Recent rate hikes have caused pre-owned home sales to decrease, making many buyers question how the presale market has been affected and if that may be a better investment.

James and Denny review the pros and cons of purchasing presale homes in today’s current conditions and break down the dangers of trying to time the market when buying. 

This episode will cover which neighbourhoods still offer the best deals, the various amenities offered with strata fees,  what role the interest rate increase has played on presale popularity, the different types of deals that developers are offering, and the top features to look for when buying presale.

Watch and listen to the Garbutt+Dumas Real Estate Podcast below and follow us on Spotify, iTunes & YouTube.

Read the Transcript Here

Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.

James: This episode, we’re going be talking about buying new construction in this rate hike environment. We’ve been, we’re on a lot of email lists, we’re getting some emails from developments, throwing some more incentives out there that we haven’t seen before. I’ve recently done a walk through on a new development in Burnaby, Concord Burnaby. And I think this is a good episode. We’ve talked about this topic before but let’s revisit what we might see in the new construction presale condo world in the year ahead in this high rate, environment, great environment. 

Denny: The environment is definitely changing of what to expect in presales and it is very neighborhood dependent. So there’s been a couple projects launched in Port Moody that have sold out in a couple of weeks and that has in the last few months, so even as rates are going up. There’s still a lot of demand in certain neighborhoods, where we’re seeing a ton of new construction along busy streets in East Vancouver, up Clark in the Burquitlam area, where there’s a lot of projects going on. We’re seeing developments not sell out in the first few months. We’re seeing like, we got emails in the last couple of days from a couple in East Vancouver that are now offering better deposit structure for buyers. They’re offering incentives to get people in the door. 

There is, every couple of years it seems like it changes as real estate markets go up and down. And I’d say for the next six months probably really good opportunities in presale developments as an investor and one of which being very low deposit structures. One of the emails we got the other day was deposit has gone down in this development. I think they’re 70, 75% sold but for the last 20% of the 25% of the unit. Their deposit structure has gone down from 15% to 5%.

James: Yet we’ve seen a lot where the deposit structure was 20% which is basically a down payment or more.

Denny: I’ve seen 25%

James: Really? So I guess as to why, why does deposit structure matter? I mean, from an investor standpoint, it’s less money in for securing a property for two to four years before it’s built. The alternative side of that is you still have to always be in a position to close on that property when it completes. So yes, you have less initial money in but you still have to be in a spot where you can complete so by saying yes to a presale, you arguably are saying no to another investment opportunity that happens between the time that you said yes in the, in the deal completes. Deposit structure, I think historically when I look back at the last decade, that’s kind of the norm has been around 10% And when the market is tough, it gets down to 5%. And when it’s frothy, it’s 15% or more. And the, for me as an investor, a 5% deposit structure could actually make me buy a property that I didn’t want to buy. If the timing was right, you know? If and the thing about presales is they dry up or they seem and I’ve never been a presale marketer, but they seem to dry up quick like when the market shifts they go from frothy to dead quiet like, like that. Now I do believe that Port Moody had launched a project today. It might be the exception that sells out but a lot of projects that are available today are you know, East Van, a real strong market 70%, 80% of the projects might be sold like these low rises that line busy streets 70%, 80% might be sold they have remaining 20% inventory that they’re trying to get rid of. And what the first 80% of buyers that paid a 15% deposit structure, the next wave is going to be at 5% down. What’s not, what we’re not seeing the email that that is more likely is the developer is probably more likely to negotiate on the price. They might not reduce the price, they might call it a decorating allowance so that they can hold their price on paper but you get some sort of cash back.

You’re more likely to see that in this environment. So we are coming off of a number of years where you get in line to buy a project, you don’t question the price. You don’t make any requests of a storage locker to be included or an extra parking stall to be included. You take it or you leave it, if you don’t take it 10 Other people well, that changed. And I think my guess is we’re going to see less project launches over the next little while. And we’re going to see the incentives from existing projects that have already launched and if you’re a buyer that was bought into a project and you’re starting to see, get emails of the remaining units at a lower deposit structure with some incentives. Recognize that that doesn’t mean that you can call the developer back and say hey, “I don’t want to pay 15% deposit I want to be 5% deposit”. Doesn’t mean you can but you can’t renegotiate don’t assume you can renegotiate, don’t assume that your lawyers gonna measure up to the developers lawyer. 

