Mortgages on Fire
I sat down to write my column and there were two themes from the last few weeks that jumped out at
me. Mortgages on fire is a bit tongue in cheek. The two things that have been a theme in my conversations lately are how the fires throughout the province are affecting both the housing market and the purchase process, and how pre-build purchase files are feeling a bit like we need a whole team of firefighters to bring them across the finish line.
Purchasing a pre-build unit can be both lucrative and very stressful. When I say pre-build, I refer to
buying a home from a developer that has not yet been built. You choose your floor plan and color scheme, make a deposit to the developer, and wait for the project to be built.
I have seen pre-builds with completion dates ranging as far out as three years down the road. The
lucrative part I referred to is that (as a general rule) real estate increases in value over time. If you buy a unit now, it may be worth considerably more by the time the project is finished and you take
possession.
In the olden days (say two or three years ago) the time to completion wasn’t a big issue. Interest rates
were lower and people qualified for more borrowing power than they do today. Some people invest in a pre-build intending to sell it closer to the time the project is complete. What they are doing is selling their contract to a new purchaser. This is called assigning the contract, or if you are the purchaser you are buying an assignment of the original contract for a higher price than the original purchase paid based on current market value of the home.
Over the last few months I’ve seen clients in tough spots as their home is nearing completion and they
no longer qualify for financing with traditional lenders. After years of dreaming about their new home clients are suddenly facing much higher payments than they planned for when they initially signed their purchase agreement. In some cases they have had to come up with additional down payment in order to complete their purchase.
On the other end of the spectrum I’ve worked with several clients who have faced delay after delay of
the completion of their new build. During the height of the pandemic this was attributed to supply chain issues and challenges finding trades to actually do the build. Over the last few months I’ve seen stories on the news and seen a few cases of developers who are facing financial challenges, which then drags out the completion date even further.
If you are considering purchasing a pre-build, I cannot stress enough the importance of doing your due diligence. Research the developer. Does the developer have a strong reputation for building quality homes and completing them on time?
More importantly, do your homework with respect to your financing. Don’t purchase something at the
top of what you qualify for anticipating that everything will be status quo two or three years from now.
Shop at a lower purchase price and save as much for your down payment as possible between now and closing.
If you are buying a pre-build, please make sure you have your ducks in a row and have a backup plan for your financing … just in case.
Back to the other part of mortgages on fire. With such an early start to the fire season this year, I expect we are in for a challenging summer.
If you are purchasing a home, one of the conditions you have to satisfy for your lender is that your home is insurable and that you have adequate insurance in place.
If a fire flares up close to the home you are purchasing, you may have a difficult if not impossible time
trying to coordinate home insurance. As a rule, insurers require that the home you are buying is a
certain radius or distance from an active fire in order to provide an insurance policy.
In order to protect home buyers that are not able to finalize their home purchase due to an active fire,
realtors ensure that there is a force majeure clause in the purchase contract.
According to google, force majeure is a contractual clause intended to protect the parties from events
outside normal business risk. The clause may be used to manage the risk of unforeseeable future events that could impact a party's ability to complete its contractual obligations.
I’m dealing with this right now with clients that are buying in Chetwynd (not far from Tumbler Ridge).
The first thing I checked was that their contract included the force majeure clause.
Regardless of the time of year you are purchasing this clause is one you should look for in your purchase agreement.
As a reminder, if you haven’t already claimed your Home Owner’s Grant, take a moment to do that. It
takes less than five minutes to complete the online form.
