If you are looking for a condo in Vancouver, you will have two choices upfront: should you buy presale or resale? This week Adam & Matt tackle this question head on with 7 reasons why buying pre-construction in 2019 might be a HUGE mistake with major consequences to your bottom line! Also, don’t miss 4 bonus tips for how you can get the best deal possible in the resale market! This episode will save you money. Level up!
Vancouver Real Estate News, Market Updates, Insider Tips, Stats, & Analysis
There is no guest today – Adam and Matt will be talking about what buyers should consider in the current Vancouver market when deciding to purchase a Presale or a Resale property.
Presale – brand new construction that has not been built yet, purchased on spec, normally 3-4 year turn around from when you purchase to when you receive the keys.
Resale – already built properties that are for sale by the previous owner.
Here are 7 Pro-Tips why Adam and Matt feel that buyers should purchase Resale Properties in the current real estate market in Vancouver:
A common misconception is that Presale properties are less expensive than new built properties because you are buying on spec and must wait until the property is built to move in. Actually, Presale properties are more expensive than Resale properties. As of the last quarter of 2018, prices on Presale homes in greater Vancouver are approx. 25-30% higher than Resale properties in the same neighborhood. This is true in markets like West Vancouver, Burnaby and New Westminster.
There is a huge premium to have brand new, similar to a new car. Save money by purchasing a Resale property.
#2 Ability to Negotiate:
Presales are normally built by large developers with deep pockets. Real Estate is their business and they employ professional negotiators, professional economists and sales people.
Resale properties are generally sold by the average public who do not have the same resources as developers and have different circumstances and motivations for wanting to sell. Death, divorce, relocation, family expansion, new jobs – these are things that motivate regular people to move through the market.
If had to choose who you would rather negotiate with to get a deal on real estate, you would choose the regular person every time.
# Fewer costs on completion if buying Resale :
To illustrate the different costs applicable when purchasing a property, lets compare if you pay $800,000 for a property in the Resale market or $800,000 for a property in the Presale Market.
Both properties require the buyer to pay Property Transfer Tax and Notary Fees, so that is a wash.
On Presale Construction, 5% GST is applicable. GST is not applicable if buying Resale. The GST paid on an $800,000 Presale property is $40,000. This is a large sum of money that is not required to be paid if you purchase a Resale property.
Although it is not normally the developer’s fault, Presale projects are often delayed. Projects often run late (6mths – 12mths) due to long delays for building permits, lack of skilled labour, other unforeseen issues.
If you have paid a 20% deposit on a $800,000 Presale, this money is not accessible to you while you are waiting for the building to be built. This results in lost opportunity costs as the money could have been invested to earn you a return (GIC’s, Stock Market).
#4 Managing Risks:
If you buy a Resale property, typically, you take possession in 1-3 months.
During this period, people lock in their mortgage rate, get an appraisal for the property, familiarize themselves with the current rental market, government and strata policies.
Rates can normally be locked by the bank for 90-120 days. If you are purchasing Resale, you will have predictable costs. With Presale, you have exposure to interest rate increases as you will not be obtaining your mortgage until the property is built.
If you have an appraisal done on a built property, you know the appraisal value immediately. With a presale property, the appraisal is done when the building is complete. You have to ensure you have estimated the value correctly or you will have to make up any difference in the value of the building vs the value of your mortgage.
If you are buying a Resale today, you know the current rents in the area and can effectively manage costs. If you are buying a Presale that completes in 3-4 years, the rents may be uncertain. Generally, rents do not decrease, but there could be policy changes like a crack down on Air BnB or the building Strata changing the policy on rental units. These changes can have an affect on your rental income.
If you bought a Presale in 2016 that completes in 2019, you have experienced the following policy changes: Foreign buyer tax, crack down on Air BnB rentals, empty homes tax, mortgage stress tests, interest rates hikes and the new speculation tax.
Resale allows you to know the rules of the game when you purchase the home.
#5 Start Building Equity:
People purchasing Presale Properties make money on price appreciation – which is not always guaranteed.
If you buy a Resale Property and rent to a tenant, you can have your tenant effectively paying down the mortgage on your unit from the day you take possession of the property.
On an $800,000 condo, the owner of the Resale option would have approx. 4 years to build equity while the Presale owner is waiting to receive the keys to their unit. Assuming an interest rate of 3.5% over 4 years, mortgage payments will be approximately $150,000, with approximately $70,000 being paid to the principal. This means that the Resale owner will have guaranteed equity of $70,000 while the Presale owner is still only betting on market appreciation.
#6 View Before You Buy:
Although most people are happy with their Presale unit when they get the keys, there is often things they didn’t account for: a transformer close to the window, hallways are not as wide as you expected, parking spot has a big exhaust vent above it, living room is too tight to the kitchen island.
When you buy Resale, you get to spent time in the unit, view the parking, take measurements, tap the finishes and see the quality of the construction. This is worth something.
#7 Buy in an Established Building:
Presale Buildings need to build the Strata Council from the ground up and develop the building culture. These things are unknown when you purchase.
If you purchase in a Resale Building, you can review the strata docs before buying to determine the culture, how the strata approaches issues, how often the strata meet, bylaws, and proven operating budgets. This gives you piece of mind and allows you to determine if this building works for you.
Also – 4 Bonus Tips:
In addition to the 7 Pro-Tips above, here are 4 bonus tips for people looking to purchase in the Resale Market:
- Learn to love no photos – listings with no photos will most likely be ignored by 60%-70% of people clicking through real estate listings. No photos does not always mean that the property is not worth looking at. There may be opportunities for deals here as there are many less buyers to compete with.
- Buy Newer – preferably in the last 5 – 10 years. Buildings under 10 years old are still under warranty. Most of the systems in the building have an economic life from 15-40 years. This allows you to have a lot of time to live in the building before the major repairs will be needed. This also gives time for the strata to build a proper contingency fund. Generally, if you buy in a newer building you don’t have to worry about leaky condos – as the rain screen regulations were in effect when built.
- Buy in a larger strata – unit entitlement matters. Unit entitlement is the portion of the building you own as an individual owner. You are required to pay your share of building repairs based on your unit entitlement. If you purchase a 500 sq.ft. condo in a large building vs a smaller building, you will generally have lower repair and maintenance costs in the larger building, as your unit will be a much smaller share of the building in a large complex.
- Believe the Hype! – If a large developer is building a presale building in an up and coming area, they will be spending a large amount of money to promote the area. This marketing push will attract people and businesses to the area. If you buy a Resale property in the same area as a new Presale development, you can expect a more livable neighborhood and you should also see price increases to your property that coincide with the new development. The rising tide raises all boats!