Pre Construction Down Payment

Edison Reis

New Forum Member
REIN Member
Feb 26, 2018
3
1
3
#1
Greetings fellow investors

I am buy and hold investor (rental properties) but I am considering investing in a pre construction in the BC interior.

What’s the typical down payment and closing costs ?

Is there anything important I need to be aware of or prepared ?

Thanks for you continuous support

Edison Reis
 

Matt Crowley

Senior Forum Member
Registered
Dec 14, 2013
812
303
63
Edmonton
#3
I know this area well.

- reputation of the developer
- return you will make buying new vs. buying current stock
- buying presales is an appreciation / full speculation model. Basically you buy high expecting market will go higher, otherwise developers would not get presales in a competitive market. Is this Kelowna?
- run the cash flows. If it is a new built condo, probably you are buying a 2% - 3% cap rate. So be very satisfied that the property will appreciate strongly. It will be the only source of return.
- where in the development process are you? Does the land have rezoning and DP?
- strength and defensiveness of the location. You are only new once

Developer will collect as much deposit as possible. Absolute minimum is 5% but more typical is anywhere 10% initial up to 20% when certain milestones are hit. Mechanically, the more down payments are achieved, the less developer cash equity will be put into the deal, and the developer will use the land lift equity to fund the whole project. Land lift equity = bought piece of unzoned dirt upzoned and then build the project on that equity.
 
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Edison Reis

New Forum Member
REIN Member
Feb 26, 2018
3
1
3
#4
I know this area well.

- reputation of the developer
- return you will make buying new vs. buying current stock
- buying presales is an appreciation / full speculation model. Basically you buy high expecting market will go higher, otherwise developers would not get presales in a competitive market. Is this Kelowna?
- run the cash flows. If it is a new built condo, probably you are buying a 2% - 3% cap rate. So be very satisfied that the property will appreciate strongly. It will be the only source of return.
- where in the development process are you? Does the land have rezoning and DP?
- strength and defensiveness of the location. You are only new once

Developer will collect as much deposit as possible. Absolute minimum is 5% but more typical is anywhere 10% initial up to 20% when certain milestones are hit. Mechanically, the more down payments are achieved, the less developer cash equity will be put into the deal, and the developer will use the land lift equity to fund the whole project. Land lift equity = bought piece of unzoned dirt upzoned and then build the project on that equity.
Thanks Matt and Tina,

Yes , I am looking into some potential opportunities in the central Okanagan as I know the area really well. (The prices have risen but I think we haven’t seen it the top yet as the area becomes stronger and more attractive as the years go by)

Cheers

Edison
 

ThomasBeyer

Senior Forum Member
REIN Member
#5
What’s the typical down payment and closing costs ?
Usually 20% these days, in stages, say 5% on offer, then 5% on acceptance or a month later, then another 5 or 10% in 6 - 12 months.

Is there anything important I need to be aware of or prepared ?
You have to be prepared to close even if market falls. Let's say you buy for $500,000 but appraisal in two years comes in at $450,000 only. Bank will lend only on the lower of the 2 values.

You have to also be mindful of the "outside date" which might be 2-3 years hence, but which will usually give both you AND the developer the unilateral right to cancel the contract. So what could happen is the project is one year late, the market strong and your $500,000 condo now worth $600,000 and developer says "Sorry, you can't buy it, contract is cancelled"

The third thing to be aware of is assignment rights or restrictions. Some contracts don't allow it at all, some for a fee, some give the developer the first right of refusal and some are completely unrestricted. So read the contract before you sign !

The fourth thing to be aware of is that condo fees are usually low balled. They are fixed in year one but then often have to go up due to actual figures. So, budget 20-30% higher condo fees a year after possession.
 
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CorySperle

Senior Forum Member
REIN Member
Sep 1, 2010
641
361
63
Edmonton
#6
To me this is the riskiest type of real estate investing there is. Yes you could turn 20K into 150 if your early in the cycle but could also turn into -150 especially in incredibly heated markets like Kelowna. The other thing I don't like is your buying a product that you can't even see. I would much rather buy new, or better a couple of years old in buyers markets such as Edmonton. Pre construction seems attractive due to the (perceived) lack of work involved.
 

angelapeng

Inspired Forum Member
Registered
Aug 19, 2011
163
11
18
Vancouver
#8
We have done three pre-sales over the 14 years of real estate investing. One was in 2004, a rising market, we sold it after 1.5 years before the completion with 100% gain on the cash invested. One was in 2007 at the peak market time, we sold it after completion with very small gain. The third one was in 2010, we closed it in 2013 and still hold today.

My experience is nothing wrong with pre-sales, as long as you are prepared to close it and hold for at least 5 years to flow through the down time of the market. In the third pre-sale case, we were contemplating whether to sell or not in 2013. However, the market was flat at the time, if we sell, we might just breakeven. Mind you, for any pre-sales in BC, we need to pay 12% GST, which we have to pay by cash, the bank will not mortgage on that amount. Therefore, on top of the 20% downpayment we have to pay during the first year of the contract, at closing we have to invest another 60K to cover the GST and other fees. From 2013 to 2018, our cash flow is just breakeven, but capital gain goes a lot, we are glad that we hold it. Now, we plan to hold for at least another 5-10 years as long as the cash flow sustain itself.

Pre-sale investment as a concept is not bad, just be cautious of individual subject property and our own individual capability of managing the process.
 
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