Preconstruction vs Resale Property
If you’ve finally accumulated enough funds to purchase your first property, then it’s obviously a very exciting time. However, you’ve probably discovered that actually making the purchase isn’t something that you can blindly rush into. As soon as you’ve reached your target, you start getting unnerved about all the new buildings that are popping up all over the place, and unnerved by stories about mismanagement and fraud that can spell disaster for property owners. Despite the risks, I’m sure you’re not ready to just turn your plans around. Like many people who are looking to buy, you may live in an area where there’s a selection of both preconstruction and resale properties. This can present a pretty difficult decision if you’re totally new to buying real estate. Here, we’ve listed the pros and cons of both options. Hopefully they’ll make your decision so much easier.
Buying a pre-built, resale property is the most popular and straightforward option when it comes to purchasing property. There are a range of advantages to this option. One of the most basic advantages is that you can see what you’re going to buy, and don’t have to simply imagine how it will look using floor plans. Another benefit is that there’s no waiting time, and you can move in or work on flipping the property as soon as you close the purchase. One advantage that attracts a lot of people who are inexperienced with real estate is that the maths are a lot simpler. You can get a mortgage pre-approved straight away, and then calculate your monthly payment based on the going rate.
While the benefits can be a huge help, buying resale property certainly has its downsides. For one, if there have been tenants or owners living in the unit for a couple of years or more, there may be damages or things missing, which means you’ll need to set some money aside for renovations. Furthermore, if the property is of a high quality or part of a popular development, there’s a chance that you can get locked into a bidding war, and be forced to drop out when the price goes over your limit. Preconstruction properties bought from the builder, on the other hand, are fixed.
A lot of people will tell you that going with the preconstruction option is nothing but headaches, and more trouble than it’s worth. However, choosing this option has various advantages. First of all, you’ll be the first owner of the property, which means that you’ll have the freedom to customize certain things. You’ll be able to choose from a range of structures from companies like The House Plan Shop, and from there you’ll have a lot of choice when it comes to things like the appliances, cabinetry, flooring and so on. Preconstruction properties also tend to be significantly cheaper, but this is a double-edged sword, as there’s a risk that the project will be delayed repeatedly or called off entirely. However, this isn’t the case in a lot of high-demand areas. Still, there’s another big financial advantage in that it gives you more time to save for the property. You’ll pay for the construction in a series of deposits. By the time it’s ready for occupancy, the deposits will usually only add up to 20 to 25% of the purchase price. However, this can vary depending on the structure the construction company uses for their deposits.
People looking for a fairly large property for a reduced price may find the preconstruction route very appealing, but again, it’s not without its drawbacks. First of all, you’ll be paying for a property based solely on the floor plan. You won’t see the finishes, exterior layout or outside view until the project is dusted off. Another major disadvantage is that buyers may find themselves paying phantom rent. You can occupy the unit you pay for as soon as it’s ready. However, until the whole building is finished and officially registered, you’ll have to pay the builders phantom rent. You can’t start with any mortgage payments until you officially own the unit. Until the deal is closed, you’ll have to pay various fees to the builders, which can be costly and confusing. Perhaps the biggest disadvantage of buying a preconstruction property, which is usually the final straw that drives people away, is a lack of guarantees. The building is going to take years to complete. When it comes to condo buildings, there’s always a risk that the construction firm won’t sell enough units to go ahead with construction, or won’t be able to finish it for some other reason. When this happens, you don’t get your property. Simple as that. Other kinds of complications can mean that the project can’t be finished according to the original plans. This can mean that the building will have to be finished without some important feature you were banking on.
The Third Way
Aside from buying re-sale or preconstruction, there is a third option: assignment, which is buying a preconstruction property from someone who’s already bought it, rather than from the builders themselves. Buying one of these properties can be tough, mainly because it’s hard to determine how much you should pay up front. This value varies greatly from case to case. You’ll have to pay to cover all the deposits the owner has already paid to the developers, and then enough to cover whatever profit the owner is trying to make. They’ll almost always be looking for some kind of return. While you’ll invariably need more cash than you would with the other two options, there’s a certain advantage in that it carries less risk than a regular preconstruction purchase. The pros and cons listed above will still apply, depending on how close the building is to completion.
If you’ve been stuck on the fence between buying preconstruction or resale, I hope that this guide has answered some of your niggling questions. Weigh up the pros and cons, research the options available, and you’ll get to the decision that’s best for you.