When it comes to purchasing a home, a lot of us want the newest and most updated features possible – right from the start. Brand new properties called presales are sold prior to the home being completed, or sometimes even before starting construction. This can take multiple years from purchase to move-in day and comes with some unique risks for the purchaser. From qualifications to upgrades, here is what you need to know when purchasing a presale home.
Mortgage Qualifications with Presales
You will not only need to qualify for a mortgage when you put in your offer, but you will have to qualify again just before the home is completed. Mortgage rates are only held for 120 days, and if the construction of your home is two years away, this can easily stress out any home buyer, especially in a market of increasing rates. After you have received your completion letter from the developer, you would re-qualify for your mortgage. Key things to consider in re-qualifying are:
- Did you take on additional debt over that time?
- Did you switch jobs and have a change in income?
- Have you completed your work probation?
- Are you still going to be with your spouse, if purchasing together?
All of these factors can change how you would re-qualify for a mortgage, and most of us don’t plan our lives two years in advance.
Costs and Down Payment
When you have a presale home, the developer will typically want a down payment of approximately 20%, but some developers require more than this and may also require multiple “draws”. A draw refers to the developer requesting a portion of funds or down payment on the property. For example, a developer could require three draws over the course of the two-year period in the amount of 10% of the purchase price each time. This can be a large amount for some owners, so it’s essential to ensure you find out the specific draw amounts and timing required before you sign.
With purchasing a presale home, you have the option to add “upgrades”, which would be any personalization you want to add to the home. These can be features such as hardwood floors, under-tile heating, or even an extra set of pod lights in the kitchen. All of the upgrades are added into the cost, typically prior to the first draw. Upgrades are added into the total value of your home, and you might have to top up your down payment if you have already given a draw. The other cost to consider will be your GST cost at the time of closing. Only new homes are subject to paying GST, which is paid via a lawyer/notary at closing.
Valuation of a Presale
The value of your property can swing in either direction – good or bad. You can’t predict what will happen with the housing market, but you can pick a safe neighbourhood in areas that have been developing or “growing”.
On the good side, you could end up with an appraisal at the time of purchase showing your unit is already worth more than you paid for it – instant equity! On the other hand, the downside would be if the value of the home isn’t what you have paid, and is actually lower. In the latter case, the bank would only lend on the current market value of the home. For example, if you purchased for $500,000 but the appraisal came in at $450,000, the lender may only lend the lower amount and require you finance the discrepancy via your own funds.
When purchasing a new or presale home, it is always suggested you do your due diligence and make a plan for two years out, and also plan for extra costs, which can occur. At the end of the day, if you can manage the risks and the stress of a new build, you could be moving into your dream home – built with exact modifications to make it your perfect property!