The most extreme example I’ve seen of this was in the 2008-2009 crash, where Onigroup had this big liquidation sale in January of 2009. They had sold, they had projects and Sutterbrooke, Victoria Hill, and I think there was another one but those are the ones that I was most active in at that time. And there were people that maybe 70%, 60% of the units in these developments had sold at pre-crash prices and they were desperate clearly to sell the remaining units and they discounted the remaining units on average 30%. So someone that bought a presale two bedroom might have paid for $420 in August or July of 2008 in the same unit in January of 2009 went from $420 to like $310 and it was like a smoking deal. 

And in that frenzy I ended up having I think it was 11 clients buy properties between the two places. So it’s like a huge success for a new realtor for me. But what I learned from that experience was 1) in a down market as a Realtor put deals in front of clients faces definitely promote deals 2) developers are in that case, Onigroup put out a real strong message saying don’t think you can walk away from your deposit to the people that bought at a higher price. They had this real strong message saying that we will go for damages, we will resell your unit and the difference between what you pay what what we resell it for and what you committed to is what we’re going to be going after you for damages so there wasn’t many defaults on the people that pay the higher price. The people that had a higher price like, keep in mind these developments hadn’t completed at the time. So if you bought a presale and you see the same unit, reduce its price $100 grand before it completes, it’s devastating, doesn’t mean you can walk from it. You just have to eat it up. And if you do walk, just be prepared that you’re going to have some legal fight coming out of it. 

So that was the, that was the most extreme pre sell environment I’ve witnessed. I don’t think that’s going to happen moving forward. I think that was kind of a rare thing. I don’t think developers can afford to discount their units 20, 30% like Oni did back then. But it was pretty wild to see. 

Denny: Yeah, I don’t think we’re gonna see that again for a little while unless rates go to 10% or 12%? 

James: No, I think a likely scenario is maybe they do a 10% off in a creative way and a lower deposit structure. I think we’re just gonna see less launches, or we might see, sometimes developers walk. You know, we’ve seen some criminal things where in good times the developer that pre sold their condos for a low price, the market climbs 20% that developer said, hey, if I don’t build this land, I get more profit by selling the land and I’m just saying that these people go pound sand and I’m not building your product. And we saw that. I don’t, in a down market. I could see just a developer not getting financing for, for the project because the rates are so high and they don’t proceed for that reason. But a lot of developments that are 70% sold or more than half sold. Those are the ones that are kind of caught in this where they have good prices and they want to sell the rest. But what’s the magic of how much do you discount it? How do you incentivize it? 

Denny: We did a podcast a couple years ago. Of like, how to negotiate with the developer because rarely, and even in slower periods like we’re in now for new construction. Rarely do they want to discount their posted price. But there are ways as an investor if you are thinking about getting into a presale in the next six months to negotiate a pretty good deal. And even if they’re not offering a lower deposit structure or 5% incentive or whatever that may be. You can write contracts and creative ways to negotiate deals, say including storage locker, parking, an extra parking stall, adjusting the deposit structure and all these things or negotiating a decorating allowance instead of negotiating the price which essentially as a consumer is the same thing. But there are ways that a developer will negotiate with you. And there are other ways that they will be very hesitant to negotiate with you. That posts a sale price that makes them happy to future consumers of that project. But it also gives you a pretty, pretty good deal.

James: Let’s talk about from an investor standpoint, what are things that you look for? What are the things that are appealing to you for presale condos opportunities as an investor? What are some of the top things you look for? 

Denny: I think location is number one. Being in a spot that is going to be desirable for a long period of time or well into the future. A, an area that is actively growing meaning more amenities, more parks, more restaurants, more schools more etc.

I think in the condo world now air conditioning is becoming more and more popular. There are resale buyers out there now that are looking specifically for units that are buildings that have air conditioning.

The amenity thing to me is a bit of a question mark. And I know a lot of developers are selling projects with these elaborate amenity centers, say 80% of which don’t get used. I think a gym is important. Do I think a bowling alley as a long term value? Probably not. A golf simulator like, I don’t know if that thing is going to last very long. 

James: Not if it’s open to hundreds of people.

