Things you should consider when purchasing pre-construction developments
If you are in the market to purchase a property that has not yet been built, working with a real estate professional can help ensure your interests are kept at front and centre throughout the process. Many builders/developers hire sales people to work in their offices to sell their condominium/townhouse projects. These sales people are being compensated through the developer/builder. Using a separate party to oversee your interest is wise to make sure all terms to the agreement are fair and reasonable. I can help with this, and guide you through the entire purchasing process. Continue reading for a bit more information on the pre-construction investment process.
Here are a few other things to consider when buying pre-construction:
Deposit payment plans
Higher deposits are often required when purchasing a pre-construction property as opposed to a resale property.
A deposit may be as high as 25% of the total purchase price of the property before your occupancy date (date at which you take possession of the home). The deposit schedule varies with each builder but is generally timed for different phases of the construction (5% when you break ground, another 5% on occupancy, etc.) or by intervals of time (30, 60, 90 days, etc.).
"Cooling off" period
The law in Ontario allows buyers a 10 day “cooling off” period which allows buyers to back out of deals with developers/builders after they have received the full signed purchase agreement or the disclosure statement.
Your deposit plus any interest will be fully refunded. If you wish to keep the pre-construction unit and proceed with the purchase, it is advisable during this time to seek financial and legal advice.
You should receive disclosure statements from the builder that contain the following information: property description, number of units, estimated project start and finish dates, the current budget of the conddominimum corporation’s budget condo fees, bylaws, and rules/restrictions.
When dealing with a pre-construction purchase be prepared to be flexible because builders frequently change their minds on many original features that may have initially attracted you to the building in the first place. It is very important that you carefully read the sales agreement and be made aware of what these potential changes might be. For example, builders could potentially feature a roof top pool to then place it in the basement. These changes can still take place even after many units have been pre-sold.
Delays (please anticipate as this almost always happens!)
Rarely are projects completed on time so please expect delays. The agreement of purchase and sale that you signed with the builder will identify if there are penalties for these delays. In my experience you should add anywhere from 6 months up to 2 years for these delays. Think practically when purchasing a pre-construction. Your money is locked in for a long time.
Interim occupancy and registration of the condo
There is a period of time when the condo/townhouse is built that the owner can take possession of it however he/she does not own it legally and officially until a transfer of land has occurred. If a buyer takes possession of the unit during this time then they are financially responsible for payments to the builder that mimic the cost of mortgage payments, maintenance fees and taxes during the period of stay.
A property is only legally registered after is has completed all the regular city inspections and gone through all the processes to become a legal entity and registration is transferred to the buyers only at this time. Mortgage begin to be owed and buyers now become official owners of their units. The registration period can take anywhere from a few months upwards of 2 years. Again, prepare to be flexible.
When you first sign the agreement of purchase and sale, maintenance fees are only estimated and typically quoted lower than what they truly are once the board of directors reviews the reserve fund, this typically happens in the second or third fiscal year the condominium corporation is in operation. They must determine what it will cost to continue running the building and it is at this time that maintenance fees are seen to increase anywhere from 10-20%.
Closing costs can carrying significantly so make sure to read the agreement carefully to be fully aware and budget for them accordingly. Anywhere from 1-3% has been typical.
It is standard that when you buy a pre-construction property, you must contribute 2 months (at minimum) of maintenance fees into the reserve fund (to cover any emergencies) and this typically happens at closing.
New developments are subject to HST. If you are an end user (you will be residing in the residence) than you may qualify for an HST rebate. If you are an investor speak with your lawyer.