If he had to do it all over again, Kyle Lake would never buy another pre-sale home. But, if some real estate experts are right, buyers are not likely to see the trend again for another seven to 10 years.
Lake and his partner, Ashley Hughes, are among the tens of thousands of British Columbia families and individuals caught in a hot real estate market in the last few years. To get into the market, they chose to buy a condo that had not yet been built, commonly referred to as a pre-sale.
A pre-sale is a contract for the purchase of a home, usually a unit in a condominium, made prior to its completion. In some projects, sales have been made before construction has even started.
Purchasers and developers enter into a contract that provides for units to be built within a period of time for an agreed price. Real estate agents or lawyers for the developer usually hold deposits in trust as part of the agreement.
In Lake and Hughes's case it took 15 months before they moved into their Langford two-bedroom-plus-den condo.
When the young couple put their deposit down last April, the target date for completion was March 2008. A series of delays resulted in them finally moving in in late July.
"If I had known it would take this long I would have looked for something else," says Lake, 23.
He says the real estate market at that time was characterized by a lack of new condos to choose from, a low inventory of existing resale condos and real estate values that seemed to rise steadily.
"Back then, there was this mentality to buy what you can and get into the market before they sold out."
While he estimates his new condo is worth more than the $299,000 he paid, the delays surrounding possession and repairs on deficiencies in the unit have soured the experience for him.
A recent cooling in the real estate market and an increase in the number of units for sale could signal the end to the trend.
At the height of the boom, real estate agent Guy Crozier estimates, pre-sale contracts accounted for 65 per cent of his sales. It is a cycle he has seen repeat itself every seven to 10 years. With a rising real estate market, many purchasers buy units on the assumption that property values will be higher by the time the building is finished.
Driven by high demand and low inventory of resale properties, pre-sales were a popular way for individuals and families to shield themselves from escalating prices.
"In pre-sales, clients were shown a hole in the ground and asked to buy a piece of air," says Crozier, one half of the Crozier and Marchant team based out of Re/Max Camosun. He points to an overheated market where many investors entered the market looking for equity appreciation. They bought condos like stocks.
The investors had no intention of occupying the suites, and usually sold them as the completion date approached. But their involvement in the market contributed to a shortage in supply, further driving up prices.
With a downturn, more units are available for immediate sale, so there is almost no demand for pre-sales.
"I haven't done a pre-sale in two months," Crozier says. "Condo listings are up 50 per cent."
The numbers might be down for now, but developers say there will always be a place for pre-sales in the construction industry. Developers looking for financing for multi-unit projects are used to financial institutions demanding proof of a certain number of pre-sales before they commit to financing.
"The more pre-sales you can bring to the table, the more confident the bank will be that the project will succeed," says Bob Gill, president of Parkway Alliance Developments. His Reflections development in Langford is 70 per cent pre-sold ahead of the project's September target completion date.
While he says pre-sales aren't suitable for individuals who cannot wait to buy, pre-sale pricing -- which is generally lower than what the units will ultimately list for -- can be a good deal for buyers.
But Gill cautions that pre-sale purchasers should do their homework and read the fine print on the disclosure agreements, as every developer has different wording in contracts. The contract is a legally binding agreement and buyers need to seek legal advice.
He says deposits, which range from 10 to 15 per cent of the purchase price, are generally not refundable. Buyers who change their minds and try to get out of the contract can forfeit their deposit and can be sued by the developer for damages. Pre-sale buyers who try to sell their contracts might also find certain restrictions and fees for doing so.
Even with a market slowdown, Gill is confident he will be able to sell the remaining units of his development.
He says, "Ultimately, people like to touch and feel what they are going to buy."
Emphasis mine. Kind of speaks for itself, don't it? Long story short: young guy and his girlfriend buy condo before built; young guy and girlfriend have less than positive experience with developer; young guy still confident that "my place is immune to downturn"; REALTOR confirms massive speculative buying drove prices upwards unsustainably and market is now very slow with rising inventory and falling sales, then says "sharpen yer pencil young fella"; Developer says: "I sell it all"; Developer doesn't say: "I dropped prices $20K" (he did, and will again); Market says: "Yawn, see you in 7-10 years".
There you have it folks... Buyer turned homeowner, CondoKing and Langford Beautifier all agree, this market has boiled out.