Free avocado toast for a year, mortgage coverage for six months, $30,000 decorating credit…these are some of the incentives developers have been offering potential homebuyers to purchase their pre-builds as sales continue to slow across Greater Vancouver. While these incentives make for intriguing headlines, the real story people should be paying attention to is the issues around the purchase on these developments once they are complete.
What is Happening
Remember a few years ago when people would lineup days before units in a new pre-build development were set to become available for sale? Well, many of those eager buyers now have their purchases coming up to completion. While most people will be able to close on their properties thanks to proper planning and budgeting, some don’t have the money or financing in place to do the same.
People may have purchased years ago, planning to move into these homes or rent them out, thinking they would easily qualify for a mortgage on the property down the road. However, with the introduction of the stress test over recent years, mortgage qualifying has become more restrictive – qualifying for 20% less now – making qualifying for the mortgage amount needed, harder for many pre-build buyers.
Meanwhile, many speculators who were looking to turn a quick profit during the hot real estate market are in even worse positions. These speculators would purchase a property by putting down 10-20% of the purchase price – hoping the property value would increase so they could “assign” their contract (sell their prebuild contract to another buyer) for a profit prior to completion to avoid coming up with the additional 80-90% of the purchase price. However, many of these speculators are losing their profit potential, forcing them to assign their contracts for a loss or, even worse, to walk away from their purchase altogether and losing their deposit.
Because of slower sales, developers still trying to sell units in a building don’t want numerous buyers trying to assign their contract at a reduced price close to completion of the property as it will affect their sale prices. Additionally, they don’t want to have to deal with multiple assignments during the final stretch of the construction process. Many of the contracts are written such that the developer has to approve a buyer selling their unit on assignment and we are now seeing developers denying “assignment” requests. So, if you put a deposit down years ago to purchase the property, you cannot assign your contract to someone else and have to complete the purchase.
Buyers not able to qualify for a traditional mortgage and those not able to assign the purchase contract prior to completion, have to resort to alternative financing which come with fees and higher interest rates. In some cases, people walk away from the purchase altogether and forego their initial deposit.
What to Do
Here are some quick tips to keep in mind when buying a pre-build:
- Sign up for developer’s financing offers if available at time of writing the contract.
- Developers often partner with banks so clients can qualify for a mortgage years ahead of completion - at a higher rate. These offers usually allow you to opt out prior to completion but provide a safety net in case you have issues with qualifying for a mortgage at completion.
- Purchase from a well-known developer.
- These developers typically have deeper pockets which allows them to continue to build during slow economic times. Additionally, they usually are accommodating with their homebuyers as they want to maintain their good brand image/reputation.
- Have a contingency plan – be prepared to close on the property.
- A lot can change while your pre-build is being constructed, it’s important to have extra money put away, available assistance from family, or another plan in place in case you can’t close on the property or assign it prior to completion.
- Discuss financing with your mortgage professional at least one year prior to completion.
- As seen with the stress test, one policy change can drastically alter your financing power. Consult your mortgage professional at least a year in advance to provide time for any necessary steps to make sure you qualify for a mortgage.
As always, please feel free to reach out with any financing related questions you may have.