued at $1,100,000 ($750,000 before April 1st, 2024) or less are eligible for an exemption from the property transfer tax, resulting in potential savings of up to $22,000 (2% of the fair market value greater than $200,000 and up to and including $2,000,000) for homebuyers. To qualify for this exemption, purchasers must be Canadian citizens or permanent residents and intend to use the home as their primary residence for at least one year following the purchase date.
   
   
2. PERSONALIZED CUSTOMIZATIONS - During the early stages of construction, buyers frequently have the opportunity to personalize their homes by selecting a color scheme that aligns with their design tastes and opting for additional upgrades provided by the developer.
   
   
3. EXTENDED TIME TO BUILD UP DOWN PAYMENT - With a presale home purchase, you'll make smaller, incremental deposit payments, affording you the opportunity to accumulate more funds to contribute towards the down payment before your home is completed. Certain financial institutions may even secure and maintain the interest rate for up to 36 months. This safeguards you against potential rate hikes, ensuring that your rate remains protected and serving as a financial safety net upon the closing of your home.
   
   
4. HOME WARRANTY INSURANCE PROGRAM FOR NEW HOMES - As mandated by the Homeowners Protection Office (HPO), properties constructed by Licensed Residential Builders are backed by mandatory third-party home warranty insurance, commonly referred to as the 2-5-10 Home Warranty Insurance Program. This comprehensive coverage entails a minimum of two years for labor and materials, five years for the building envelope, and ten years for the structure of the building. In contrast, resale properties may lack such warranties, potentially leading to increased overall costs.
   
   
5. EXPERIENCING THE NOVELTY OF A NEW HOME - There's an undeniable allure to settling into a freshly built home, untouched by previous inhabitants. Similar to the thrill of stepping into a new car, you'll be the first occupant, leaving your unique mark on the space. Moreover, with the home's appliances, mechanical systems, and other components just beginning their warranties and lifespan, you can expect minimal risk of immediate repairs or replacements.

The Disadvantages of buying a pre-sale property

1. UNCERTAINTY IN THE FINAL CONSTRUCTION - One of the primary risks associated with buying a presale property is the uncertainty surrounding its final outcome. Since the property is yet to be constructed, buyers must rely on floor plans and artist's renderings to visualize the finished product. However, there's always the chance that the actual result may not meet expectations, leaving buyers feeling disappointed with their investment.
   
   
2. DELAYS - Another potential drawback of purchasing a presale property is the possibility of construction delays. These delays can stem from various factors such as labor disputes, material shortages, adverse weather conditions, and even pandemics. Such setbacks may result in buyers facing extended periods without a place to live or finding themselves stuck in their current living arrangements for longer than anticipated.
   
   
3. CHALLENGES TO MORTGAGE FINANCING - Another hurdle in buying a presale property is obtaining mortgage financing. Because buyers are investing in a property that is yet to be constructed, they often encounter additional obstacles in securing a mortgage. Lenders may demand more extensive documentation or provide less favorable terms to presale buyers, potentially affecting their ability to afford the property.
   
   
4. LIMITED FLEXIBILITY IN CONTRACT TRANSFER - Buying a presale property demands a considerable level of commitment from buyers. Once the contract is signed, it becomes exceedingly challenging to withdraw or modify the purchase agreement. This lack of flexibility can pose difficulties for buyers who experience changes in their circumstances or decide against proceeding with the purchase. Furthermore, buyers should also consider the restrictions and potential costs associated with assigning the contract to another party, should they need to exit the agreement before the completion of the property.
   
   
5. RISK FOR ASSET DEPRECIATION AND FEDERAL TAX - One challenge associated with purchasing a presale property is the possibility that its value, once completed, may be lower than the initial purchase price, particularly if there's a downturn in the market. While there's often an expectation of home prices increasing over time, fluctuations in the housing market are inevitable. Additionally, buyers should be aware of the federal tax implications. A 5% Goods and Services Tax (GST) is required in addition to the purchase price quoted by the developer. This GST is payable upon completion of the property.

Conclusion

When navigating the challenges of purchasing a presale property, buyers can adopt several proactive strategies. Firstly, aligning with a reputable developer known for delivering projects punctually and to high standards is pivotal. Additionally, scrutinizing marketing materials and floor plans meticulously provides insight into the envisioned final product. Thorough neighborhood exploration further enhances understanding of the prospective community post-completion. 

However, amidst these challenges lie promising opportunities inherent to presale investments. For those seeking an accessible entry into the real estate market or yearning for tailor-made customization options, presales offer an attractive avenue. Not only can presales be a financially savvy choice, but they also afford buyers the chance to secure desirable properties at potentially advantageous prices. 

In conclusion, while presale purchases may pose challenges like uncertainty and financing hurdles, they also present exciting prospects for buyers. By carefully navigating these challenges and leveraging the inherent benefits of presale investments, buyers can embark on a journey toward securing their dream homes and realizing their real estate aspirations.