Buying a pre-construction condo could be more straight forward that what people may think. The buyer starts off by receiving the price list, floor plans, incentives offered and renderings of the condo as an investors package.
If there is a sales office, it’s best to go in with a real estate professional as they are paid commission from the builder and will have your best interest at heart. Your realtor may be able to negotiate better terms, upgrades, incentives, cap on development levies & the down payment structure. Remember, that friendly agent inside the sale presentation center works for the builder or may be working for a brokerage that is selling for the builder - they may not always have loyalty to your best interest. Factors that buyers should consider and should research when looking for a pre-construction condo:
The developer’s reputation
City plans for the next 10 years
Local transit
Parking
Price per square foot
Comparable in the same area
Features and finishes
Condo amenities
Floor plans
Growth/appreciation of other neighbouring condos
Some developers require that the buyer obtain a mortgage pre-approval letter from a bank, which is attach to the agreement of purchases of sale prior to securing them the unit in the condo.
A main difference when purchasing a pre-construction condo opposed to a resale condo is the way it is financed. For a resale condo, the buyer could put down as little as 5% towards the purchase price (Buyer would need to pay CMHC mortgage insurance). – If it’s a first time home buyer in Ontario, they would need to put down 20% and go through a stress test.
For a pre-construction condo, the buyer is often required to put 10-20% down depending on the project/builder. However, that amount is usually broken up into smaller instalments known as the ‘deposit structure’.
Example of a 20% deposit structure:
$5,000 with the offer/upon signing
5% in 30 days
5% in 90 days
5% in 180
5% at occupancy
*the percentage and/# of days may vary*
Deposits are generally higher in the beginning of a project, as the bank has certain criteria’s that need to be meet prior to financing the development. The buyer’s deposit is generally used towards the builder’s construction cost. Closer to the completion of the condo, the deposit structure becomes more negotiable and the buyer may be able to come to an agreement with the builder for an extended deposit structure or even reduced payments.
If it is an opening weekend for VIP clients and the buyer decides to put in an offer for a unit in the condo, they would need 1-2 pieces of government issued ID, a deposit and post dated cheques. It is very prudent to hire a real estate lawyer and get legal advice prior to signing any pre-construction contracts. However, there is a rescission period in Ontario known as ‘a cooling off period’ in which the buyer has 10 days to cancel the contract for any reason and get back their deposit. The rescission period starts from the day that the buyer received a written copy of the agreement of purchase and sale. The buyers deposit is held in trust by the builder’s lawyer until the deal has firmed up. The buyer doesn’t officially own their unit until the condo is registered, which happens when conditions are met which are set out by the provincial land registry office. The registration process can take several months or longer to complete. During the registration period the buyer will able to move into their unit which is called the interim occupancy period. The buyer is responsible for monthly "occupancy fees", which is a type of ‘rent’ that will not be put against what is owed for the condo to the builder. The reason for this is because developers are eager to stop paying interest on development and construction loans they borrowed from the bank for the project, they pass on the carrying costs as soon as possible to the buyers. This is done by announcing to the buyers that their units are ready for occupancy on a specified date even though the building amenities, hallways and other common areas may not be completed or useable. Each month's occupancy fee incorporates the interest portion of the balance owing on the purchase price minus all deposits, the condo fees and a portion of your property taxes, this is sometimes called phantom rent. Once registration is completed the title is then transferred to the buyer. This is when any mortgage or other pre-payments that were made is put towards ownership. Prior to closing there will be several fees that is owed to the builder that can be confusing. Consult with your legal, mortgage or real estate professionals to help determine how much extra you will be paying in closing costs in addition to what you are paying for the home itself. Budgeting for closing costs could range between 1 to 3 percent or more which typically includes: legal fees, enrolling in the provincial warranty program, title insurance, property tax adjustments, land-transfer taxes and development levies. The buyer may be able to work out an agreement with the builder to cap development levies. Prior to the move in date (usually two weeks to a month) a representative for the builder will ask the buyer to come in and inspect the unit. During this Pre-Delivery Inspection (PDI), the representative will help the buyer check out any deficiencies such as: scratches/cracks, poor workmanship to the features/finishes, appliances malfunction (could be covered under manufacture warranty), heating, mechanical and air conditioning. The builder's representative will carry a PDI form to mark down anything that needs to be fixed or left out from the original sales agreement. The builder must address these issues prior to the owner moving in or shortly afterwards. Warranty programs tend to have special PDI checklists available online that break down what will be inspected and tips on what to look for.
A note of caution for any investors looking to buy a pre-construction condo to rent out without moving in first, you will be required to pay the HST. However, if your pre-construction condo is your primary residence and you lived there for over a year, you could qualify for a HST rebate – it’s best to consult with an accountant or lawyer.
Pro: Buying a pre-construction condo 1) The buyer/investor has time to raise the money for the condo because the deposit structure is spread out over many years. The balance which is paid upon the occupancy period could be two to three years away. While the condo is being built, it could be rising in value if there are other economic developments in the area such as: transit, commercial retail, etc. 2) The buyer is the first owner of their home in which they had input into the finishes and materials that were used such as: what type of flooring, cabinetry, appliances would be installed, upgraded lighting, closets and window coverings at additional cost. 3) All new built condos in Ontario are covered under the Tarion Warranty program which offers a range of protections including: delayed occupancy and delayed closing coverage, deposit protection, coverage for labour and materials needed to fix faulty workmanship or construction/structural components. 4) Your mortgage rate could be locked in for a longer time: Builders tend to work with preferred mortgage providers, who, if you qualify, would give you a special interest rate locked in over an extended period, compared to what a lender not associated with the builder would allow. Check whether the expiry date for the locked-in rate has a chance of being extended if your home's completion is extended. You also do not have to stick with the lender preferred by the builder.
5) For sophisticated investors, there are various hybrids of investment opportunities in which the developer will offer 2 year - 5 year rental guarantee. Property management is usually included, so that the investor enjoys a healthy stream of passive income while enjoying their real estate asset appreciation.
BAUHAUS CONDOS, TORONTO - 2 YEAR RENTAL GUARANTEE
Con: to consider when buying a pre-construction condo 1) There’s a chance that the developer will not sell enough units to be able to complete the project on time, or even at all. Sometimes the condo may look a bit different when it’s finished compared to what was initially proposed by the builder. 2) The buyer is purchasing based on the floor plans without seeing the finishes, the layout or the outside view of the building. 3) The money that the buyer has locked up could have been invested elsewhere. It is not uncommon for targeted move-in dates to be extended several times and by many months, as a builder could legally cite 'unavoidable delay' situations, such as building-trade problems. 4) It may be difficult to accurately determine market value, as there are no previous resale condos to compare to. It may also be challenging to determine rental income. Visit here for current Pre-Construction projects posts.
Contact us: Team Mpire
mpirerealtyinvestments@gmail.com
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