If You're Thinking About Buying a Presale Condominium...

Everyone in Vancouver is by now aware that the real estate market has bounced back. We can see it in the hard, cold numbers produced by the REBGV every month. Prices are up, sales are up and inventory is down. We can also see evidence of the rebound in the media. It's hard to find a newspaper article that is pessimistic about the future of Vancouver real estate these days. One more sign indicating that Vancouver real estate is once again hot is the return of the Vancouver condo development presale.

As the real estate market spiraled downwards in early 2008, one Vancouver condo development after another was put on hold. Now that the market, and public confidence has returned these projects (Cosmo, V6A, Richards) and many new ones (The Mark, District, Social) have been coming back online. These projects are typically sold before construction begins (usually a financing requirement) in what are called presales.

In the Vancouver real estate boom of the 2000s there were thousands of investors that made lots of money purchasing presale condos. When buying a presale, you are not required to put all of the money up front. Usually, you are required to put down 10% - 20% of the purchase price in a series of payments. The full amount is only paid at closing which can be 2 - 3 years in the future. This allows you to place a bet on the Vancouver real estate market with a minimum cost.

In a rising market, this prescription is magic. Of course, if the market heads south then the investor can be on the hook for a condo that is worth much less than what was payed. This happened to large numbers of investors in 2008. They were willing to walk away from their investments, foregoing their deposits. Unfortunately, it's not that simple. As they had signed contracts committing them to fulfill the purchase, many developers were able to seek damages in court.

After the last couple of years, most investors have realized that buying presales is not without it's dangers. However, there are some additional risks that I have found most people to be unaware of.

One of the biggest risks is that you are buying something sight unseen. Yes, you may be able to view a display suite. However, developers usually use little tricks to make these spaces more appealing. For instance, ceiling heights will be higher and room sizes more spacious. They are also able to switch finishings such as appliances or flooring. So...what you see in the display suite may not be what you get in your finished home.

Additionally, you might not get the same unit that you are expecting. By law, the developer must deliver at least 97% of the square footage that they "sold" you at presale without having to compensate you. That means that the 600 sq ft condo must only be 582 sq ft for the developer to fulfill their legal obligation. If they deliver less than this, they must compensate you (if you notice).

Finishings, ceiling heights and square footages aren't the only things that can change. Layouts can also be altered. When you purchase a presale you will be able to view a floorplan of the suite you are purchasing. However, the developer can alter the floorplan prior to it being delivered. That means that you might not get the entry closet that you were expecting, or a den could completely disappear.

All of these changes can seriously affect the value and saleability of your investment. Does it make buying a presale condo a bad idea? No. There can certainly be advantages. However, it's a type of real estate investment that has it's own unique sets of risks. It's important that if you are considering purchasing a presale condo in Vancouver that you make your decision in full awareness of these risks.