Presale

Definition of "Presale"

Written by

JERRY BOLOCK

COLDWELL BANKER

A presale refers to selling a commercial or residential unit prior to its completion. For example, a residential home developer discounts the price of a home by $10,000 if prospective buyers will agree to purchase prior to its completion. This enables a developer to obtain a construction loan to complete additional units.

Many investors or first-time home buyers see presale homes as a great way to enter a market. For investors, if the market is “hot”, the potential of profit is the best incentive, so purchasing presale homes is an attractive opportunity for them. However, presale homes aren’t risk-free as the market can change at any time, which may lead to a loss of profit when home prices depreciate.

What does Presale Mean?

The definition of presale describes a home that can be purchased before it is ready to be occupied. These homes have not been lived-in yet, but they can be bought before they are built or during their construction. When we discuss a home that has already been built, is move-in ready, but wasn’t lived-in before, those are “new constructions”. For a home to be a presale home, it must be purchased before or during its construction. 

Pros of Presale Homes

There are many benefits to purchasing a presale home that are unavailable for newly built homes. To start with, the mortgage can be delayed until the home is entirely built. This means that while the home is already yours, the price set, and the mortgage established, you don’t yet have mortgage payments. This allows you to continue saving money for the down payment and closing costs. Also, if the lender is a partner company of the developer, they can hold the rate. This means that if the rates go up while you wait for the presale home to be move-in ready, the rate hold won’t allow your mortgage rate to grow. However, if rates go down during this period, the lower rate will be applied to your mortgage.

Secondly, as the price for the home is already set, if the value of homes in the area appreciate, your purchasing price will not, but your presale home will already build up equity. This is the main reason why presale homes are so popular for investors.

Thirdly, presale homes come with a warranty as new purchases that can be between 2 to 10 years. This will limit the cost for any new owner once they move in.

Cons of presale Homes

With the potential of market fluctuations, while the housing market can appreciate, it can also depreciate, so no profit is certain. This can mean that while the market was rising at the time of purchase, it can happen that by the time of completion, the market shifts and starts depreciating. The second con for presale homes is that mortgages for the purchase can not be approved before completion. This means that while your mortgage can be pre-approved based on an assessment. However, because of this and the second assessment that occurs once the presale home is completed, if the first evaluation is higher than the second, the homebuyer will have to cover the difference as the lender will only cover the value based on the second assessment.

Lastly, whenever you purchase a presale home, you technically purchase a home based on its floor plan. Because of this, you need a bit of imagination and a real estate agent as the variance allowance is stated in the contract of purchase, and they can help you decipher it. This can tell you what the developer can take away from the home based on square footage, finishing, etc., during the construction as the floor plan can be altered during construction.