Pros and Cons of Buying a Pre-sale Condo in Calgary
The Canadian real estate market has seen a surge in the popularity of pre-sale condos over the past decade. Many urban centres, such as Vancouver, Toronto, and now Calgary, have seen a flurry of new condo developments and have attracted many prospective buyers. But is buying a condo before it's built (a.k.a. pre-sale) the right decision for you? Let's first talk about what a pre-sale condo is and then delve into the pros and cons to help you make an informed decision.
What is a Pre-Sale Condo?
A pre-sale condo is a condominium unit available for purchase before the building is completed. In some cases, these condos are sold even before construction begins. Buyers are essentially purchasing a future right to the condo unit based on architectural drawings, plans, and show suites rather than a physical, finished product. Here's a breakdown of what it entails:
How to do Pre-sale Condos Work?
Marketing Phase: Builders and Realtors often start marketing condos before construction. This phase includes promotional events, advertisements, and the setup of show suites to give potential buyers an idea of the final product.
Contract and Deposit: Interested buyers sign a contract and provide a deposit, which is often a percentage of the purchase price. This deposit secures their right to the condo upon completion.
Construction Phase: Once enough units are pre-sold and financing is in place, construction begins. The duration can vary widely, sometimes taking several years.
Completion and Move-In: Once construction is complete and the condo passes all inspections, buyers close the sale by paying the remaining balance, typically with a mortgage. They can then can possession of their new condo.
Why do Builders Offer Pre-sale Condos?
Selling units before they're built can provide developers with the capital they need to finance the construction or satisfy lender requirements. It also reduces the financial risk for builders, as they can gauge the market's interest and ensure a certain number of sales before committing to the full project.
What are the Pros of buying a Pre-Sale Condo?
Appreciation Potential: If the real estate market is on an upward trend, there's potential for your condo to appreciate in value between the purchase date and the completion date. When you take possession, your property might be worth more than what you paid. Many Canadians sell their presale condo right a completion and lock in their profits.
Customization: One of the main draws of pre-sale condos is the opportunity to customize finishes, layouts, and other design elements. Buyers can often choose their preferred flooring, countertops, and cabinetry, allowing for a personal touch or perfect set up for a rental property.
Flexible Payment Plans: Builders may offer flexible payment schedules for pre-sale condos. Instead of a full down payment, you might only need to provide a series of smaller deposits over time. In some cases, builders even allow for a borrowed deposit.
Warranty: New homes, including condos, come with a builder's warranty. This can cover defects in materials, labour, and structural elements, offering peace of mind to buyers.
What are the Risks of buying a Pre-Sale Condo?
Return on Investment: When you purchase a pre-sale condo as an investment property, most builders require a 20% down payment. If the condo will not be complete for 2-3 years, this means that $100,000 or more could be locked into an “investment” that isn’t making any return.
Delays: Construction projects don't always go as planned. Labour strikes, supply chain disruptions, or even financial difficulties can delay the completion of your condo, which can be problematic if you want to move in, sell or start making money on your investment.
Changing Market Conditions: While there's potential for appreciation, there's also a risk the market might cool down. When your condo is ready, it might be worth less than what you paid. If your mortgage requires and appraisal and the finished, appraised value is less than the purchase price, you may be required to increase your down payment. This unknown is a big risk when you’re purchasing a new build with a completion date 2-3 years in the future.
Uncertainty in Final Product: Renderings and show suites are great, but there's always some uncertainty about the final product. The quality of finishes or the actual view might differ from what you expected.
You’re Locked-In: Your deposit for a pre-sale condo is typically non-refundable. If you change your mind or your financial situation changes, you might lose significant money. Further to this, if you cannot close on your legally binding purchase contract, you’re at risk of being sued.
Pre-Sale Condos vs. Resale Condos
Buying a pre-sale condo means committing to a property before its construction is completed, often even before it has begun. This approach offers the allure of brand-new amenities, potential customization options, and the possibility of price appreciation by the time of completion. However, it also comes with uncertainties like construction delays, potential discrepancies between promised features and the final product, and market volatility.
On the other hand, purchasing a resale condo is about acquiring an existing, tangible property. With resale condos, buyers can physically inspect the unit, assess the building's condition, and better understand the neighbourhood vibe. The biggest advantage of a re-sale condo is that your money starts working for you right away. If you purchase a re-sale condo as a rental property, your tenants will start paying rent immediately. This puts money in your pocket each month via cash flow and mortgage paydown. It means that you’re building equity and on the path to paying off your mortgage right from day one. While you might miss out on the latest amenities or design trends, there's a level of certainty and immediacy in possession that pre-sale condos cannot guarantee.
Both options have their merits and potential pitfalls, and the right choice largely depends on your risk tolerance, timeline, and personal preferences.
Is it a good idea to buy a Pre-Sale?
In conclusion, if you feel strongly that a Real Estate market may appreciate in the future if you’re passionate about choosing your own finishings and if you have access to the down payment funds, a pre-sale condo could be right for you. That being said, risks surrounding the appraisal, the mortgage and the final product from the builder should be considered and mitigated. Make sure to work with a mortgage broker so that you’ve got a plan in place to actually close on the property in the future. Check out our 3-year Mortgage Road Map to understand the mortgage process for pre-sale condos in Calgary and start your pre-approval here!
