Instead of a down payment, unfinished condo projects require a different kind of financial commitment called a presale deposit. It’s similar in that it's a substantial sum of cash provided to show commitment to the project.

Condo developers are bolstered by presale deposits because it lets them know that there is serious interest in the units, which can help assure them if there are delays or unexpected expenses during construction.

In British Columbia, presale deposits are usually held in trust accounts managed by third parties, lawyers or real estate professionals, which keeps the funds locked away from use by the construction company and from withdrawal from the buyer. Essentially, the third party is there to safeguard the funds during the transition period so that the condo developer feels assured of the commitment while being able to just take the money and run.

The amount and timing of presale deposits vary by development. However, there are a few commonalities that we can provide as guidelines of what to expect:

Typical Deposit Amounts

• Developers usually require between 5% and 20% of the total purchase price as a deposit, similar to a down payment.
• To ease the financial burden, these amounts are often divided into installments for condo purchasers, making them a bit easier to pay than a lump sum down payment.

Payment Milestones

The typical payment structure for most condo developments in BC, at least, is as follows:

1. Initial Payment: Generally 5% of the total purchase price, due upon signing the presale agreement.
2. Secondary Payment: Another 5% to 10%, often due within 30 to 90 days or upon achieving milestones like securing building permits. This is usually the most variable payment, depending more on the specifics of the project than the others.
3. Final Payment: Any remaining balance (if applicable) is paid near the project’s completion, usually within 6 to 18 months of the agreement date.

There are a couple of reasons the staggered payment method has become more popular. It provides greater flexibility to presale buyers who may be cautious around projects that can get extended indefinitely or even halted. It also allows them to pay in smaller doses, which can be more financially achievable for some.

• Research the Developer: Look into the developer’s reputation and track record before getting into business with them. Different developers have very different reputations, and it’s important to know what you’re getting into.
• Thoroughly Review Contracts: Ensure you understand all terms and conditions. Seek legal advice if needed. This is not something to be taken lightly, as the devil is in the details when it comes to some of these contracts.
• Prepare for Delays: Construction timelines often shift. Maintain realistic expectations and be prepared for at least 6 to 12 months of potential delays. Sometimes, it’s not even the developers' fault.
• Budget Strategically: Most developers allow for staged or staggered payments for the presale deposit. This can make an otherwise financially out of range property viable, so be sure to check what their policy is. 
• Use the Rescission Period Wisely: Take this time to consult professionals and confirm your decision. You have 7 days to get a full refund of your deposit, so you may use the time to triple-check that everything is in order.

Alright, we now know that presale deposits are held by a third party for safekeeping, but happens happens if you do want a refund? Well, there are a few different ways to get a refund, but the options are quite specific:

• 7-Day Rescission Period

Under the Real Estate Development Marketing Act (REDMA) in British Columbia, buyers have a 7-day window after signing the agreement to reconsider their decision. Cancelling within this period entitles you to a full refund of your deposit without penalty.

• Developer Non-Performance

If a developer fails to meet certain obligations, such as securing financing or completing the project, your deposit must be returned in full by law. This protects buyers from catastrophic failures on the developer’s end.

• Buyer Default

Similarly on the buyer’s end, however, failing to meet the terms of the agreement, such as missing deposit payments, can lead to the developer legally retaining part or all of your deposit, depending on the contract’s stipulations. Be sure to understand all your contract details on this.

Presale deposits in British Columbia are safeguarded in ‘escrow ’like accounts, called trust accounts as mandated by provincial regulations. These accounts are managed by neutral third parties to ensure funds are used only for their intended purpose. While not escrow accounts in the technical, and legal sense, they work similarly. So, here’s how these escrow trust accounts work:

Neutral Oversight:

Funds are held by a third-party lawyer, notary, or licensed real estate professional. That is, someone not controlled by the developer or the buyer. The third party will only release the funds when specified conditions are met, to ensure both sides follow through with their sides of the contract.
• Transparency: Developers cannot access the money prematurely, protecting buyers from potential misuse. This is not always done maliciously, as some developers may try to use the funds to cover necessary expenses. But this is not allowed as part of the risks with presales.
• Conditions for Release: Common triggers for releasing escrow funds include achieving project milestones, such as obtaining building permits or occupancy approval. Look at the specific contract to see the exact release component.

In part due to the similarities to down payments and yet lacking the immediate property of something like purchasing a house or already built condo, there are quite a few misconceptions about how presale deposits work floating around.

Let’s just take a moment to dispel some of these myths, shall we?:

1. Myth: “The Deposit is Always Non-Refundable.”

Reality: Deposits are refundable during the 7-day rescission period and if the developer defaults. Essentially, you’re protected from a short term mistake (if you find something in the paperwork or contract in the week after the deposit) and from the developer not fulfilling their end of the deal.

1. Myth: “The Full Deposit is Due Immediately.”

Reality: As we outlined above, most developers allow deposits to be paid in installments, which provides buyers with several different benefits.

1. Myth: “Changing My Mind After the Rescission Period Means Losing Everything.”

Reality: While you may forfeit part or all of the deposit depending on the contract, a deposit made in installments may only be 5 to 10% of the presale price. A costly mistake, but not the same as ‘losing everything’. You can also talk with the developer directly in the hopes of securing a more flexible payment plan.

