The world of pre-construction purchasing is very different from – and infinitely more complex than – that of resale buying. For some, purchasing a condo or house before it’s built is the ideal way to buy a home or investment property; for others it is not. Here are the facts you need, to help you make the buying decision that is best for you.
Why Buy Pre-construction?
There are several reasons that you may choose to buy pre-construction, rather than resale. For many purchasers, there is the appeal of buying something brand-new, a property that doesn’t require repairs, renovation, or even a major cleaning before move-in. Buying tomorrow’s property at today’s price is another plus. For younger buyers whose family may help out with the deposit, there is the advantage of having a few more years to build income before the mortgage kicks in. And, importantly these days, when you purchase pre-construction, you don’t have to engage in any bidding wars. Pick the property you want at the price point you want, and it’s yours!
In order to purchase any property, pre-construction or resale, you need to be pre-approved for a mortgage at the time of purchase. In the case of pre-construction, you will also need to go through the mortgage pre-approval process a second time, before the final closing on your purchase, when title is transferred from the builder to you. Remember that rates will change over the intervening years, and that your income and life situation may also change over that period.
Project Sales Representatives
Every pre-construction project has a sales office, with a team of salespersons. But what many prospective buyers don’t know is that the sales representatives employed by the developer represent the developer’s interests, not yours. To ensure that your best interests are served, do not register directly with a project sales office; rather, use the services of a Realtor of your choice, who is experienced in the sale of pre-construction properties. This may be a Realtor you have worked with before, on the purchase or sale of a property, or a Realtor recommended by someone you know and trust. The Realtor you hire has a fiduciary duty to you, will give you the best advice, and will be able to negotiate favourable terms that you will not get when dealing with the project sales team. For instance, your Realtor has the power to cap your closing costs, which can be substantial.
Whereas the purchase of a resale property becomes legally binding on the buyer and seller the moment all the paperwork is signed, pre-construction purchases come with a 10-day cooling-off period. Pre-construction purchase contracts are drawn up by the builders and their lawyers and are very complex, so it is essential that you forward your newly-signed purchase agreement to a real estate lawyer experienced in this area, for a thorough review. Your solicitor will discuss and explain all aspects of the contract with you, so that you can make a final decision as to whether or not to move forward with your purchase.
When buying a resale property in the GTA, a five percent deposit on acceptance of the offer is pretty standard, with the rest of the funds due on closing, usually within one to three months after signing the purchase agreement. The total deposit for a pre-construction purchase is usually 20 percent; however, the initial deposit on signing is fairly minimal, ranging from just $5,000 to $20,000, followed by instalments to 20 percent that are stretched over one to three years, depending on the developer. Furthermore, some projects feature incentive deposits as low as five to ten percent, to entice purchasers – something that investors find particularly attractive, as they are not tying up much money, and their risk is very low, should rates increase or an economic crisis occur.
Choosing Finishes and Upgrades
You can’t select your finishes when you buy resale, but when you purchase pre-construction, you can choose from a range of choices in cabinetry, flooring, countertops, etc., to allow your property to reflect your taste. But keep in mind that upgrades can be expensive and that (in the case of condo apartments) you will have to pay the bill for these approximately one year before occupancy, so be sure to budget for that expense.
The Waiting Game
Of course, the big downside to buying a pre-construction property is the wait between the time you sign the purchase agreement and the time that you can actually take occupancy. In the intervening years, the market for your type of property or that particular neighbourhood can go up or down – although real estate values in the Greater Toronto Area have remained strong over the past decade. Buyers of pre-construction condos have seen returns of 10 to 15 percent per year on the purchase price, so that by the time they take occupancy, they have doubled if not tripled their investment, in a strong market such as the one we’ve had.
The builder will give you an estimated completion date for the property, but that is likely to get pushed back, anywhere from a couple of months to a couple of years, so be prepared for that eventuality.
It’s not unusual for the builder of a condominium building to make changes to units or to other areas of the building at some point during the construction, for various reasons. Buyers are protected from “material changes”, which means that you can cancel your purchase if the builder makes a major change that no longer makes your purchase appealing. However, be sure that you understand what your purchase agreement deems not to be a “material change”, before you sign on the dotted line.