Denny: Exactly. Amenity centers can catch people’s eyes and other people will just kind of be like oh that’s kind of a cool perk. But at the same time, if you plan to live or rent out that unit for a handful of years after it’s complete, it probably will increase your strata fees over the life of, or how long you own that property.

For me, the number one is if it’s an investment property is location and rent potential. How easy is it going to be to get a renter, what’s the demographic of the renter that is going to be likely asking to rent that place? And what is the rent potential? 

James: Yeah. A couple of other things to add I, I recently went on a walkthrough for a Brentwood, Concord Brentwood, and we’re talking about say a 1300 square foot development. How do you get 1300 square foot and Burnaby, you have massive beautiful towers, air conditioning, sliding doors that open up indoor and outdoor space and make it feel connected. Real high end finishing, not necessarily completely to my tastes but it is high end finishing like a lot of millwork they even had built ins like garbage disposal like, they went over the top with, with the detail. They got a top tier price for it, but I only think they could achieve that by having a massive amenity center and a lot of wow factor when you went through the presale.

It’s always good to double check when you’re buying a presale and in my opinion what the most comparable unit. Is that what you’re buying looks like in on the resale market right now. And if you’re buying a presale that’s like a two bedroom 800 square foot place for $1.2 million and the resale market is saying it’s $850K or $900K. There’s a big discrepancy there. And a lot of developers have been able to get away with that. But I don’t think they will when the market shifts. 

As an investor, a low deposit structure and a long completion is a bit of an appeal. So when you’re looking at The Amazing Brentwood what, was it the, what’s the most recent tower and how was, how far was the completion?

Denny: The most recent tower is 2028. Yep, that was and that launched in the summer of 2022. So it’s almost six years away. And the deposit structure I believe was 20% But it was, it was spaced out over three years.

James: And that probably will change. You know, so if, if you can get in and the prices are high, what are they around 1300 a foot or, or more?

Denny:  Upwards of 14 on higher floors. 

James: If you have a 2028 completion, five or 10% deposit and your paying 1400 a foot and maybe if it existed today, it’s worth 1100 a foot, you’re making a 300 foot gamble on that deposit and you might be right, you might be wrong. There’s a lot of people that have been right over the last decade buying in presales but that’s past doesn’t predict the future That could make a development more appealing but I’m less into areas where there’s an abundance of product. So when we’re looking at say Brentwood where you have 1000 units in the development come up versus say an East Van development where there’s 150 and it’s a wood frame. The amenities don’t matter as much, the location matters more. And the perk of I guess, getting into new construction early is selecting what you think is the best unit. And you know, a tactic developers use is when they market a project they’ll have a really appealing entry level price and then those prices will shoot up pretty quick.

So when, if you’re a buyer that bought into development that’s not 100% sold out and you’re seeing these emails come out where the remaining units are discounted. Just recognize the remaining units are usually not the most appealing units and in the case that we had with a client, he bought a great one bedroom unit with a view in East Van that was on the right side of the building, on the quiet side of the building. And it’s likely going to overlook residential tree canopy, tree lined streets and it’s going to be as good as it gets in East Van. The remaining units are largely three bedrooms or that one one bedroom that’s probably facing Broadway and it’s what got leftover. So the deposit structures is one thing, actually evaluating the unit is key and important. Looking at the spread between the price of they’re asking and what’s happening in the resale market, there was a time and I don’t think those times are going to come back. But I felt like a decade ago, presales were in line with, like new resale prices. They were like almost the same. And somehow through speculation they ended up getting away with a 20% premium for a while. And I, that will probably subside moving forward.

Denny: It’s interesting you bring up resale because looking at resale in neighborhoods that have an abundance of supply or have a ton of new construction that is just completing. There is a lot of new product that has never been lived in that is coming to market now. Burquitlam is a good example, up Clark and, and Como Lake. There is a lot of stuff that has just completed that is coming up for sale that investors who bought this three or four years ago are now not necessarily loving the investment because they are paying a higher interest rate on their mortgage and the rent in that neighborhood may not cover their cost per month so it’s not as appealing to them to keep. 

So a lot of people are getting rid of these and just kind of, they’re gonna make a little bit of money on the lift, but it’s not as exciting as an investor today. When you’re looking at presale versus something that is brand new that is the resale unit, you’re gonna save 10% or 15% on the price into a market that you’re wanting to be and that rent is going to be a lot closer to covering your mortgage.

