Sophia – Pre-Sale Risk in Action

The current fiasco over the collapse of the Sophia development, serves purpose to remind those considering a pre-sale purchase of the potential pit falls inherent in these transactions.

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Flickr.com/photos/ESPNGO

Earlier I posted Wendy Mesley’s Condo Crunch report on the pitfalls of buying a pre-sale residence.

The Financial Institutions Commission of BC published a document in August of 2007 that IMO should be at the front of all agreements involving a residential pre-sale.

The following is a summary of that document. The full text is here.

How Does it Work?

  • A residential unit is sold before completion of construction
  • Typically the sale occurs two years before completion.
  • The unit is sold at a fixed price
  • Deposits are taken to be held in trust by a lawyer, a real estate brokerage, or notary. If deposit protection is obtained, the deposits may be released to the developer.
  • If the development does not proceed the contract is terminated and deposits returned.
  • No interest will be paid if it was not a requirement of the contract.

Get Advice

  • have a Realtor® explain the details
  • consult with a lawyer about your rights and obligations

Make Certain You Understand the Disclosure Statement

  • you should be provided a reasonable time to read it
  • under the Real Estate Development Marketing Act you the right to cancel the purchase within seven days

The Risks

Some reasons a development will not proceed to completion:

  • inadequate sales
  • financing
  • permits
  • higher than expected cost of construction
  • can’t find skilled workers

What it Means to You When

When the Development is Delayed

  • contract can be terminated
  • contract can be extended
  • higher price can be demanded if extended
  • agree on a new contract (probably at a much higher price)
  • developer may choose to do none of the above and decide to sell the unit to someone else.

Your Options

Rising market:

  • seek the extension before the termination date be prepared to arrange temporary accommodation
  • invest your purchase monies to keep pace with the rising market
  • if you are funding your purchase from the sale of your current home don’t sell too soon so that you can keep pace with the rising market

Declining Market

  • if the project is completed on time you will be obliged to pay the agreed price

Assignment of a Contract

  • they may not be permissible
  • there may be a substantial fee involved
  • the above risks apply to the Assignment Purchaser
  • the new buyer may not be able to recover any monies paid to the original buyer and the developer

What you think you saw may not be what you bought

  • most pre-sale contracts allow the developer to make material substitutions
  • they can also change the layout of the unit

Source: REDMA-07-02 Financial Institutions Commission of B.C.

Got a Vancouver Real Estate question? I’ll do my best to answer it. Call or send me an email. Larry

About Larry Yatkowsky

Larry is a recognized real estate expert. A veteran professional, his experienced counsel leads Vancouverites in his west side community to place their trust in a man passionate about his work. Uncompromising ethics bring a balanced approach to realizing your real estate dreams.

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*Disclaimer: Statistics Courtesy REBGV. While believed to be accurate they are not guaranteed.
**Numbers provided may vary as they are dynamically posted by the REBGV.

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