1. Myth: “Developers Can Spend My Deposit Freely.”

Reality: Deposits are held in escrow and can only be accessed under agreed-upon conditions. The developer does not have access to the funds directly but rather feels secure in the reliability of the third party to deliver the escrow funds upon project completion.

Real estate agents and legal advisors are the two professionals you’ll most need as a buyer through the presale process. Both serve important purposes:

Real Estate Agents

• Market Expertise: Experienced agents offer insights into market trends and whether a particular project is a good investment, including its pros and cons.
• Property Selection: They can also help you to compare all the options in an area, helping to find the best fit for your budget and needs.
• Negotiation Support: Finally, skilled agents can even negotiate favourable terms for buyers and better payment schedules.

Legal Advisors

• Contract Review: Legal professionals scrutinize purchase agreements to ensure they comply with the Real Estate Development Marketing Act (REDMA).
• Protection of Rights: Lawyers ensure buyers understand their rights, including rescission periods and refund policies.
• Risk Mitigation: Advisors identify red flags, such as ambiguous terms or clauses that may leave buyers vulnerable. You’ll want this done properly if and when things go wrong.

Why Seek Professional Guidance?

Presale agreements are complex, complicated, and different from other real estate ventures. It’s filled with unfamiliar legal and market nuances. But with professional guidance, you can gain the confidence that your investment is secure and aligned with your financial and lifestyle goals.

Unfortunately, completion delays are not atypical for condo developments. If you are considering buying in this market, you have to be prepared to deal with them, as much as a developer might have an excellent track record and provide assurances. Things like the pandemic or natural disasters are problems no company can predict, but can lead to substantial delays. Here are the most common reasons in list form:

Common Reasons for Delays

• Supply Chain Issues: Material shortages or transportation delays can significantly slow construction timelines. Sometimes this can occur due to market changes too, where there’s a huge upswing in demand for a necessary material, or a downswing in supply for unforeseen reasons.
• Permit Approvals: Government oversight, the dreaded ‘red tape,’ can also cause unexpected delays. Of course, regulations are good and necessary for the property safety of construction, but that safety comes with some potential delays due to awaiting certain inspections and approvals. This can be anything from building permits and safety inspections.
• Weather and Environmental Factors: Adverse weather or unexpected site conditions may cause interruptions. Even something like an ice storm or an overly hot summer can cause enough of a problem to cause significant delays.

Legal Protections for Buyers

Under the Real Estate Development Marketing Act (REDMA), developers are required to disclose all significant changes to project timelines. Of course, the exact definition of ‘significant’ involves a judgment call, but it is meant as a legal protection from changes that would cause buyers to want to withdraw from the project. We recommend that all potential buyers review their contracts carefully to understand how each developer provisions for delays and their associated fixes or compensations.

Financial and Logistical Planning

• Budget for Extended Timelines: Include contingency funds in your budget so that you’re prepared for additional living expenses and storage fees in case you do face a delay.
• Flexible Move-in Plans: Keep your exact move out date flexible from your old place, or consider what temporary housing options you could use if you need them.
• Stay Informed: Regularly check in with the developer for updates and track progress. More than their anticipated timeline, the speed of their achieved progress is a good yardstick for how likely they are to finish on time.

How to Monitor Progress

• Developer Communications: Usually developers will have regular updates and reports on the construction status, typically in the form of mass emails to all presale purchasers. 
• Government Permitting Sites: For checking how the regulatory side is progressing, you can use online government-run portals to track the status of permits and inspections on the building.
• Third-Party Inspections: If things are looking especially suspicious, you can consider hiring an independent inspector to verify the progress and identify potential issues.

Presale properties offer a great chance at financial growth but also come with inherent risks. Many people wonder how and if it’s possible to sell your presale contract before the condo is completed. The answer is yes, but there are some caveats:

Presale Property Appreciation Before Completion

• Real estate value can drastically change during construction, which means buyers can benefit from rising prices even before a project is completed.
• That’s part of why presales became so rigorous and popular in high-demand urban areas, especially where supply is limited (CMHC - Presale Housing Market Analysis).

Risks of Market Downturns

• While the hope is that the property value will go up while in construction, there is always the risk it will also go down in value.
• When this happens, the financial situation can become very strained, as the ability to power money to pay for it can change with the change in equity.
• Therefore, you have to consider more than just if you could afford the loss, but also if you have the means to continue making the payments.

Strategies for Evaluation

• There is no surefire way to tell the value of a condo in the future. Especially in these volatile markets, value is tied much more to location and current demand than it is to inherent material value.
• This means there can be huge changes in value due to factors like trendiness, accommodations, local industry, and city growth.
• What you can do is research comparable properties in the area and in other cities with similar characteristics.
• Then, you can look at market trends and historical data to extrapolate where the value might be headed.
• Finally, it can be helpful to consult with real estate professionals to gauge potential risks and rewards.

Location and Developer Reputation

• Properties in desirable locations with access to amenities, transit, and strong community development plans typically offer higher returns. However, many buyers already know this and will include it in their offers. To succeed, you have to have unexpected insight into an area that other buyers haven’t factored into the price already.
• Reputable developers with a history of successful projects can also lower your risk of delay or problems with the building once completed.

Presale deposits are common for property purchases in British Columbia’s competitive real estate market. By understanding how it all works, including payment schedules, refund policies, and escrow protections, you’ll be ready to start the process with confidence. Stay informed, ask questions, and consult experts, and then you’ll be well on your way to making a well-informed investment.