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How to avoid pre-sale pitfalls

Blog by Ian Watt | April 27th, 2008

How to avoid pre-sale pitfalls: Learn about market and yourself
Difficulties are rare, diligent buying makes them rarer

Jenn Podmore Russell and Julia Smith, Special to Westcoast Homes
Published: Saturday, March 22, 2008

A few new-home projects in the Lower Mainland have run into difficulties recently, creating uncertainty for purchasers. The exposure of this portrays an industry-wide problem. The reality is some developers fail to complete their projects in our market.

However, a larger reality is that incompleted sales amount to a fraction of one per cent of all the new homes purchased during 2006 and 2007.

In those two years, more than 36,000 homes were sold before or during construction. Of those, more than 99.7 per cent have or will be completed without issue.

Greater Vancouver has some of the very best developers, big and small. Many of them have been building for generations and have worked through good times and bad.

While the real estate market is currently healthy and flourishing, there are still some basic principles buyers should follow to avoid falling into the less-than-one per-cent category of investing in a development that fails to complete

The first basic principle is to do your homework. Buying a place to live, whether it's a condo or single-family home, is the largest financial decision most of us will ever make.

Before purchasing, you should educate yourself on your potential new neighbourhood and the area's regional values.

You will also need to decipher your needs from your wants, and determine what you can afford and what threshold of risk you are comfortable with.

The reality is that risk will be prevalent in any housing decision you make.

Should you rent and risk the market moving up beyond your affordability?

Do you buy an older building and risk a large assessment?

Do you buy a home knowing that it will have to be renovated into something you like?

Do you buy a new place in light of the over-inflated presale uncertainty portrayed in the news media?

If you decide that a new development is what you want, what steps should you take before you put down your deposit?

The first thing any good realtor will tell you is to look at reputation. Researching reputation shouldn't be limited to the developer; it should also include the builder and the insurance company.

The good news is researching has never been easier.

Starting the process is simple: look online. For both the developer and builder, find out what projects they have worked on. Next, go and visit these buildings to see how they stand up over time.

During this visit, you may meet a resident who can attest to the pros and cons of living in the building. Realtors who have worked on these products before are also great resources for your research. They can offer insight into the building history and if their clients have been happy with their purchases in it.

Another approach is to survey friends and family and co-workers about what they have heard or what their experiences have been with various developers and builders.

You can, of course, go to exhaustive lengths while you are researching. The point is, you should only consider developers or builders with proven track records.

After you have selected a developer and builder, visit the building's sales centre to find out what they offer. It is important that you fully understand the terms.

Is the project completing when you want it to complete?

Does it meet your needs (not your wants)?

Do you understand the product offered?

Can you obtain a capped mortgage to secure today's rate for tomorrow's product? How much of a deposit do they want? Strangely enough, developers that ask for larger deposits are typically some of the most seasoned in the industry.

It is important to note that presale risk is not exclusive to the consumer. Developers require your deposits as a guarantee that you will honour the terms of the contract to completion. In fact, higher deposits are indications of developers trying to attract end-users and dissuade investors from their properties.

When looking to buy a home, it is vital to understand what the realities of the market are. Currently, developers are facing the same challenges as everyone else, such as labour shortages, cost overruns and long waits from the city.

However, in addition to those challenges, developers also face the rising cost of land.

Developers also endure a loss of confidence in the industry every time a development falls into receivership. Nobody aspires to go into receivership and it is not in the industry's best interest for this to happen.

In the real estate industry, nearly everybody is working with the consumer's best interest in mind because when the customer is happy, the

industry is healthy.

As B.C. continues on its positive economic path, the development industry will continue to deal with cost increases, lack of available land and labour shortages. Our market demands more homes to be built as more and more people are moving to the Lower Mainland. This demand continues to fuel the development industry.

To keep the industry healthy and minimize risks, developers need a certain percentage of presale homes. The reality is homes sold by presale serve as a vehicle to new development and developers need them to secure their financing. The cost of construction demands this.

While many tend to focus on the risk of presales, there are considerable benefits.

You are buying and will be living in a brand new place with new finishes.

You are buying tomorrow's product at today's price.

You are putting down a deposit today, which allows you to save for the next couple of years.

You are securing a mortgage today at today's rate for completion of a product up to 36 months away. This means if rates go up, your mortgage will be at a 2008 rate.

So what are the downfalls? For one, you can't "kick the tires" and see the suite until it's finished.

Two, you have to do your homework.

Three, you have to be patient; and four, you have to trust the group you have chosen to invest with.

When you look at the odds, the benefits currently outweigh possible risks.

After you have selected a unit and entered a contract, you have seven days for rescission.

This means you have seven days to do more due diligence by reading your disclosure statement, which tells you everything you could possibly ever want to know about the developer (completion dates, strata plans, developer promises to customer obligations).

The disclosure statement is filed with the British Columbia superintendent of real estate, an office of government under the provincial Real Estate Services Act and the Real Estate Development Marketing Act.

It isn't usual to take the disclosure statement to a lawyer or trusted adviser to review the documents during the seven-day rescission period.

It is important to note that when you buy a new home through the presale process, similar to purchasing a home on the multiple service listing, your deposit is placed In Trust, either with an agency or a legal office.

Deposits are placed in trust to give assurance to both parties of each of their commitment to the contract. If the contract is nullified for any reason, the deposit is directed to the injured party.

If the unthinkable does happen and you end up in the less than one per cent group, here's a Coles Notes version of some of the things you may experience. Since your deposit was placed In Trust, if the transaction is cancelled by the developer, your deposit will be returned.

If the development in placed under receivership, the court appoints a representative at the request of the creditor. It is the representative's job to try to safeguard against losses for the creditor. The appointed representatives will work to recoup costs for lenders, which ideally leads to completion of the building.

A development going into receivership doesn't automatically mean its purchasers will not get to their homes.

If you find yourself in this situation, the best thing for you to do is call a lawyer to seek advice and guidance through the process.

Occasionally developments are cancelled outright. There are a number of reasons why this can happen, ranging from issues that are out of a developer's control, like poor soil conditions to an inability to build and/or maintain costs.

If this happens, your money is returned and you need to decide if you want to start the process over again. Typically, a credible developer will assess these risks beforehand.

Developers do not aspire to get into these situations and they will do anything in their power to avoid it. Developers want to build homes for people, and want to be successful.

On the rare occasion that a development is cancelled or placed under receivership, all parties are merely trying to secure against losses and find the best resolution possible.

By researching the market, you can find comfort in the integrity of Vancouver's development industry and the developers, who continue to build, create and dream the future of our city.

The bottom line is that while risk will continue to exist in the purchase of presale condominiums, it is minimal and mitigating that risk, be it perceived or real, can be done through due diligence on the part of the consumer.

Jenn Podmore Russell is a principal with MPC Intelligence, which provided the Sophia new-home-project receiver with estimates of the value of the homes there today and when sold. Julia Smith is a writer and publicist with Peak Communicators.