We're back for episode 12!

Today we talk about presale properties and investments. We talk about everything from owner occupied properties, key considerations, and what happens with payments and GST. This episode is packed with information.

WHAT IS A PRESALE?

Essentially , this is a property that's in it's pre-construction stage. In most cases, the house is not yet built. What's the difference between a presale and a new build? A new build has a physical house already made. With a presale, sometimes the land hasn't even been cleared yet.

WHY DO PEOPLE BUY PRESALE?

There is great potential for appreciation with a presale. Because you're typically waiting 18-24 months, there's time for the value to go up by the time its ready to move in. We generally see a 2% increase every year. 5% down to secure it makes a good return on downpayment alone. Another reason is when you can't qualify right now but have an 18 month runway to build that. Owning a second property, you may not be prepared now, but a presale allows you sufficient time, in most cases, to get your finances in order.

example: We have a client who's been laid off but has no doubt he will be back to work. He bought a pre sale as an opportunity to invest now.

Buying a presale, you also have more options for interior finishing. This allows you to create the house to your liking. This can include style of cabinets or carpet vs flooring. This also plays into investing as certain style prove more valuable in resale.

There is a lot of planning that goes into buying a presale property. You need to make sure you close on the property or face the risk of losing your deposit.

At Thrive, we do a full on approval to make sure you will qualify. If you do qualify, you need to keep that top of mind within the next 12-24 months. Things to avoid include switching to a personal business as a form of income, financing a new vehicle, or missing credit card payments. You need to actively communicate with your mortgage broker during this waiting process. We can run the numbers to make sure any decision you make will work. Most lenders wont give an approval outside of 124 days from completion. There are a few that do 18-24 motnhs approvals. With most lenders, you wont be able to lock in final interest rate until 124 days out. Another important note is to not remove subjects until you've had a thorough plan made with a mortgage broker.

While waiting for a presale to finish completion, guidelines may change and property values can decline. What happens if you review your file with a bank and in two years the guidelines change and no longer allow rental income? What are your options? Should you use your home equity? We recommend always looking at using you existing property. This can help you cover the difference in the new property.

When appraisals come in lower than what you bought it for, the banks will take the lower of the purchase price and the appraised value. If purchase is $450,000 and appraised is $500,000 then you will need to come up with the extra $50,000. You have to cover the difference. If you're required to put down a 20% downpayment, you will be putting 20% on $450,000 and making difference up with cash. Its a scenario people need to think about because nobody knows what will happen. If you can position as an owner occupied property, you can put as little as 5-10% down. If it's an investment, you will need the 20% down.

Thrive can help you work through some of the unique programs that are available to cover these costs right through the mortgage.

BUYING SIGHT UNSEEN

Buying sight unseen doesn't always mean that's what you are getting. Some aspects may change such as the layout. This is something to be prepared for. Delays can also occur. The warranty factor is a good consideration as construction quality at times can be rushed. Poor construction is something you can protect yourself from. Condo construction is very different from townhomes. Most builder's either construct one or the other. It's good to make sure the builder has built this type of product before. Even with a warranty you don't want people to come in to fix one deficiency after another.

Another important piece to note is that some contracts have the ability to delay up to 10 years. You should thoroughly read the contract in order to catch something like that. It's there to protect the builder but is still something you need to watch out for. A lot of the neighbourhoods where you are buying will change. Pay attention to what will happen in that area. A presale are a long-term investment, so it's wise to make sure everything is in order.

BENEFITS

Nobody has ever lived in this property. Theres no dents, it's fresh, and there's brand new appliances. All this can be very appealing when reselling. Buying something brand new theres very low maintenance. Even though you have a warranty, most likely you wont need to use it and if you do, you have piece of mind it will be solved. When the property value goes up, people bank on that. Its a long-term play.

GST

You pay GST on top of the purchase price. Most times when you buy a pre-construction property, when you put down your deposit, thats not based on total purchase price. Thats based on price before negotiated GST. Once complete, your final mortgage and downpayment will be based on price including GST. The value has to support the purchase price plus GST. There's a lot of confusion around property transfer tax rebate. If you are a first-time home buyer and the purchase price is under $750,000, you are eligible to have zero property transfer tax. If buying as a first property, it has to be owner occupied.

NET GST REBATE

New homebuyers can apply for a rebate up to 36% of tax if purchase price is $350,000 or less. There is another partial rebate available for between $350,000-$450,000. This rebate is something you want to double check with your lawyer and accountant. If buying for yourself, you're eligible to waive property transfer tax when compared to owner occupied that is a resale. This applies to values up to $750,000 with a sliding scale.

SHOULD YOU USE A REALTOR FOR A PRESALE?

YES, you should use a realtor. Not just any realtor, use one with experience with development properties. When you are buying you don't pay the realtor a dime. They're working for you but get paid from the sales side. Their knowledge could get you a better suggestion on an investing. A property sales center will only tell you that their property is the one to go with. Realtors know their way around the contracts. A lot of pitfalls can be mitigated by working with a professional who knows these types of properties. They should be working with you up until closing.

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