There are advantages and disadvantages to buying a pre-sale property over a resale one. Before you sign any contract, it is important to fully understand the risks and benefits. We will be discussing what you need to know before purchasing a pre-sale property in British Columbia. This information is based on the guidance provided by the Government of BC, Understanding Pre-Sale Buys.
What is a Pre-Sale?
British Columbia developers often “pre-sell” residential properties such as townhouses and strata-titled apartments before constructing them. Pre-sales are not the purchase or sale of existing property. It is a contract to obtain a unit and to make payment for it at a future date. This distinction should be made clear to consumers so they can make informed decisions about buying a unit in a new community.
What is an assignment?
While most people will enter into pre-sale contracts with a developer directly, some may do so via an “assignment”. An assignment, by definition, is a legal sale transaction in which the Original Purchaser (the ‘Assignor’) of a property sells and transfers their rights and obligations under the original contract.
Contract assignment is when a buyer transfers the contract for property purchase to another person before the completion date. Contracts can be transferred for any price, even if the original purchaser paid more than the property was worth. Some buyers assign the units or “flip” them to others before construction even begins.
Developers usually enter into agreements that require prospective buyers to pay deposits and to build units within two years. Unless deposit protection insurance has been obtained, the deposits are kept in trust by a lawyer or real estate broker.
Disclosure Statements for Pre-Sales
Developers must provide a disclosure statement to interested buyers before they sell a pre-sale unit. The disclosure statement describes what the developer is selling, and explains the buyer’s rights under the Real Estate Development Marketing Act for cancelling the pre-sale agreement within seven days. The disclosure statement should be carefully reviewed by the purchaser. A developer cannot enter into a contract to sale a development unit without a copy of the disclosure document being provided to the purchaser. The purchaser must also be given reasonable access to it.
Considerations for a pre-sale agreement
There may be delays in the development process
Sometimes a development is delayed for months or even stopped altogether. There are many reasons why this might happen, including inadequate sales, delays in obtaining financing and building permits, higher construction material costs than anticipated, labour shortages, or inability to hire skilled workers.
Delays in development could lead to termination, extension, or a new contract
The contract can provide for the termination of a contract if a development is not completed by the deadline set forth in the pre-sale agreement. A purchaser might be required to pay more if the market has increased due to delays in construction. The developer might not consent to an extension of the contract or a new contract, and instead decide to sell the unit to another buyer.
In the event of termination, clarify deposit refund terms
Buyers have the right to their deposit money back if a development fails or the purchase contract is terminated. The purchaser will not be able to receive interest on the deposit unless the contract for the sale requires that interest be paid to them. A purchaser should clarify this at the time they sign a contract.
Construction: Substitutions and adjustments
Construction often involves adjustments and substitutions. Developers may be able to make changes to the layout or substitute materials through a pre-sale agreement.
Sell your current home
If there is a delay in development, timing the sale of your current home. Prospective buyers may need to find temporary accommodation, or delay their move from their homes due to delays in development. Potential buyers should think about when to sell their home, and be prepared for delays in development.
The price agreed upon may be binding on the purchaser, regardless of future market values
In the future, real estate prices could fall. The purchaser could be required to purchase the unit at the agreed price if the pre-sale agreement is completed by the developer within the stipulated time.
Restrictions for Contract Assignments
It may be impossible to assign a pre-sale agreement depending on its terms or only with the consent of the developer. A substantial assignment fee may be required to be paid by the developer. A pre-sale contract is subject to the same risks as a new buyer. The terms of the assignment may dictate that if the contract is not completed, the new purchaser might not be eligible to collect any payments to the original purchaser. Additionally, the developer may not be entitled to any assignment fees paid by the initial purchaser.
Things to consider when assigning pre-sale contracts
Is it allowed to assign under a purchase contract? Assignments are not permitted in all contracts. Some contracts do not allow assignments. Others require developer consent and a large assignment fee.
Are you sure that the assignor meets all requirements for a valid assignment? What happens if the assignment agreement is not met or violated?
Before entering into an assignment agreement, have you sought advice from a lawyer?
Make an informed decision
Prospective purchasers who are considering entering into pre-sale agreements need to be aware of the potential risks. Consumers who experienced some of the problems described in this brochure have complained to the Office of the Superintendent of Real Estate. These issues should be considered before you sign a pre-sale agreement and while your unit is being built.
Independent Advice: The Importance of Independent Advice
Before entering into any pre-sale agreement, buyers should seek advice from a lawyer or licensed real estate agent. This brochure does not cover all the possible risks for anyone considering entering into a contract. Real estate agents and lawyers have a duty of care to their clients. It is important to get independent advice.