There are many great advantages in buying a pre-construction condo in Toronto – we are big believers! Condos in general, both new and existing come with great advantages: condos are generally more affordable than houses, they offer modern and luxurious amenities, and most importantly a low maintenance lifestyle. Imagine the freedom!
Buying brand new has great additional advantages: customizing your space to your liking by choosing colours for the finishes, everything is brand new and the new appliances are under warranty. And let’s be honest, there is incredible joy in being the first to live in a new place.
As you consider buying a pre-construction condo, it’s important to learn and understand what is unique to purchasing and investing in pre-construction condos.
Here are some important things that all buyers of pre-construction condos should know before entering in a transaction:
Not every new condo project on the market is a good investment opportunity. In fact less than 10% of new condo projects are actually good investments. This is why it is critical to do your research and work with a realtor who specializes in pre-construction condos. This specialist will not only have experience in pre-construction condos but will also know which locations, builders (super important), which unit types are good investments for rental returns and future resale value as well.
Here are some quick factors to consider when looking at condo projects: builder reputation and experience, location, transit connectivity to name just a few.
You will be investing a significant amount of your savings in this investment property or home. You do not want to take this lightly. It is critical to do your research thoroughly especially on the builder because as with any partnership, it is important to know who you are in business with!
Your pre-construction condo specialist realtor is a valuable resource: Chances are they have worked with the builder before and can speak to their reputation and track record.
Other ways to learn more about a builder: A good place to start your research is on Tarion’s website under Builder Directory.
If the development is a joint venture it is important to research both (or more) of the builders.
Here are a few things to look for in their past developments: how long did it take to start construction and how close did they complete the building to the stated occupancy date?
If the builder has condo buildings that are already completed, book showings through the MLS system to visit the building and the condos – look at the amenities and the finishes in the suite. It is a good idea to check out the workmanship and the quality of finishes the builder provides.
When possible, speak to a past owner. May be someone who has been through the pre-construction process with the same builder(s) and can speak from their experience about the sales, construction, occupancy and final closing processes.
As with every investment there are risks, pre-construction has risks as well. One of the higher risks with pre-construction developments is the possibility of the project cancelling prior to starting construction. This is why it is important to always invest with reputable and experienced builders.
One of the greatest advantages of investing in pre-construction condos is the extended deposit structure.
Most pre-construction condos require approximately 20% deposit of the total purchase price. Often this deposit down payment is broken down into several 5% instalments to be paid over the course of the project’s construction phase, 3 to 5 years (depending on the project).
Let’s look at numbers: for a $500,000 investment a 20% down payment would be $100,000.
Not many people have that amount of cash on hand to pay upfront.
This is why investors like the extended payment plans as it allows them to plan for the upcoming payments in advance. For first time home buyers, these payment plans are very important as it gives them time to save up towards the upcoming payments – kind of like a forced savings plan.
Remember, you really don’t need as much saved as you think!
In Ontario, every pre-construction condo purchaser has 10 calendar days to reconsider and withdraw from their purchase contract. During this 10-day cooling off period, also known as the “rescission period,” purchasers should do the following:
(i) Secure the unit: make the 10 days period work to your advantage. Once you sign the agreement of purchase and sale, you have successfully not only secured the unit but have also secured the price. Especially in early launch days, builders increase prices quite frequently with every new release of suites. We always advice our clients, that as soon as we bring you a unit that you like, sign up and secure both the unit and the price. This is because if you take your time to consider, the unit may no longer be available, most likely the prices will have gone up and there is no negotiating the price with the builder. So it’s a good idea to sign, you do have the 10 days to think about it. If the hesitance remains or you do not feel good about the investment, you can withdraw from the purchase within the 10 days at any point.
(ii) Lawyer review: Work with a specialized (in pre-construction contracts) real estate lawyer to review the agreement of purchase sale – this is important so you are aware of any unusual clauses or costs included,
(iii) Get a mortgage pre-approval: usually builders do allow you 30 days to provide this however we always advise our clients to get this done in this cooling off period. This is because if for whatever reason you are unable to secure a mortgage pre-approval, you still have the option to withdraw from the purchase during this time. If you wait until after the 10 days expire, at that point you will not be able to withdraw and are in a firm and binding deal with the builder.
(iv) Get post-dated cheques: it’s fascinating that many millennials do not have cheque books, we don’t blame them. It is an e-transaction kind of an era. Builders and their lawyers, however do require post-dated cheques for the upcoming instalment payments. Take this time to get a cheque book from your bank and submit the required post-dated cheques within the 10 days. This way, you do to have worry about visiting the sales centre for every future payment.
Pro tip: set alerts for yourself to make sure the account has sufficient funds on the due dates. Since these payments are so far in the future, it is easy to forget about them. You will be charged NSF charges and those are hefty so it’s best to avoid those.
From the sales in the early phases to completion, the project may be 3-5 years away. Purchasers will need to plan towards completion with this wait time period in mind. Most often then not, projects experience construction delays – these really are inevitable. Anything could happen, delays within the materials supply chain, strikes, weather related delays, cost related delays and the major one this year in 2020 pandemic related delays. Anything can happen within those 3-5 years.
