Buying Pre-Sale or Re-Sale | Weighing up the Pros and Cons

Posted on by Meghan

Is now a better time to buy pre-sale (pre construction) or re-sale (existing dwellings) in Squamish? We look at multiple considerations to help you decide.

 

pre-sale

 

Squamish has seen an explosion of new construction over the last few years. While some projects are now complete, there are hundreds of units still under construction with thousands more proposed over the next decade. Pre-sale purchases were a no brainer back in 2015, you only need to look at the Parkhouse development project which sold out in 30 minutes with units selling for under $300K. Purchasers doubled their investment in only a few years.

Here we are in 2019, and the market has changed a lot since 2015. Not only is there a slew of new construction on the market, prices have escalated drastically, lending has tightened, and interest rates have risen. If you’re debating whether or not to buy pre-sale or re-sale, here are some important considerations.

Purchase Price

It is now no longer more affordable to buy a pre-sale in Squamish. For the last few years, even after paying GST (which is 5 percent and is only payable on new construction), the price of buying a pre-sale was comparable (even lower) then the price of buying re-sale real estate. This is not the case anymore. According to the Vancouver Real Estate Podcast, the last quarter of 2018 saw presale homes in some parts of Greater Vancouver 25-30 percent higher than resale.

Currently in Squamish, you can buy a two-bedroom pre-sale townhome (which will complete in 2-3 years) for $700K. Alternatively, you can buy a two-bedroom townhome that’s around 10 years old for under $600K.

Back in 2015 people were banking on price appreciation during the 2-3 year construction period. Due to current market conditions where price is expected to stay relatively flat for the next few years, short-term price appreciation no longer makes sense as an investment strategy for pre construction (or re-sale for that matter).

The Deposit

Pre-sale purchases often require an up-front deposit of 20 percent. This is typically a staggered deposit with the first 10 percent paid within the first 1-2 weeks while the remainder is due months later. Re-sale construction doesn’t have a specific amount required for the deposit, this can be negotiated between the buyer and the seller but is usually around 5 percent.

Closing Costs

The closing costs (costs above and beyond the purchase price that must be paid by the buyer), differ between pre-sale and re-sale real estate. Both require the buyer to pay property transfer tax (1% on the first $200K and 2% on the amount $200K- $2m) and lawyer fees, however pre-sale transactions also incur a 5 percent GST charge which equates to $40,000 on an $800,000 property. GST is not required for re-sale purchases.

When buying re-sale a building inspection is almost always suggested, this can cost up to $600 and is not always required for a pre-sale purchase.

Ongoing Costs

There is no doubt that there are fewer ongoing costs when buying new construction. Once the deposits are paid and closing costs are finalized the home remains under warranty for a period of time, (see here for more info on new home warranty). New homes are also more efficient, use smarter materials and may have running cost that are substantially less then established homes.

Maintenance costs of older homes can definitely add up, and when buying an existing home even after a thorough home inspection there are risks of deficiencies and defects that could be extremely costly.

Interest Rates and Financing

We have enjoyed extremely low interest rates for the last decade, and rates are now going up, although not at the pace that many were expecting last year. One risk of buying a pre-sale now is having to secure a higher rate when it comes to the property’s completion down the road. Rising rates by default also put a downward pressure on property prices so not only will you be paying more for your mortgage then if you entered into a rate agreement now, prices historically stabilize during a rising rate environment.

Financing is another consideration. In early 2018 the Federal Government introduced a mortgage stress test making financing qualification more stringent. This will impact the tens of thousands of buyers who purchased a pre-sale before the stress test, with some now unable to secure financing when their units are ready for completion. This will result in an increase of assignments (when a buyer sells their contract before the unit is finished), which will boost the inventory of new construction on the market.

Negotiation

When it comes to negotiating on a real estate purchase, there is much more flexibility with re-sale homes. This is true in any market, but especially a balanced or buyer’s market (which we are seeing now), where market activity is quieter, and sellers are more willing to make a deal.

Presales are typically built by big developers and in most cases negotiation on purchase price is not entertained. Sometimes discounts can be given on the deposit or buyer incentives will be offered.

The Inventory

Current and projected inventory levels are worth considering when deciding between a pre-sale or a re-sale. For example, in Squamish there aren’t many single-family homes being built anymore compared to other property types. From a price appreciation stand-point, these types of homes will likely maintain their value over time due to supply and demand. Condos on the other hand will see a surge in supply over the coming years in Squamish, buying a new condo may pose more risk in the long run.

Rentals

If you plan on buying a rental property in Squamish, both pre-sale and re-sale can present appealing options. The vacancy rate in Squamish is very low (hovering around 1 percent), so it is a good market if your open to finding the right tenants.

New construction requires the initial deposit outlay, and then a 2-3 year holding period before the unit is ready for occupancy. Re-sale properties can be rented out within weeks or months of the sale meaning rental income is immediate. Both new and existing properties are desirable to renters.

 

Your Objective

To determine what is right for you it’s important to be clear on your buying objective. Are you moving to Squamish in the next few years as a single professional who will be commuting to Vancouver for work and looking for something that is new, nice and low maintenance? If so, pre-sale could be a good fit for you.

Are you a family looking to set roots in Squamish and are torn between a brand-new townhome pre-sale or an older home? If you are budgeting for the future maintained costs of the home and are prepared to sacrifice shiny new for a bigger yard and more privacy, the established home may make more sense.

 

So is it pre-sale or re-sale?

 

Everyone’s situation is different so there isn’t a clear-cut answer for all. That being said, the current market conditions at the time of writing this piece are favouring re-sale construction over pre-sale. The lower price point, fewer closing costs and current lending and interest rate environment make this a safer and more potentially more lucrative option.

Still not sure what is best for you? Schedule a call with the Move to Squamish team and let’s discuss your unique objectives and real estate goals (plus fill you in on the latest market data and trends related to new and established contruction in Squamish).

About Meghan

Meghan is a real estate agent who is passionate about connecting lifestyle driven individuals to her vibrant town of Squamish, BC. Meghan was born and raised in Squamish, spent 15 years living abroad, and is now back partnering with her mother Nanci Fulton who has been selling real estate in Squamish for 30 years. Meghan loves representing buyers, welcoming them to her community and helping them find their perfect place to call home.