So I think something like that when you are investing into a neighborhood is interesting to keep in mind because there’s a lot of there’s a lot of these units that are coming up for sale right now that are brand new. That are much discounted from new construction next door or presale next door.

James:  And really the only perk of buying a presale in that same area is that you’re not a landlord until it completes. But when you see the existing new unit that’s never been lived in 10%, 20% lower the right call is to buy the existing unit and be a landlord tomorrow.

We are in an environment where rental rates are rising and I do anticipate that to continue in an area like Burquitlam, Lougheed where there’s an abundance of condos they might they might not be reaping the rewards of higher rents like other areas, but a good reason to maybe connect on a resell and we’re recording this at the tail end of October 2022 you might be listening in spring 2023. A good reason to connect on resale is anticipating higher rental rates when it completes and anticipating lower mortgage rates when it completes, having at least hopefully two years to get, to get the weirdness out of the market. Like a two year minimum closing between when you buy the unit when it when it completes. 

Those are good reasons to maybe consider it the only thing I would add to that is I don’t see any presale opportunities today. That, that feel, that feel like deals today. I definitely see presales out there but they don’t feel like deals right now because a lot of these presales launched months ago at, in a more optimistic market than we are in today. And those prices don’t feel like a deal today. 

So if 2023 is the year where presales start to feel like we’ve got a deal but more in line with resale or more realistic. There is from an investor standpoint, it’s a good argument to you know, if in 12 months from now, you can buy a condo for the same prices today in a presale and it’s going to close three years after I feel much better paying that price and 12 months from now, or committing to that property in 12 months now then I would today because of all the uncertainty and my only comment is if 12 months from now you buy a presale and it  feels like a deal at that time. I think developer reputation is everything. And in, in weird markets where say you make your time up perfectly say you buy a, I don’t know a presale in the Fall of 2023 and the market runs up 30% or 40%. Let’s call it 30% over three years between when you bought and when you closed the more the market shifts for the positive or the negative, the more likely a developer will either back out of a project or do something slimy if it’s, if it’s not a reputable developer.

And what I mean by that is if there’s a lot of gain in the market before they break ground, they might choose you might be like okay, I bought this unit for $500K they haven’t broken ground yet, but I think it’s already worth $700K. Well, recognize that if it’s not a reputable developer, they might have some fine print that allows them to not proceed with the development and just flip the development site to another developer for a higher profit. So it is, it is devastating. We’ve had this happen before. It’s devastating when the market, in really good times. Would you buy a presale and it doesn’t happen? It’s, I’ve also had it wherein really good times the developer asked for 10% or 15% more to proceed. It’s like, you got to pay us more if we’re not going to do the development. 

Rare instances and they do not happen with like a Bosa or a Concord Pacific or you know the big, the bigger name, the more reputable the developer is more likely to go through with the project, their name depends on it. So if you, that’s definitely one thing I would consider. And if you, if you don’t take the advice and the  market goes crazy, well just recognize that there could be some there’s a small chance of something unfavorable happening.

So outside of deposit structure, developer reputation, location, areas like Burquitlam, Lougheed where there’s a lot of units that, a lot of product. For all those areas with a lot of product. There’s a lot of areas that have very little product, Port Moody being one of them. North Vancouver being one of them. I think East Van is probably under serviced in a lot of areas.

You know, New West is dying for townhouses, you know, bring more townhouses to New West. So there are certain areas where I think if you had a townhouse, smaller townhouse project in New West come to light, you’re not going to get a Bosa reputable developer buying a small project. They might have to place a little more risk in that but you are getting a product that is very desirable because there’s not many of them.

Presales – Pros and Cons. Pros are you’re not a landlord, cons you’re paying a premium. Anything else comes to light when buying a presale at a high rate environment that we haven’t touched on?

Denny: You are, you have to complete, I think you’ve touched on that briefly and we’re seeing it now with the Burquitlam area with a lot of resale happening once as soon as a development completes, but you’re forced to complete in three years from now and you don’t know what the interest rate environment is going to be like, you are, don’t know what your job situation is going to look like in three years from now. So there’s just a little bit more risk in terms of presale environment. There is a lot of reward in the last decade if you bought a presale three years before completing.

