A Guide to Purchasing Pre-Sale Listings in British Columbia: Condos, Townhomes, and Homes

Purchasing pre-sale listings is an attractive option for many prospective buyers looking to secure a property in a booming market like British Columbia. Pre-sale condos, townhomes, and homes offer benefits such as securing a property at today’s prices, often with the flexibility of a deposit structure and the advantage of a newly constructed property. However, the process comes with its intricacies that require thorough understanding and careful consideration, especially with legal and financial factors like flipping taxes, potential cost increases, and fine print in contracts.

This blog will explore the essential aspects of purchasing pre-sale properties in British Columbia, including key legal considerations, common risks, and tips for ensuring a smooth purchase process.

What is a Pre-Sale Property?

A pre-sale property is a home that is sold by a developer before it has been built or is completed. Buyers purchase based on architectural drawings, floor plans, and renderings, rather than seeing a physical property. This type of sale is common for new condo developments, townhomes, and some detached home projects.

Benefits of Buying Pre-Sale Properties

1. Securing a Property at Today’s Prices: Buyers can lock in the price of the property at the time of purchase, which can be advantageous in a rising real estate market.
2. Time to Save: Since the project completion is often many months or even years away, buyers have time to save for the down payment on their mortgage, as deposits are typically spread over several months or years.
3. Customization: Developers may allow some customization to finishes, giving buyers the ability to personalize their new home.
4. Brand-New Home: Buyers receive a property that is brand new, with modern amenities, energy-efficient appliances, and new home warranty from the developer.

However, purchasing pre-sale homes also comes with responsibilities and risks that every buyer should be aware of.

Legal Considerations for Pre-Sale Purchases in British Columbia

1. Contract of Purchase and Sale

One of the most crucial aspects of buying a pre-sale property is understanding the contract of purchase and sale. The contract outlines all the terms and conditions of the purchase, including the completion date, deposit schedule, and any adjustments to the final purchase price. It’s essential to thoroughly read and understand the fine print before signing.

In British Columbia, pre-sale contracts can be complex and filled with legal jargon. For instance, developers often include clauses that allow them to make changes to the size, layout, or even the pricing of the unit during construction. These changes may result in higher costs for the buyer, which is why it’s critical to be aware of such provisions.

Key Contract Clauses to Watch For:

• Assignment Clause: This determines whether the buyer can transfer their rights to another party before completion (commonly referred to as “flipping”). While some developers allow assignments, they often impose fees, and buyers need to adhere to specific regulations. 
• Completion Date: Pre-sale properties come with an estimated completion date, but delays are common. It’s important to know what your rights are if the completion is delayed.
• Additional Costs: Watch for clauses that mention potential cost increases, such as the cost of materials rising during construction. Buyers could face higher final purchase prices than expected.

2. Property Transfer Tax (PTT)

In British Columbia, buyers of pre-sale properties are subject to Property Transfer Tax (PTT). The tax is based on the fair market value of the property at the time of registration and is calculated as follows:

• 1% on the first $200,000
• 2% on the portion of the fair market value between $200,000 and $2,000,000
• 3% on the portion above $2,000,000
• An additional 2% on homes over $3,000,000

Buyers should be aware that PTT applies even if the property is purchased pre-sale and the value for tax purposes may be different than the contract price. However, first-time homebuyers may qualify for an exemption if the property is priced below a certain threshold.

Understanding Buyer Responsibilities: Fine Print and Cost Increases

1. Deposit Structure

Pre-sale buyers are required to make a deposit, often structured in phases. In British Columbia, deposits typically range from 10% to 25% of the total purchase price, with payments spread over several months or sometimes years. It’s essential to carefully review the deposit schedule in the contract, as missing a payment could lead to forfeiture of the property and any deposits previously paid.

2. Cost Escalation Clauses

A significant risk in pre-sale contracts is the possibility of cost increases. Many contracts include clauses that allow developers to pass on rising costs of construction materials, labor, or other expenses to the buyer. This can result in the buyer paying more than the initially agreed-upon price at completion.

To protect yourself, it’s advisable to:

• Negotiate a Cap: Where possible, negotiate a cap on how much the final price can increase due to unforeseen costs.
• Hire a Real Estate Lawyer: A lawyer experienced in pre-sale contracts can help identify and negotiate clauses that could be detrimental to the buyer.

3. GST on New Homes

In addition to the purchase price, buyers must pay the Goods and Services Tax (GST) on pre-sale properties. GST is 5% of the purchase price and applies to newly constructed homes. In some cases, buyers may be eligible for a partial GST rebate if the property is their primary residence and the price is below a certain threshold.

Flipping and Assignment Sales: Laws and Taxes

Flipping refers to buying a pre-sale property and selling it (or assigning the contract) before the property is completed. This can be a lucrative strategy in a hot real estate market, but buyers must understand the tax implications and legal restrictions.

1. Assignment Sales

An assignment sale occurs when the original buyer of a pre-sale property sells their contract to a new buyer before the completion date. In British Columbia, developers often allow assignments, but they typically charge assignment fees, which can range from 1% to 5% of the original purchase price.

2. Flipping Tax (Speculation and Vacancy Tax)

The Speculation and Vacancy Tax (SVT) was introduced in British Columbia to discourage property flipping and speculative buying. This tax targets properties that are left vacant for extended periods or are flipped for quick resale.

• Speculation Tax Rate: The tax applies at 0.5% to 2% of the property’s assessed value, depending on the owner’s residency status and whether the property is used as a principal residence or rental.

3. Income Tax on Flipping

Flipping a pre-sale property can result in significant income tax obligations. The Canadian Revenue Agency (CRA) views profits from flipping as business income, meaning that any profits from the sale are fully taxable as income rather than capital gains. This can significantly affect the financial benefit of flipping a property, as business income is taxed at a higher rate.

Potential Risks of Pre-Sale Purchases

1. Completion Delays

Construction delays are common in pre-sale developments, and while most contracts have a specified completion date, developers are often allowed some flexibility. Delays can range from a few months to years, affecting your plans for moving in or renting out the property. Always account for possible delays when purchasing a pre-sale property.

2. Market Changes

While pre-sale properties allow buyers to lock in prices at today’s rates, there is always a risk that the market will change before the property is completed. If property values decline, you could be left paying more for your property than its current market value at the time of completion.

3. Developer Bankruptcy

Though rare, there is a risk that the developer could go bankrupt before completing the project. This could leave buyers with a lengthy legal battle to reclaim deposits and may result in the project being delayed or canceled entirely. Always ensure that the developer has a solid reputation and financial backing before signing a pre-sale contract and make sure your deposit is protected.

Conclusion: The Importance of Due Diligence

Purchasing a pre-sale condo, townhome, or home in British Columbia is a significant investment that offers many advantages, but it also comes with risks and responsibilities. Understanding the legal framework, reading the fine print, and being aware of potential cost increases can help protect buyers from unpleasant surprises.

To navigate the complexities of pre-sale purchases, it’s recommended to work with an experienced real estate agent, such as those at Nest Real Estate Group, and a qualified real estate lawyer. Doing so ensures that you are fully informed about your rights and responsibilities, helping you make a sound investment decision in BC’s ever-evolving real estate market.