Wildfire impact and pre-build issues when it comes to mortgages

Photo: The Canadian Press / BC Wildfire Service

An evacuation order was issued earlier this month for the community of Tumbler Ridge in northern B.C., as wildfire moved close to the town. The order was lifted after nine days and the fire did not reach the town..

When I sat down to write this column, there were two themes from the last few weeks that jumped out at me.

The two themes have come up in my conversations lately — 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 colour scheme, pay 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 past—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 purchaser 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 building.

Over the last few months I’ve seen stories on the news and seen a few cases of developers facing financial challenges, which drag 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.

As for 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 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 who are not able to finalize their home purchase due to an active fire, realtors ensure 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 who are buying in Chetwynd (not far from Tumbler Ridge). The first thing I checked was if 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.

Finally, as a reminder, if you haven’t already claimed your Home Owner’s Grant (for you annual property taxes), take a moment to do that. It takes less than five minutes to complete the online form.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.