Pitfalls await early investors and homebuyers ready to sign pre-sale contracts. This post is the second in a 2-part series on pre-sales in Vancouver by real estate litigation lawyer, Arsen Krekovic. Buyers may encounter risks that may lead to disputes in their real estate contracts which may need resolution through legal remedies or even court action. Find out and be prepared to do your due diligence before risks overtake the rewards of pre-sales. (Read about the top 7 advantages to enjoy in this post)
The disadvantages of pre-sale contracts – in summary for real estate investors and homebuyers:
- Federal Tax: Pre-sale purchases often require buyers to pay a Goods and Services Tax (GST) on top of the purchase price, which is payable at completion. This additional tax can increase the overall cost of the property.
- Real Estate Market Fluctuation: Even Vancouver’s ever-rising real estate market is subject to fluctuations. Buyers entering pre-sale contracts may face risks if the market experiences a downturn between the time of purchase and completion. This can impact the profit potential and may require buyers to adjust their plans accordingly.
- Mortgage Approval: Buyers cannot secure a mortgage until the completion of the property. While pre-approval may be obtained, a final assessment is necessary upon completion. If the property’s value is lower than the purchase price at completion, buyers may need to cover the difference, posing financial challenges.
- No Guarantee of Profit: While pre-sales can offer opportunities for profit in a rising market, there is no guarantee that market conditions will remain favorable. Buyers must assess the risks and be prepared for potential fluctuations in property values.
- Purchasing Based on Floor Plans: Buying property based on pre-sale floor plans requires imagination and vision. Changes to the floor plan during construction may occur, leading to variations in the final product. Buyers need to understand the allowances for such variances and ensure they purchase from reputable developers to mitigate risks.
- Complexity of Contracts: Pre-sale contracts are lengthy and complex documents, often drafted in favor of the developer. Understanding the terms and conditions, including obligations and rights, requires legal expertise. Failure to comprehend the contract fully can lead to unforeseen risks and consequences for buyers.
When is it time to talk to a real estate litigation expert about the pre-sale?
(Read an earlier post on what can go wrong with pre-sale properties) - Potential for Project Delays or Cancellation: Pre-sale projects may face delays or even cancellations, leaving buyers in uncertain situations. Delays in construction or project abandonment can disrupt buyers’ plans and result in financial losses, including forfeiture of deposits.
- Limited Options for Exiting the Contract: Once the rescission period expires, buyers may have limited options for exiting the contract without penalties. Assigning the contract to another party or forfeiting the deposit may be possible but comes with challenges and additional costs. (Learn more about buyer protections in this post)
- Post-Completion Issues: After completion, buyers may encounter “growing pains” associated with new developments, such as the need to establish building culture, address security concerns, and adjust to rising strata fees. These issues can affect the overall experience of owning a pre-sale property.
Some of these disadvantages can be managed with good communication. (Read more on the risks and rewards here) So, despite these disadvantages, pre-sale purchases can still be attractive to buyers, especially in rising markets such as Vancouver’s. Also, pre-sales appeal to those with flexible timelines and investment objectives. However, thorough due diligence, legal review, and consideration of alternatives are essential to mitigate risks and make informed decisions.
If you have doubts or concerns about the pre-sale contract and purchase you are considering, reach out for a consultation with real estate litigation lawyer, Arsen Krekovic. As a lawyer with significant experience in both commercial dispute resolution as well as residential real estate litigation involving the intricacies of Vancouver real estate, he can offer a proper assessment of your situation.
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