But I think just as long as you can manage that risk and you are capable of completing. I think there’s going to be a lot of opportunity in the next 12 months.

James:  And I, let’s just before we close out on this topic, let’s just share some tips. And I think just tips of what to look for, what to do when you by a presale. And I mean just a couple things that come to mind is – when you’re, when you’re walking into a presentation center, and you’re or you’re selecting a unit – what are you looking for the units that you select in a presale? The advantage of being first and is you have options. So what are the things that when you have too many options that can be overwhelming.

Denny: Sure. 

James: How do you narrow that?

Denny: Location in the building is super important. So a lot of these in East Vancouver are on busy streets, on Broadway on 1st, on Grandview and facing a busy street is always going to be more challenging resale wise. So being on the quiet side of the building, often that quiet side of the building faces north towards mountains. So being a little bit higher in the building and getting the view. And then depending on the construction if it’s a wood frame, being top floor is always going to be a premium resale wise. Top floor or big patios.

James: I think outside of the location of the building. I think air conditioning’s more and more important. You know there are still developments not doing it. I do feel it will be the norm in the future. And especially if you’re facing west or south I think air air conditioning is important.

But aside from that, you know, sometimes the right development comes up at the right price and it doesn’t have the amenities. It doesn’t have the air conditioning but the price is right. And when it’s a low rise, quiet side of the building, if there’s too big of a premium between the top floor and say it’s a four storey, low rise. Sometimes developers have a really luring entry level price for that second floor unit. But then that top floor unit same floor plan, might be $50,000 higher and it’s two levels above or more. 

If the premium, if the per-floor premium is too much. Then pick a lower floor but quiet side of the building.

If a third floor, usually the second floor is the cheapest, the third floor is the second cheapest, if the third floor view or outlook is better, significantly in some way than the second floor, upgrade to the third floor. If the pre-floor third floor on the fourth floor is, is absurd. Recognize it’s not going to realize itself in resale. So if it’s, if it’s for an investment lean towards the third floor but if it’s where you’re, if you’re buying it for yourself, there’s a huge perk to living on a top floor. So if you buy for yourself, ignore the advice but if you’re buying for investment, watch that premium and in a high rise example, as an investor I typically steer towards the most favorable there’s usually a favorable side of the building. And if I have my investor hat on, I’m usually leaning towards lower – mid building, you know, I would tend to find that the 10th floor would still have a nice view and some developers like to charge $10,000 or five to $10,000 a floor and if, if they’re getting really ambitious with $10,000 a floor and you can have say a 10th floor unit at $600 grand and a 30th floor unit at, I don’t know what that math is, like, call it eight, $750 I don’t think you’re gonna see that gain in resale market. 

So recognize that you’re buying presales on a tower. The lift a lot of developers put on each floor is more than you see in resale. They do that in my opinion because they can get away with it the way that they structure it is, a low appealing entry level price on the bottom floor and then gradually as they sell off, they, they have the low price to get you in the door and then for those that are really picky and want to be at the top, they’ll pay the premium. But I’d say oftentimes in the resale market, you might see a $2,500 floor premium and in the presale market, they might be trying to get away with $10,000 or $7,500. 

Denny: Parking and storage is a, is a really interesting thing as an investor too. Often like East Van for example, a second parking stall my coffee $30, $35 grand and getting that out of selling it in the future is very, very challenging. You’ll get a little bit of a premium based on a recent one, say one bedroom condo, if you have the second parking you’ll get a bit of a premium it might be $10 grand, but getting $35 grand out is going to be very, very challenging and probably not going to happen. The storage locker thing is always like, well how much does it cost? If the storage locker’s five grand and you are an investor in the future, getting the five grand out is maybe or maybe not. But in a slow market, having a storage locker could be the difference of you selling or you sitting on market for three months. The, what do you think about the parking stall thing? Because in a lot of circumstances, developers are not willing to discount parking stalls and maybe in the next 12 months we see that change slightly with slower presale environments but in the last two years – New West 25k per parking stall, Burnaby probably 30, East Vancouver 30 or more. 

James: Yes, somewhere in my career they went from $5,000 to $30,000. And when I started off I remember “News” in New West they were selling for $2,500 a pop. 

