and How to Avoid Them

5 Biggest Mistakes When Purchasing a Pre-sale and How to Avoid Them

by Kyle Green

When purchasing a pre-sale, it is crucial to confirm that you are able to get a mortgage on the property, even if you plan to assign the unit before closing. Planning ahead is very important in order to avoid being in a position where you are unable to complete on your contract and/or risk losing your deposit.

Here are the 5 biggest mistakes people make when purchasing a pre-sale property:

1. Changes in the real estate market

When the time comes to close on the unit, the bank will typically ask for an appraisal. If the appraisal is lower than the price you are paying, you will need additional down payment to make up that difference. It is important to be prepared with more down payment funds than you originally expected.

If the value is lower, it will be harder to find a buyer to assign the unit to for the same price you paid, making it more likely you will need to complete the purchase yourself.

2. Changes to lending guidelines

Lending guidelines with banks change all the time. Even if you think you are a strong borrower, you may experience challenges fitting inside of a bank’s “box”. Regardless of your situation, it is very important to confirm your ability to qualify for the mortgage.

3. Changes to your financial profile

Buying a pre-sale can come with a lot of risk. Between the time that you write the offer and the time that you close, your personal circumstances can change. Changes that can affect your ability to qualify for the mortgage include starting a new job, losing your job, purchasing a car or another property, retiring, applying for credit, etc.

4. Rising interest rates

In the event interest rates rise during the course of the construction, you may find that you are unable to afford or to qualify for the mortgage by the time that the construction is finished. It is important that you understand the worst case scenario for interest rates and get a long-term rate hold.

5. Restrictions regarding your ability to assign the contract to another buyer

Whether you intend on assigning the contract or not, it is important to review the contract and know your options. Many developers either do not allow assignments or will charge a fee for an assignment; however, these terms can be negotiated when you are writing the offer. Always aim for the most flexible terms possible to allow for more options when closing approaches.

The solution: Choose a long-term rate hold and approval

There is one simple solution that can solve all of these problems: choose a long-term rate hold. A long-term rate hold offers the following features:

Get fully approved now, which protects your ability to close regardless of changes to your financial profile. This also protects you from changes to lending guidelines, to ensure you are “grandfathered”. Lenders will typically offer this if the completion is within 18 months (occasionally up to 24 months).

Most lenders offer a long-term rate hold for 18-24 months. For longer-term rate holds, they may need to approve the building itself. Typically, this rate hold is more expensive than current rates; however, it provides you with a worst case scenario rate, protecting you in the event rates increase. Most lenders will allow you to revert to their standard rates at closing if they are lower, making a long-term rate hold your best option.

Sometimes lenders will get a “blanket appraisal” on the building and your unit, which protects you from changes in valuation between the date you write the offer and the closing date. That way if the value drops, you will still be able to use the value from the date that you wrote the offer (and you will not require more down payment funds to complete).

Overall, even if you plan on assigning your unit, it is important to have a contingency plan. If you are a real estate investor, make sure this property makes sense in the event that you have to close. Does it cashflow? Does it fit your portfolio and your game plan? Always visualize ahead of time and consider what your situation will look like if you have to complete the purchase. If you have a pre-sale under contract or you are considering a pre-sale, make sure you have a long-term rate hold and approval in place. The Green Mortgage Team has access to a number of options for long-term rate holds to help protect you as a buyer. To review your options, contact us today at Info@GreenMortgageTeam.ca or 604-229-5515.

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