Sometimes it’s the buyers who would like to make changes to the space they have bought. With pre-construction houses or townhomes, you have a fair amount of flexibility to alter the layout to suit your specific wants and needs. In the case of condo apartments, boutique buildings afford buyers a much better chance of being able to make changes to the layout; there is little chance of moving walls, etc., in a large, high-rise building.
Interim Occupancy (Condos)
Finally, the big day has arrived! Your unit is ready for you to move into (or for a tenant to move into, if your Realtor has negotiated that for you). But what exactly does “interim occupancy” mean? It means that the building, and your unit, have been completed to the point where City inspectors have certified the space to be livable. However, you still do not own the unit at this point. Final closing is yet to come.
During interim occupancy, you start to pay the builder a monthly fee that is made up of three parts: interest on the unpaid balance of the purchase price of your condo; an estimate on the municipal taxes for your unit; and a projected common expense contribution to keep the building running.
Condo buildings grant occupancy from the lowest floor up, so those with units on the lower floors will pay interim occupancy fees for a longer period of time than buyers of suites higher up. And amenities are the last element to be finished in any building, so don’t expect to be lounging by the pool or working out in the gym just yet.
Low Condo Fees… To Start
Whereas the monthly fees in resale condo buildings can be very high – especially in older, smaller buildings with lots of amenities – the fees in new buildings are relatively low, at least for the first couple of years. This is because the fees can only be estimated in advance of construction, and also because the builder covers any increase in the first year after your final closing. Count on an average of 59-69 cents per square foot per month at the start, depending on the number and type of amenities your building offers – although fees may be as high as $1.50 per square foot per month in boutique, luxury buildings. Within two years, the condominium’s new board of directors will take over the running of the building and, along with the condominium’s property manager, will set the budget going forward. At this point, expect your monthly fees to rise by around 20 percent, before stabilizing.
Condominium Registration and Final Closing
Although a few builders time occupancy to coincide with registration of the condominium – saving buyers months of interim occupancy fees – in most cases the interim occupancy period lasts three to six months, and sometimes even longer. To become registered, the building must have passed all inspections and gone through the process to become a legal entity. This is when you reach the final closing on your unit. You become the legal owner and your mortgage kicks in.
When you buy a resale property, your closing costs include land transfer taxes (always the largest closing cost), adjustments on property taxes, utilities, etc., and your real estate lawyer’s fees. But when you close on the purchase of new construction, be it a house, townhome or condo apartment, there are many more charges to pay that can add significantly to the total cost of your purchase. In fact, those closing costs can run well over ten percent above your purchase price. In addition to your legal fees and land transfer taxes, you will pay municipal development charges, education levies, utility connection charges, HST on your appliances, the Tarion new home warranty plan enrollment fee – more on that later – and, in the case of a condominium, two months’ contributions to the building’s reserve fund. It is therefore vital to know ahead of time how much money you should set aside for closing costs. Reputable builders tend to offer caps on closing costs in their purchase agreements, but if that is not included in your contract, your Realtor can negotiate this for you.
In addition to the HST you will pay on your appliances, there is also HST payable on the full purchase price of a brand-new property.
If you or your immediate family will be living there, you will likely qualify for an HST rebate, and builders usually adjust the price by that rebate, but could add it back on if they suspect you’re a short term investor. However, if you rent out your property for at least a year, starting at occupancy, you can also claim the rebate. Most of the time, if you assign the unit (i.e. sell it to another buyer before final closing), the rebate won’t be transferable to the new purchaser and the builder will automatically add on the HST, on the final closing.
The rules around HST are complicated, so be sure to speak with your real estate lawyer about the rebate before you buy. Do note, though, that any purchase over $500K is eligible only for Ontario’s provincial rebate, which is a max of $24,000, whereas the rebate can be higher for properties priced at less than $500K, as these are also eligible for a federal rebate.
One huge advantage to buying pre-construction is the Tarion new home warranty that is included. Almost every new construction home / condo in Ontario is covered by Tarion. The coverage is three-pronged, with a one-year warranty to cover defects in materials, as well as unauthorized substitutions; a two-year warranty to protect against water penetration, defects in electrical, plumbing and heating systems, and problems with exterior cladding; and a seven-year warranty covering major structural defects. For most condominium projects, warranty coverage also extends to the shared areas of the building, such as the lobby, corridors, gym, rooftop terrace, etc. Tarion also provides protection for your deposit, as well as coverage for delays in occupancy. Learn more at: https://www.tarion.com/