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episode # 230

Major Mistakes Presale Buyers Continue to Make with Layne Hellrung

Everyone knows someone who has made a fortune in Vancouver’s presale (new condo) market. But what are the costly mistakes you never hear about? Today, Litigator Layne Hellrung sits down with Adam and Matt to talk about the tribulations and actual trials that he deals with day in and day out. Jam-packed with useful information and case studies, this episode will elevate your understanding of new construction and potentially save you thousands of dollars. Thinking of buying a presale condo? Listen to this episode FIRST!

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Episode Summary


 

*disclaimer: the information contained below and in the companion audio podcast are intended solely as legal information for personal use and should not be considered legal advice*

 

Who is Layne Hellrung?

Layne is a Litigator at Cassels Brock & Blackwell LLP. His legal practice focuses on business and real estate litigation. He is usually engaged by clients when there is a problem or when there is a risk assessment needed about a potential problem in a real estate transaction. A lot of his work is performed in court to settle disputes. What people may be surprised by in real estate litigation is that you may have rights on paper but enforcing those rights under the law is sometimes a very expensive process.

 

What is a Presale Contract?

A presale contract is a contract where a purchaser receives the right to purchase a development unit from a developer when the development is completed. This contract can be entered into months or even years before the completion of the construction phase of the development. These contracts can be long and sometimes hard to interpret. They are drafted this way by the developer because the building of a condo development may have a lot of unknowns. The contract is meant to address as many unknowns as possible to cover the period between the sale of the unit to the purchaser and the eventual completion of the project.

The contracts are fair to both parties as long as the purchaser reads and understands the contract. Problems may arise when the purchaser has not read or understood the contract and does not understand the risks associated with the contract and what they are getting. The reality is that there are some key things that purchasers can look for in these contracts to protect themselves and ensure they understand what they have contracted to purchase. Today we will look at 7 tips for purchasers of a presale contract.

 

#1 – Understand what you are buying, a contractual interest

There is a difference between a presale contract and a standard form purchase and sale agreement for a property that is already built. When you have a standard purchase and sale agreement for a built property and the deal falls apart, there is the option of one party to sue to get that deal to happen, called specific performance. When you are dealing with a presale contract, you have a contractual right to purchase the property. Before it is built, the deal hasn’t happened yet. Under a presale, if the deal falls apart, what you are suing for is a claim for damages only, based on any market increases during the interim.

Purchasers may also not be able to complete on a project. For example, a purchaser enters into a presale contract to purchase something for $1,000,000 in 2 years and you put down 10% ($100,000) as a deposit. Something changes in your financial situation during those 2 years and you are unable to purchase the project when it is completed. If you walk away from this deal, you will forfeit your deposit. Also, there is a possibility of damages. If the developer cannot sell that same unit for $1,000,000 and can only sell it for $850,000. The purchaser would also be on the hook to make up the additional $150,000 in damages. Under this example, the purchaser is out $250,000 because they lost their job or something similar, with nothing to show for it.

The timeline of a presale can provide fantastic leverage for your money, but there are also considerations, as above, that can affect you as well if things do not go your way.

Here are some things you can do to protect yourself:

  • Read the documents
  • Have your own realtor, independent of the developer
  • All contracts have a 7-day rescission period, which people can go over with a lawyer if they have any concerns, and back out of the deal before the end of this period, if needed
  • Research the developer and their reputation

 

#2 – The project may not complete on time

A presale contact will normally have an estimated completion date and an outside completion date. The estimated completion date is the date you can expect the project to be completed if everything runs smoothly. The outside completion date is the date that the project can be extended up to if the developer runs into unforeseen issues.

People should be cautioned in buying a presale if they have a strict move in date that they need to adhere to. The estimate completion date should not be relayed on for strict deadlines in people’s lives as there are often unforeseen issues over a 2-3 year construction period.

The developer has to disclose on a continuous basis changes in material facts of the development. If this disclosure if not made, the purchaser has the option to sue for damages, be it a couple of months rent or other costs. Costs may need to be significant before this legal route is pursued, as litigation is also costly.

It is also worth mentioning that the developer only needs to provide a 10-day notice of completion for a project. Purchasers need to ensure they are ready to obtain financing and take possession of a completed presale development within a short timeline. You should take steps to ensure you are prepared for when you expect the project to complete, like reading your mail and getting preapproved for a mortgage.

