The boom and subsequent decline of British Columbia’s real estate markets over the last few years—combined with the banks’ insistence on pre-sales of new strata units as a precondition for construction financing—has led to a plethora of issues and questions for developers and purchasers alike. Due to the inherent uncertainty involved in pre-sales, the B.C. Legislature enacted the Real Estate Development Marketing Act (REDMA) to govern pre-sale contracts, which are agreements for the purchase of a new unit and typically entered into before construction starts and subdivision is completed. They are contingent, therefore, on several factors, including successful registration of the subdivision plan and raising of title.
Depending on market conditions, what happens after a pre-sale can be problematic for both developers and purchasers. Pre-selling strata units as a requirement for receiving construction financing forces developers to sell at existing prices—in a rising market, these may well not fully anticipate price escalation. In fact, in the years before 2008, pre-sale prices completely failed to predict the unprecedented rise in construction and labour costs. Developers faced a triple pain: purchasers pocketed large market gains made at the developers’ risk; profit margins eroded as construction costs went up; and refinancing was made almost impossible because the banks’ inexorable demand for pre-sales effectively capped a project’s returns.
Consequently, developers faced two equally unpalatable options: sell a unit under the pre-sale contract at reduced (often zero) return or refuse to complete the sale (and risk a purchaser’s likely lawsuit). Some developers, however, were able to renegotiate prices with cooperative purchasers who were concerned about a developer’s ability and desire to complete a project.
More recently, the situation reversed as markets tumbled. Purchasers looked for excuses to walk away from pre-sale contracts as values declined and comparable properties became available for significantly reduced prices. An additional complication has been lenders’ reticence to provide the expected takeout mortgage financing; units are now often appraised below pre-sale prices, forcing purchasers to inject additional personal equity.
More...