Most people are aware of the more traditional methods of real estate investment, but there is still a bit of a shroud of mystery behind pre-sale condos, which are very popular investments in Vancouver. They (along with real estate in general) can often receive a bad reputation due to buzzwords in the media such as “shadow flipping” which could happen with any property but even easier with pre-sale properties, as well as the stories about how pre-sale investors have been able to evade taxes on the gains from the sale of the properties, due to there previously being no mechanism in place to track such transactions. However, pre-sale condos are great for investment, and they can also be ideal if you just want a new home to live in and want to buy a place for tomorrow at “today’s prices”.
What are pre-sale condos
Pre-sale condos (I am saying condos because that is the most popular pre-sale real estate in Vancouver, but it could be pre-sale townhouses or even pre-sale detached houses) are real estate developments that are “pre-sold” to buyers, meaning that they are sold before the property has been built, and in many cases before it has started being built. They will sell them at a price that they feel they can afford to sell a target number of properties at, and over the years has proven to be a strong investment for many buyers as they have a strong track record of appreciation between the purchase of the property from the developer and the completion of the project.
If pre-sale condos have such a great track record, why don’t developers sell them when the building is complete?
This is a logical question to ask. The issue with it comes down to the financing of the project. In order to provide a mortgage lender with assurances that the project is viable and that the mortgage lender will get their investment back in a reasonable timeframe, they ask for proof that the project can sell, which is what pre-sales provide. You might think that it is to help raise capital for the project, but this is not how it is practiced, as the purchaser of the pre-sale would have their deposit held in trust with a lawyer. This provides the pre-sale investor/purchaser with peace of mind that their investment in the purchase is safe, as the developer cannot access those funds directly.
What are the benefits of buying a pre-sale condo?
Appreciation in value
When you buy a pre-sale condo, you are buying at a price that you would expect would be based on a price somewhere between today’s price and what the price at completion will be. It is still speculation, but it has generally been a pretty strong bet that if you buy a pre-sale today, that in 3-4 years down the road when the project is complete, that it will have a greater value than you bought it for.
Leverage without borrowing
When you buy a pre-sale, most projects will require you to put 20% of the purchase price down on the unit, but not all at once. They usually have a schedule where you would put 5% down, then another 5% at a later time, and so on until you would have made the full 20% payment. The amounts and schedule of payments vary from project to project, and I have seen developments that only require 5% down in total. It is important to be sure that you have this money available for when it is needed, but the main point is that you are buying 100% of the appreciation in value of the property over 3-4 years with only 20% of the price, and without any need to obtain a mortgage approval until the property is complete, which saves you money and cashflow compared to purchasing regular real estate that has already been built.
Saving on taxes
There are other taxes besides income tax to consider when buying real estate in Vancouver. First, you have the property transfer tax if you are not exempt from it as a first-time home buyer if you are buying a non-pre-sale. With pre-sales, the tax is exempt up to $750,000, if you choose to complete on the purchase of the unit. If you were to sell the pre-sale to someone else before the completion of the pre-sale (this is called a pre-sale assignment), even if the price was over $750,000, you would not have to pay the tax on that.
There is no property tax on the pre-sale while it is being built either, and while this is obvious, it is something you would have to pay if you purchased traditional real estate.
When a pre-sale development is complete, GST also becomes due on the purchase price, which is 5% of the property’s purchase price. If you do a pre-sale assignment before the completion of the project, then the GST liability also passes on to the new buyer.
I am not an accountant or tax lawyer, but typically, an investment that is held for more than a year is also eligible to be treated as a capital gain. This means that you are only needing to pay capital gains tax on 50% of the profit, which is a much lower tax rate than regular income would be.
Mortgage financing not required
You cannot get a mortgage on a pre-sale unit when you buy the pre-sale, and if you do a pre-sale assignment, you do not need to obtain any mortgage financing as it will be out of your ownership before the completion of the project. If you do complete on the purchase at the completion of the project, then you would either have to come up with the remainder of the purchase price or obtain a mortgage. I know a mortgage broker who can help though, and if the property needs to be valued at the value of the property at completion instead of the purchase price, the mortgage broker I know has at least one lender who can do this.
I mentioned pre-sale assignments above. This is how you cash in on your pre-sale condo in the easiest and best possible manner. Most developers in B.C. will allow the assignment of a pre-sale, although there may be some kind of fee involved that is payable to the developer to do so. When you assign the purchase contract to another buyer, they pay you the amount that you invested in the project (your 20% as an example) PLUS the difference of the purchase price that was agreed upon, which is often called the lift. The lift is your profit. The only expenses to this transaction are Realtor® and legal fees. Pre-sales can be assigned at any time, but it often makes the most sense to do it as the completion date is approaching, as typically the buyer will have an intention to own the property at that time and they can qualify for mortgage financing and purchase with confidence.
20% down is a lot of money?
This is a strategy that is definitely not for everyone. However, sometimes there are possibilities that one has not thought of that can make such a plan possible. A young person buying their own home may have family that can help, or you might have equity in your home that you can use. If you like the idea of doing a pre-sale but need direction, we can definitely discuss this and I can help point you in the right direction.
I can help you with buying pre-sale condos
My job as a Realtor® is to represent your best interests in helping you to buy or sell your pre-sale condo. Whether you have a project already in mind to buy, or would like me to help you find one that meets your requirements, I am here for my clients every step of the way, including helping you navigate any pitfalls which can present themselves with pre-sales. I also have associations with groups that allow me earlier access to a development and sometimes provide further discounts on certain projects. Beyond what I say I can do, I endeavour to be honest and forthright in general, and will make a strong effort to look out for your best interests as my client. Please give me a call if you have any questions, I look forward to hearing from you.