Posted August 31, 2023 | by Keaton Bessey, Managing Broker
With much of the new development in Greater Vancouver being purchased by Landlords or "expected" end users who then become an "accidental" Landlord, we are getting bombarded with homeowners who assume what they know about pre-sales and then experience another once their closing dates are set and its time to officially purchase.
There are nearly 16,000 realtors in Greater Vancouver so we're not going to spend this blog post to try to sell you on pre-sales, rather the opposite. Below we'll work through the disadvantages of a pre-sale condo as an investment property to help you better understand what you're getting in to:
- Deficiency Inspection
- Glut of Competition
- 1st Year
After you've paid your deposit(s) to secure the property and waited 2-5-10 years (we'll use this later on when talking about the warranty) for the new development to be completed, you will generally get a notification about 6-8 weeks prior to your closing date about a deficiency inspection. This inspection takes place while the developer still owns the property and it is your chance to take a look at the unit prior to closing to raise any concerns you have with the current condition as the developer is suggesting it is basically ready for closing.
Also, to get a jump on marketing, we always suggest to take professional photos at the deficiency inspection before you own the property.
Generally, with good developers--and you only know this once you've bought from them--there are very minor cosmetic issues with the unit which they can easily repair before closing: paint scratches, poorly installed flooring, trim issues, minor adjustments on doors, etc. Sometimes, you will arrive to this inspection and things as obvious as--there are no blinds?, where is the fridge? what are all these paint cans doing on the balcony? These would be red flags at this point no matter how reassuring the developer is about these things being resolved prior to closing. If these are out of place at the deficiency inspection, they should not have scheduled the appointment in the first place.
Make sure you report all the deficiencies to the developer noted on your deficiency inspection.
Around the date of your deficiency inspection, you'll get a notice from the developer about your closing date. This often has suggestions about which lender or mortgage broker to contact, etc. It is generally 4-6 weeks away from closing at this point, and you should have already be more than ready to setup lending terms at this phase. Do not wait until this point to get your lending in order as this can cause significant issues and stress for you. The most sophisticated purchasers are working with their lender to lock in rates when the commit to the purchase at pre-sale--years in advance--of closing. These are optional terms, but covers the buyer with some certainty if rates are less favorable at closing (similar to today--Q3 2023).
Once you know your closing date, you'll also get a key pickup appointment where you grab the keys and access devices, and get all the paperwork to take over the utilities, setup communications and Strata fee payments with the Strata Management company, and help answer any questions you may have about the home warranty program, the home, and the development. This is usually a 30 minute appointment and it happens after you've actually closed on the property.
This is also a good time to shut the water and gas lines off in the unit (they are generally left on...) as well as make sure the thermostat is set to at least 10C, and ensure you have setup your electricity account. You do not want the fridge to die in between showings, and to leak melted ice all over your new floors...
This is where things can start to get hairy if you're not working with a good developer. We have rented dozens of pre-sale units and have seen many different situations:
- No blinds--for the entire building--with a bylaw requiring owners/occupants to use the exact developer specifications to avoid a fine
- No working fridge due to improper installation
- No fridge at all
- Laundry not connected to the drain--and connections were hidden so this did not come to light until laundry was done
- Pinhole leak in small supply line--took 3 months for the water to start showing up under the flooring. Developer only responsible to fix the leak and replace the drywall from the leak repair. Owner on the hook for $5k in flooring replacement
- Heating/Cooling system not holding temperature
- Heating/Cooling system constantly firing up and shutting down (every minute or two causing unnecessary wear and tear on the system
- Heating/Cooling system filter not cleaned of construction dust so it burned out even before owner can take possession
- Drainage not working in certain pockets or building wide. Nightmare scenarios to the point where the building is uninsurable for drainage issues.
- Emergency communications in the elevators not working (and someone getting stuck, in between floors, in a building mostly vacant with no cell reception...)
Some of these items were resolved quickly. Many took months, also requiring us to step in and get home warranty companies involved, additional expenses from our clients to ensure the tenant actually had use of the home due to the lack of action from the developer, etc. While these are not massive financial issues--in many cases--and do not cause a tenancy to have to end, these are still items that come up and may not be dealt with as you expect they should be.
This is one of the reasons why we suggest a professional home inspection when purchasing a pre-sale. We suggest doing so once you have possession of the property and at the advise of your realtor. Depending on the pre-sale agreement, you may be forced to close anyway even if the above items are not resolved prior to closing. A professional home inspection can find many of the above issues when they are not visibly apparent, can generate an excellent record of them for your submission to the developer's warranty system, and you can get to work immediately rather than waiting for something to fail or a problem to come to light because your tenant started to use something in the normal course of their occupancy.
Glut of Competition
When a new building is completed and sold, many of the units (30-50% and up according to many reports) are purchased by people who will be renting them out. So as a building closes on all its sales over the course of a 2-6 month period, many of these units come on the rental market at the same time. This causes a micro glut in competition which will effect your ability and speed to rent out your unit.
This is why we always suggest to take professional photos at the deficiency inspection before you own the property.
This way you can market the property strongly during the period between deficiency inspection and closing. Most or all of your competing units will not coordinate a professional photographer. We find a significant advantage to having professional photos of the actual unit online before you own the property. This way you can hit the ground running with a ton of viewings immediately upon closing so you have a much higher chance of renting the unit immediately rather than battling it out with the other vacant units.
We covered many scenarios of what to expect in your first year above. Just like a new car, you should always be keeping your ears perked for anything that seems out of the ordinary. On top of your professional home inspection immediately upon closing, you should take the following actions in the first year once your tenancy begins:
- A condition inspection at the move in of your tenant
- An inspection of the unit 3 months after tenant move in. Try to coordinate asking them some questions about the systems in the unit, and anything the home inspector flagged to see if they have anything to report. Also if they have heard of any issues from neighbours that may have not happened in their unit so you can get a jump on a building wide pattern (slow or backing up drains, elevators getting stuck or under repair, gym/other amenities still not complete or open, etc.)
- An inspection at the 9 month mark
- Filing of any and all deficiencies to the developer portal as they come up. Ensure the developer confirms the items are in the system with an email or something. If there is no confirmation email, download the information from their portal. Remember they manage the portal so if something disappears from the system, and you have no record of submitting it, there is no record of it being submitted and you can miss out on them having to warranty it.
While we do not blame developers for how their sales contracts are drafted--they are quite intelligent and well managed on this point generally--its your lack of knowledge of this process as the purchasing consumer that needs significant improvement.
Pre-sales can be an excellent investment opportunity and a great community to live in and call home as an owner occupier. They provide cash efficient ways of getting into the housing market, and who does not love a brand new home to live in? However, the above items are very important to consider whether you are purchasing a pre-sale to live in or as an investment.
Ensure to get advice from your realtor to understand the above risks more, or reach out to us for a discussion on the topic.
*The above information is not to be relied on as legal advise. If you require professional or legal advise for your personal circumstances, please reach out to us for a referral, or consult with us for property management services.
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