 

#3 – What you get might be different from what you ordered

Some presale projects have short timelines for the pre-closing inspection. Sometimes, you won’t have enough time to do anything about any changes in the property. If you expected X and you actually get Y, what can you do about it? Normally, the presale contract has provided the developer the option to change the size, the layout and the finishings of the project. This means that the completed unit might not look exactly the same as the show unit you viewed 2 or 3 years ago.

If you have engaged your own lawyer, you may be able to claim for damages if what is delivered deviates from the contract. As discussed, the contract normally provides a bit of wiggle room for the developer on what the completed development looks like. If the deviations are outside of what is stipulated in the contract, the purchaser may be able to sue for damages. Also, litigation can be costly, and a purchaser would need to determine if the deviations are worth pursuing.

The takeaway here is that the finished product may be slightly different than what was expected and people need to be prepared for that.

 

#4 – In rare cases, the project is never completed

This is unlikely, but it can happen, and purchasers need to be aware of this possibility. There are examples of developers cancelling presale projects in the past where purchasers have joined together to sue the developer for damages (ie. the uplift in prices over the 2-3 year construction timeline). In this case, the purchaser might get some money for the cancelled project, but what they are really out is that they will never get to own that unit.

A purchaser may have put down a significant deposit and waited for 2-3 years for a unit they were planning to move into. If the project is cancelled, the purchaser doesn’t get the unit, they also have all of this lost time and they need to start the whole process over again. This is a worst-case scenario, but purchasers need to be informed that this is an unlikely risk of purchasing a presale development.

 

#5 – There are restrictions on getting out of the contract

A problem often arises because people love the marketing materials and the photos, but they have not paid attention to the purchase and sale agreement and the disclosure statement. They decide they want to get out of the contract but find they cannot.

As discussed above, you have a 7-day recission period to walk away from the contract. You can easily walk away from the contact within this period. After this period is over, people may need to look at an Assignment to get out of the contract. Assignments generally happen in two ways, people assigning a personal contract to their wholly owned company (which are generally easy), and people who cannot complete on the contract that want to sell it to another party that can complete.

Assignments where people are selling a contract to a 3rd party are generally challenging:

  • You need developers consent to assign a contract
  • Certain developers limit how you market an assignment to potential buyers (you cannot use the developer’s name, cannot use the building address, it cannot be marketed on MLS)
  • The developer often wants an assignment fee based on a % of the sale price of an assignment

Generally, if you have entered into a good deal, you can get out of it via an Assignment. If you have entered into a bad deal that nobody wants, you may have a tough time getting out of it.

The big take away for people is that if they have passed the 7-day recission period, they should be prepared to complete on a project. They can try to assign the property or walk away from their deposit to get out of the deal, but these options are not always ideal and shouldn’t be looked at as viable termination options when considering entering into the contract originally.

 

#6 – Expect some growing pains, post completion

The upside to buying a presale is that you get something new. New properties shouldn’t have many problems and you also get a the 2-5-10 warranty if you run into any problems. Generally, you can expect some growing pains in the first year or two of owning a new condo property.

Some examples:

  • A strata needs to be started for the building and the building culture needs to be established
  • new properties could experience a break-in that results in the security system needing to be upgraded.
  • Strata fees rarely stay at the rate of what the developer originally sets them at and can increase significantly in the short term to ensure all the operating costs are covered, including increased insurance deductibles for water

People just need to be aware of these growing pains associated with a new development and not be caught off guard when they encounter them.

 

#7 – A presale is a fantastic purchase in the right circumstances

Presales in a rising market can be an amazing investment for purchasers. Presale contacts generally require a deposit of between 10%-20% of the purchase price to enter into the contract. If the market is rising through the construction period of 2-3 years, the purchaser can be building equity for a small percentage of the eventual purchase price. For example, if you put down 20% on a $1,000,000 condo and the market goes up 10% over the construction period, the purchaser is making a 50% return on their deposit ($100,000 profit for $200,000 down).

People should be cautioned that the market isn’t always going up in the short term and your money may be better spent on a built property, paying down your mortgage, avoiding the 5% GST on new construction, and having a place to live immediately. All options should be considered.

There are two situations where a presale purchase makes the most sense. One, if you have a flexible and solid personal situation that can deal with the odd hiccup before the project completes or, two, if you are an investor and this isn’t your primary residence. These situations make presales a great option to consider.

 

Find out more about Layne Hellrung.

 

 

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