Before you buy a preconstruction, whether it is a condominium, towns or even a detached property. One of the most important steps you can take before you buy is to educate yourself and get the help you need to make an informed decision. Consulting this Guide is a good start, but it is also important to seek legal advice before you buy. Buying a preconstruction is a complex process and involves reviewing lengthy and sometimes difficult-to-understand documents. Seeking legal advice is the best way to ensure you are making an informed decision.
What is preconstruction?
A pre-construction project in real estate is exactly what it sounds like: it is a property or home development that has yet to be built. Pre-construction homes are a popular choice with homebuyers who want to live in a brand new condominium or town/Detaches homes that can still be customized to their specifications.
How much do you need as down payment?
On a pre-construction project, Buyers are often required to make some deposit up to 20% on average. That amount may seem high but there is flexibility on the deposit structure as the full payment is broken up into smaller installments, made in what is usually referred to as the deposit structure.
Here is an example of a typical deposit structure for a 500,000K Purchase price
500,000 (with 20% EXTENDED DEPOSIT =100,000)
Upon Signing = $7000
5% Minus $7,000 in 30 Days = $18,000
1% in 90 Days = $5000
1% in 120 Days = $5000
1% in 150 Days = $5000
1% in 180 Days = $5000
1% in 210 Days = $5000
5% in 400 Days = $25000
5% on Occupancy = $25000
Deposits are generally required to be higher in the beginning of a project, as the bank that is financing the building will have this set out as a requirement. Closer to the completion of the project, deposit structures become more negotiable, and by simply discussing the fee structure with the builder, you may be able to extend or even reduce your payments.
What does the typical sale cycle of pre-construction building look like?
The very first sale is for family and friends of the builder, typically a small number of units are sold at this stage.
Platinum Launch: The builder opens the doors to a select number of agents that have proven to be professional and do high sales volume. This is the absolute best time for clients to pick and choose the best units, views and floorplans and take advantage of Platinum incentives and introductory pricing.
VIP Launch: This is a much larger group of agents that may or may not had past sales with the builder, but they are in the database. At this point there are still good options for buyers, but prices and incentives may be different.
Registered Public Sale Event: This one is for the people that have previously registered on the builder’s website
Sales open to the public: By this time on average 40% to 60% of the building has been already sold and this is when the sales slow down.
Investor Suites Release: This sale may take place when the project is close to being 70% sold but sales are slow and the deadline to begin construction is approaching. This is another good opportunity to get a sweet deal, the project is closer to being completed and often the builders offer rental guarantees to attract investors.
What is Occupancy?
Occupancy is a stage of construction where the buyer’s unit is ready but the building is not completed yet. People can move in the unit but they cannot close yet until the building registers(completed). The unit owner will be charged a monthly occupancy fee comprised of maintenance fee, projected property tax and the interest portion of what their mortgage
payment would be. Typically once occupancy starts, the builder can finish one floor per week.
If somebody does not want to pay occupancy then they should purchase a unit on a higher floor.
Builders charge a floor premium, the higher you go the more expensive.$1000-$1500 per floor is very common but I have also seen $8000 if that makes a significant difference about the view(clearing the building in front)
10 Days Rescission period
Unlike resale, when purchasing pre-construction, buyers have 10 calendar days to change their mind. This is the time when they should do their due diligence by having the APS review by a lawyer familiar with preconstruction and get a mortgage pre-approval
Can any real estate lawyer review the APS?
Buyers should always have the APS reviewed by a real estate lawyer experienced in pre-construction. Lawyer that don’t have that experience don’t have a handle on how this works and they can easily kill the deal for something trivial. Any proposed changes to the APS have to be submitted in writing by the buyer’s lawyer.
Buyers have to provide a mortgage pre-approval to the builder with 30 days of signing, I always push my clients to take care of this during the 10-day rescission period, if they find out later that they do not qualify then that is a big problem and they are in breach of contract.
Closing costs are higher than resale, beside the land transfer tax, buyers also have to pay utility hook up fees, land development fees, Tarion warranty registration.
These fees are charged by the city on closing, they keep going up every year and there is no way of knowing exactly what the amount would be on closing. Sometimes builders offer to put a cap on them, so that the buyer can buying confidence knowing that they will not go over a certain amount and if they do, the builder will pay the difference.
New homes/condos come with a 7 year warranty, the first year everything is covered 100% then the following years only the major systems are covered. There is a registration fee for the warranty payable on closing, the amount is related to the purchase price. To give you an idea the fee for a $300,000 condo is approximately $800, for a $500,000 it’s $1130.
Utility Hook Up Fees
These can total $1000-$2000, I always suggest to my clients to have the lawyer request the builder to put a cap on it.
There is an HST rebate for new condos that the builder can claim on the buyer’s behalf and deducted from the total purchase price. When a condo is purchased for personal use, the listing price is the final price that the purchaser pays. It is net of HST and HST rebate. If a condo is purchased as an investment, then the builder cannot claim the HST rebate on your behalf, they will charge you the difference on closing.
Then it is up to the buyer to apply for the rebate. Calculating the HST rebate is complicated, always advise your client to contact their lawyer to find out more.
To give you a general idea, the HST rebate on a $300,000 property is approximately $24,000. The investor would have to add that to the money needed for closing then apply for the rebate, it takes approximately 2 months to get the money back.
Opportunities to make money investing in pre-construction.
- Property Value Appreciation
Leverage: while you are only investing 15%-20% of the purchase price, the entire asset is appreciating in value during the construction period.
- Cash-Flow (Monthly Income minus Monthly Expenses)
Most resale condos in Toronto have a negative or breakeven cash-flow. Pre-construction condos tend to have a positive cash-flow from the start. You are buying a condo at today’s prices but you are not renting it until 2-3 years down the road when rental prices would have gone up.
- Mortgage Pay-down
At today’s interest rates, approximately 50% of the monthly mortgage payment is interest and the other half is principal that increase your equity.
Why new condos are the preferred investment option for investors?
The entry-level price is much lower than freehold and most importantly condos rent easily and are easily managed. There are fewer items that require maintenance or that they can break down compared to a house. For small issues the tenant will contact property management first
Conclusion we understand that this can appear to be a lot of information to process, and you may have a number of questions that you would like to discuss before even considering this type of purchase. However, at The Real Estate Info Realty, our sales representatives are highly trained, highly skilled and highly motivated to provide you with clear and competent advice, in order to help you make one of the biggest decisions in your life.
Our realtors are friendly, compassionate and caring, as well as educated, creative and thoroughly trained in the art of sales. Whether its resale, commercial, or pre-construction, we are here to help!
If you have any questions whatsoever, feel free to contact us today. We would be more than happy to answer any questions you may have, and point you in the right direction!