Understanding Presale Contracts: What You Need To Know

When considering the purchase of a home in a presale development, there are many important aspects a buyer should make sure to understand BEFORE signing on the dotted line. Here, we’ll take a look at some of the contract terms, deposit requirements and other legal points.

Contract Terms

Understanding Presale Contracts: What you Need To Know

  • Disclosure Statement

    • In British Columbia, all developers are required to provide a copy of the Disclosure Statement to potential buyers before the contract is signed. If they do not provide it for review, do not sign anything.
    • The Disclosure Statement includes information about the number of units the development will have, the unit sizes, and what amenities (if any) the development will have.
    • It must also include the estimated completion date, the purchase price and the deposits required.
    • Lastly, it should include the name, address and contact information of the developer.
    • The purpose of the Disclosure Statement is to ensure buyers have all the information they need to make a well-informed decision about whether or not to purchase the presale unit.

  • Deposits

    • Deposit amounts will be detailed in the Contract.
    • The total deposit will generally add up to 20% of the full purchase price, payable overtime during the construction phase.
    • We’ll look at the structure of the deposit later in this article.

  • Recission Period

    • Under the Real Estate Development Marketing Act, buyers have a seven (7) day recission period.
    • During this time, a buyer can cancel their offer, for any reason without penalty.
    • Cancelling the offer or contract after this seven (7) day period will result in penalties such as forfeiting deposits that have already been paid.
    • Once the recission period has expired, there is a legally binding contract in place between the buyer and developer.

  • Assignment

    • Carefully review the contract regarding the buyer’s right to sell an Assignment of the purchase contract to another buyer.
    • If the buyer changes their mind about moving into the development before it is complete, can they sell their contract to another buyer or will they be forced to complete the purchase?
    • Make sure the contract clearly defines the process and whether or not the developer must consent to the Assignment. If so, an Assignment cannot be completed without the developer’s approval.

  • Cancellation Clause

    • This clause is vitally important for the buyer.
    • The cancellation clause will outline the developers’ rights to cancel the contract, and under what circumstances.
    • What happens to the deposits in the event the developer cancels the contract should also be clearly stated under this clause.

Deposits

While a 20% deposit can be a substantial amount, with presale developments, the deposit payments are structured in a way which may make it more manageable. Deposits are paid over time, with varying amounts due at specified times.
Deposits are paid into a trust account, usually held by the developers’ lawyer or the real estate brokerage representing the developer. The developer does not have access to these funds until completion.

  • Initial Deposit

    • When a buyer makes an offer to purchase the presale unit, and it is accepted, they are required to make a small deposit. For this example, let’s use $1,000.

  • Secondary Deposit

    • Upon expiry of the seven (7) day recission period, the buyer will need to top up the initial deposit to ten (10%) percent of the purchase price.

  • One Year After The Contract Is Signed

    • An additional five (5%) percent of the purchase price will be required.

  • 18 Month Mark

    • At this point, the remaining five (5%) percent of the total deposit is required to be paid by the buyer.
      Once these deposits are paid, the buyer does not have to provide any further funds until completion of construction, at which time, a mortgage for the remaining eighty (80%) percent will generally be required.

Legal Issues

Understanding the legal components of a presale development will often mean the buyer needs assistance. Having the right people working in the buyer’s best interest can ensure any unforeseen issues can be addressed promptly, to everyone’s satisfaction.

  • Real Estate Agent

    • Buyers should always work with a real estate agent with experience in this type of property to ensure they understand what they are buying.
    • An expert real estate agent is likely familiar with the developer and can advise and direct a buyer to a reputable builder and development.

  • Hire a Lawyer

    • Buyers should also hire a lawyer to review the Developer Disclosure Statement, Contract Agreement and any other information which may be pertinent to the development.
    • Lawyers can review issues related to building codes and specifications, as well as zoning and land use restrictions for the property.
    • Lawyers can identify risks associated with the property and offer mitigation strategies to address them.

Always consult with professionals when considering a large financial transaction such as a presale development. They will protect your best interests and work to ensure your purchase is completed with a minimal amount of stress!