Denny: Oh! Buy em all!

James: And yeah in early Victoria Hill days it was like five grand but then they jacked it up to like 25. To answer your question I think if they are including one stall and no locker I do think a storage locker in most cases makes sense. I do think going from one stall to two stalls. If you’re paying $20,000 or more for that second stall. I think you’d better have a high end unit. I think if, if you have an 800 square foot two bedroom, don’t do it. I mean sorry, don’t act on our advice. This is not financial advice but if you have a 1300 square foot sub penthouse, just a higher end unit in the building, there’s a higher probability that the buyer will want an additional parking stall and it could make the difference of you selling or not selling to a buyer down the road. 

So making your place more liquid and appealing is a good argument for that second parking stall if you have a high end unit. Usually the higher end ones should come with two stalls, if the developer’s not including a storage and two stalls in a sub penthouse shame on you. But I think that would be the expectation. 

Denny: As an investor the hot topic in the last couple years is the EV chargers.

James: Yeah.

Denny: All stalls are capable of you recharging. They all have a 110 volt. Do you upgrade as an investor to have the EV charger put in?

James: I mean, it depends on cost, obviously but I think the ultimate is, it’s yeah, if the infrastructure is easiest at that time I probably would do it. It may not make an extra dollar on your first tenant. But if it’s a long term hold at some point in time, it’s going to be an expectation.

Denny: The, it solely depends on the cost. So if a developer is charging $1,000 to upgrade to a EV charger, do it. If they’re charging you $5,000 probably wait till completion and have your electrician come in and do it for you because it’s gonna be way cheaper. The $1,000 just kind of the fringe. 

James: I guess we got to put in an disclaimer, if, if that’s in a townhouse where you have control of your unit you can add a later, absolutely. But if it’s in a condo tower, like in Brentwood Concord with all the stalls had EV charges, well, in the section I saw so I don’t know the whole development did but I mean, you might be in a scenario where that’s your chance to do it. Otherwise you’re asking for strata permission and you know, I feel it, any building needs a way, needs to be mindful of adding future EV chargers, but it might be one of those things where instead of getting one at your stall, you have to go to the specialized EV charging stall. And it just may be inconvenient. 

One thing I will highlight with the townhouse comment and I, I don’t know, if you’ve had an inspector talk to you about this, but the, a lot of townhouses will advertise that they’ll be, they’ll have wiring ready for an EV charger. But what they’ll often do is they won’t actually put the charger and they’ll just cap off the wiring there. Because a lot of, I believe a lot of townhouses have 100 amp electrical service. And the actual charger triggers it to be more than 100 amp and developers don’t want to upgrade the service to a 200 amp. So what they do is they just rough it in or cap it off. And I think in theory, when if, you put in a 30 amp charge to charge your car down there, you’re, you’re either in breach of code, that 100 amp service is not supposed to handle it, so you’re doing something that’s against code. But ultimately, a lot of what developers and townhouses are, are offering right now is against electrical building code. If you wanted to get the charger, the right amperage and put it in on the service that they provide. They’re not providing enough electrical service for what they’re giving you.

Just a little tidbit, that doesn’t mean don’t do it. I mean, you can slow charge your car, no problem. Just slow charge your car. 

Denny: You can adjust the chargers too. So I think a lot of the chargers that you purchase for your car are going to be 40 amps. But a lot of the electrical panels won’t have room for 40 amps. So you just have to adjust the charger or get a different charger that is 30. That’s what I had to do in my in my townhouse in Port Moody is that I plugged in my car the first couple of times that tripped the breaker. And I’m like “What the hell’s going on here?” So I called an electrician friend. He’s like “Ah, you probably have like too much amperage going to the charger” but you can adjust, in the Tesla charger anyway you can adjust on the app, how much amperage is going to that charger so you can turn it down to 28 or whatever.

James: Ah, I’m so jealous of your Tesla.

Denny: Which is cool. I know. So that’s what I had to do. 

James: I had the decision to go 4runner and I have been regretting it ever since! It looks cool though. That’s a lot on presales. 

Denny: Yep, that’s a lot on presales. 

James: Yeah, in closing it’s weird right now. I’m excited to see what opportunities come in presales next year.