A slowdown in some of Canada’s residential real estate markets isn’t necessarily going to make it easier for buyers to land bargains, but the balance of power has shifted in favor of buyers.
“Developers are starting for the first time in many years to take a look at small incentives such as appliance upgrades and things like that,” says Vince Taylor, a partner with Pilothouse Real Estate Marketing Inc. in New Westminster, BC.
Deposits on pre-sale units – the amount paid to secure a property pending completion – haven’t yet felt the love, however. There remains virtually no room for negotiation; indeed, many developers are less willing than before to ease the terms.
While builders want to move unsold inventory – new units awaiting development as well as those already underway – tighter lending requirements in the wake of the US mortgage crisis are requiring them to post greater equity in order to get financing for new projects.
“The current situation in the US has, if anything, caused an increase in deposits,” says Taylor, whose company handles projects across North America from Puerto Vallarta, Mexico to Kamloops, BC.
Banks are now looking for 15% down, he says, while zero-down are history.
“That won’t be negotiable any time soon,” he says.
So, what’s a buyer to do?
The key to negotiating the best deal, as always, lies in a familiarity with market conditions.
The forces affecting different projects, even within the same city, may differ depending on the age-old laws of supply and demand, as well as the expertise of the developer. An area suffering a glut of condos, for example, will likely give a buyer greater room for negotiating a deal than one offering just one or two projects.
Taylor cautions that most developers won’t willingly accept significantly looser terms for fear of introducing downward pressure to a market, especially if speculation is rife that a downturn is imminent. Any precedent for lower prices or deposits may jeopardize the developer’s ability to maintain terms with future buyers. And, it may not look good on the project.
Good projects, after all, are difficult to negotiate down regardless of broader market conditions because they’re able to sustain interest. Showing a willingness to make deals in order to move units could unwittingly push projects downmarket – something no developer wants to risk in the current environment.
Still, exceptions exist.
Highlighting the dynamic were advertisements for 1212 Howe, a project Wall Financial Corp. was developing in Vancouver’s West End. A conversion from rental units to condominiums, Rennie Marketing Systems ran ads for the project headlined, Developer says ‘Close the presentation centre!’
While much of the buzz was on higher deposits in a city where developers have been largely disciplined and very little new product remains available, the project touted a 5 per cent deposit.
But there are other ways to secure deals, even as deposit requirements rise.
Registering as a potential purchaser with many developers will flag your interests to them, opening the door to alerts about discounts on projects the developer is trying to sell. While negotiating a further discount may not be possible, you’ll be one up on other buyers.
Paying the deposit isn’t the only aspect worth attending to, however.
A deposit will secure the property pending completion, but you may also want to leave yourself an option if you want to exit the deal.
The first opportunity is during the recession period, a window usually between three to 30 days in which buyers can opt out of the purchase agreement. The length will be either spelled out in the contract, or entrenched in provincial law.
A second option open to buyers is assignment, the process of assigning one’s interest in the purchase to a third party. The right of assignment is typically allowed except where explicitly excluded, though it is common for the right of assignment to be spelled out in the purchase agreement.
An assignment grants a new buyer rights to the presold unit for a mutually agreed upon amount. The original deposit, however, returns to the deposit pending completion of the unit and the new buyer stepping in as owner. Since this typically works out better for the original purchaser than the developer, some developers are putting limitations on assignments.
Should a buyer wish to back out of a deal completely, effectively breaching the contract to purchase the unit, the deposit is forfeited.
In the event that the developer fails to complete the project, your sale agreement should spell out your rights and entitlements. Review the sales contract with your lawyer to ensure your interests are adequately protected.
Regardless of what percentage of the purchase price a developer requires as a deposit, the process follows a similar pattern from province to province in Canada.
Typically, three installments of the deposit are made. The first is required on signing the sales contract. A second is typically required within 60 days. The final installment is made when the developer files the final disclosure statements, usually within six months of signing the contract.
Payment of the complete deposit concludes the process, and the funds become nonrefundable except in the event that the developer halts the project and does not fulfill its obligations.
The deposit funds are held in an interest-bearing trust account. Should the project go sideways, purchasers are entitled to immediate repayment of deposit funds with accrued interest.
A trust fund is used to protect the interests of purchasers. Never pay a deposit directly to a developer or any other vendor.
Peter Mitham is a freelance writer in Vancouver, and co-author of Real Estate Investing for Canadians for Dummies.
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