We always advise our clients to expect and plan for 6 – 8 months delay from the occupancy date that is stated on the price list you receive when you sign the contract.
Builders are within their rights under Tarion to delay closings for the project. This is included in the Tarion addendum in all agreements of purchase and sale. Builders are required to communicate timelines to the purchasers as they are available. It is also a great idea to periodically visit the project site to see the construction progress and also to take pictures as keepsakes of your first home or investment! You could also keep in touch with the builder’s customer care department to learn more about the project’s progress.
Closing costs are due on Final Closing for your pre-construction condo. Every pre-construction project will have different closing costs. There is no set amount for closing costs. There isn’t a percentage amount either – it is unique to every agreement, what is included in the contract and of course what the purchase price is as well.
Closing costs are out-of-pocket expenses. This means you have to budget for these to be paid on Final Closing. The good news is that you have 3-5 years to save up for them.
What we’ve seen this year, when buying a pre-construction condo in 2020 the closing costs are approximately $15-20k for a studio or 1 bedroom condo, and approximately $20-40k for a 2 bedroom or larger condo. This is not the case for all condos and this is not a rule of thumb either.
What are the biggest closing costs?
(i) Land Transfer Tax: this may be the single highest expense on closing. If purchasing in Toronto, the city has both a municipal and provincial component to the Land Transfer Tax.
(ii) Development Charges or Levies: this is may be the biggest expense. On signing you should always try to have the builder cap these charges to a maximum amount. It is important to note that development charges are subject to HST.
Other costs include: Legal Fees, Utility Hookups, Tarion Warranty Program, HST on appliances, Reserve Fund Contribution, Miscellaneous fees and charges.
(iii) HST: Most developer’s price lists will state “prices include HST.” Careful though because prices include HST only when you are moving in the condo yourself or someone in your immediate family is moving in there as their principal residence. If you are an investor planning on renting the condo, you will be required to disclose this fact to your lawyer on Final Closing. At this time and with a one year lease, you can apply for a HST rebate to get this money back from the CRA which is great. However you do need to budget for the HST as part of your closing costs. Please note however this really isn’t a “cost” since you will get a part or all of your money back.
For more information on HST and condo investing we strongly recommend you speak with your lawyer or accountant. Here is a resource for more information as well.
You could move in or rent your condo (if you have the Right to Lease clause in your agreement) in the Interim Occupancy Period – this is when you get the keys to your condo however the title for the condo has not yet been transferred to you just yet. That is because the building has to completed, registered and pass all required inspections before it can get to Final Closing. This is when you get title to your suite and take on a mortgage.
Until then, the builder will still be on the title, and your “mortgage” payments will actually just be rent payments or “occupancy fees” made to the builder until the building is complete. Your mortgage won’t actually kick in until Final Closing.
It is important to note that the building’s common elements will likely not be completed at this stage. The amenities will not be accessible and the hallway and elevators not complete.
If you decide that you no longer want to close on this condo to own it, then you have the option to assign the condo provided that you have the assignment clause in your contract. You can ask for this clause to be included in your contract upon signing.
Assignment of a condo is when the original buyer sells the unit prior to completion to a new buyer who assumes the contract as is. The builder however has to allow, approve and sign off on this assignment in order for it to go through. Usually the builder gives permission to assign the unit closer to occupancy date.
Written in your purchase agreement are details about “material changes.” This clause allows the builder to make changes to the floor plans of the unit or amenities etc. of the building. If there is a change in the interior of your unit, the builder usually notifies the client in advance. So you could end up with a unit that may have changes to the plan that you signed up for.
You have probably heard in the news of a couple of developments getting cancelled prior to the start of construction or while under construction. This could happen for several reasons. For example, the expected sales for the project may not materialize or the development approvals necessary for the project are not forthcoming.
When a cancellation occurs it can be really disappointing for the buyers. They may have purchased the condo 2-3 years ago at a lower price per square foot than current market value.
There may be some recourse with the help of Tarion to return the buyer’s deposits.
As of January 1, 2020, all agreements of purchase and sale will include a Tarion Addendum information sheet at the front of the purchase agreement that outlines some of the key potential risks of buying a residential condominium unit in a pre-construction standard or phased condo project.
Maintenance fees are estimated several years in advance. It is tricky for a builder to know how much it will cost to run a building prior to construction. Keep that in mind and consider the maintenance fee advertised as an approximation as the cost will change with the inflation rate among other things. Low condo fees can be enticing when comparing condo projects to one another, but always be prepared for fees to increase over the years.
As with any real estate transaction, its a good idea to team up with a specialized real estate agent who is experienced in buying pre-construction condos and can help you navigate the sales process and help you understand exactly what you’re getting into. Our team at Toronto Condo Investments are pre-construction specialists and would be happy to work with you!
Want to learn more? Sign up on this form and let’s chat!
We have other great blogs to help you learn more about pre-construction condo investing as well:
4 Reasons to Invest in Pre-construction Condos
5 Tips for Starting Your Pre-construction Condo Search
5 Tips for Preparing for Your Colour Selection Days
