— We take our content seriously. This article was written by a real person at BREL.
Toronto’s pre-construction market for condos is on fire once again. Here are 10 things you need to know before falling in love with that model suite:
- The Deposit – While purchasers of resale condos in Toronto generally provide a deposit of 5% upon signing of the agreement, builders generally require significantly higher deposits in order to fund the construction – often as high as 15 or 20%. Usually a set amount $$3,000, $5,000, etc.) is required when the agreement is first signed, and the balance to 5% is due within 10 or 15 days. From there, there are various ways the remainder of the deposit is paid – for example, an additional 5% at 30 days, 5% at 90 days, 5% 180 days, or sometimes the deposit is timed with the phases of construction (5% when they break ground, 5% on occupancy, etc.). Point is: be prepared to pay the builder a much larger deposit for a pre-construction condo.
- The 10-day Cooling Off Period – In Ontario, every purchaser of a new condo has 10 days to reconsider their purchase. Note these are calendar days and not business days. During the 10 day cooling off period, a Buyer should arrange to get financing pre-approval and have the agreement reviewed by their lawyer. If the Buyer changes their mind (for any reason) during the 10-day cooling off period, they can back out of the contract and have their deposit returned without deduction.
- Waiting, Waiting, Waiting. While builders will provide an expected completion date for the condominium, rarely (if ever) are condos completed on time. Builders have the right to delay for all sorts of reasons and for a surprisingly long time. The actual delays and builder penalties (if any) are outlined in the agreement of purchase and sale, but in our experience, add at least 6 months – and up to 2 years for delays.
- The Only Constant is Change. Builders have a fair amount of leeway to make changes to the units and buildings, even after they have pre-sold them. We’ve seen builders add or subtract floors, change layouts and decide that the rooftop pool should now be in the basement. Buyers are protected from any “material changes”, but you might be surprised to find out what is and is not considered “material”. Read the sales agreement and be prepared to be flexible.
- The Interim Occupancy Period When the condo is built and ready to be moved into, there is a period of ‘interim occupancy’, where the Buyer can take possession (in other words, move into the unit). During the period of interim occupancy, the Buyer does not yet own the condo; they simply pay the builder an amount roughly equal to what their mortgage payment + condo fees + taxes will equal. No transfer of land has yet occurred, and no mortgage has yet been given.
- Condo Fees in new buildings are usually set arbitrarily low. That’s partly because they are estimated years in advance of the condo being built, and partly because they don’t know the actual costs of running the building. The skeptic in me also wonder if it isn’t a sales strategy too. Expect condo fees in new buildings to increase substantially during the first 2 years, usually 10-20%.
- Registration of the Condo Once a building has passed all the city inspections and gone through all the processes to become a legal entity, condominiums are officially registered. During this registration period, condo ownership is transferred to the Buyers, mortgages come into effect and Buyers officially become owners (a.k.a. the closing). This registration period can take anywhere from 3 months to 2 years (though usually it happens 4-8 months after people begin to move in for the interim occupancy period).
- Builder Closing Costs When the unit is officially registered and you close on the purchase, you’ll be responsible for all sorts of closing costs that don’t apply to resale units These ‘builder adjustments’ apply to all new construction projects and include development and education costs, HST on appliances and utility connections fees. These builder closing costs can easily amount to 1-3% of the original purchase price (and there’s talk of the development fees doubling in Toronto in the near future). If you’re looking at taking over someone else’s contract via an assignment, look to see if the original purchaser capped the amount of these costs when they originally negotiated the unit. Otherwise, make sure you have lots of money put aside for closing costs.
- The Condo Reserve Fund When you buy pre-construction, you’ll need to contribute 2 months condo fees to the condo’s reserve fund (the emergency fund). This usually happens at the time of closing.
- HST Unlike resale condominiums, new condos are subject to HST. If you’re an end-user (you’ll be living in the unit yourself), you’ll likely qualify for an HST rebate (and most builder prices assume you are, and so this rebate is already factored in). If you’re an investor, there is a similar (but different) rebate, but you’re only eligible if you rent the condo out for at least a year (and prove it!) If not, you may have to pay thousands of dollars in HST upon closing. HST rules are confusing at best, but make sure to get legal advice about whether you qualify for the HST rebate before you buy a condo.
Buying a pre-construction condo isn’t nearly as straight-forward as buying a resale condo. Remember that the person at the sales centre works for the builder and their job is to get the best prices and conditions for the builder, not for you. If you’re considering buying a condo pre-construction, make sure to read: Should I Buy a Condo Directly from a Builder?
Emile Solanki says:
An excellent article that allows one to approach this subject with their eyes wide open. On the reasons for purchasing pre-construction:
– Torontos Real Estate economy has not matured yet, it is still relatively cheaper compared to other major cities around the world.
– Pre-construction allows you to buy at discount prices. For instance earlier this year I saw Tiffany Park Homes in the Etobicoke area, selling units @ around 650K, where similar units in the neighborhood are then re-sold for 820K once built. Imagine buying a unit for 650K, with a 170K equity head start. 3 years later, if property continues to grow at 7-10% a year, you could have this unit hitting the 1M mark. The value of time, leveraging, supply/demand, and cheap access to debt.
– Pre-construction gives you time to save for the next few years.
– The unit you have purchased is still growing in value.
– If you currently own a home/condo, it will continue to grow in value as you wait for your future unit to be built. This allows you to narrow the purchase gap.
– Pre-construction is a good way to go about using existing equity in your current home. Leveraging good debt when managed well can be lucrative.
Spoken like a true agent lol
Pre-construction is a nightmare. NEVER DO IT. Your money is tied up, you can’t move if you get a new job, heaven help you if your family grows, your life is totally hobbled, builders are terrible and will not give you any information for months if not years, you are buying something that costs hundreds of thousands of dollars that you can’t see. There are massive fees that are not in purchase agreements. Pre-construction favours the builder only. Why doesn’t this article mention the nightmare of HST rebates? Builders get the rebate, but eligibility for the rebate is based on who lives in the new build. So in many cases you are forced to live in the new build to qualify for a tax rebate that you will never see.
Melanie Piche says:
Excellent point about the HST. It’s a huge pain.
Always do your research on the builder involved
Always read the documents in full, maybe consult legal professionals if you feel necessary
Jeff Johnson says:
Very informative post! we have to keep all the points in mind, whenever we will buy a condo in Toronto. All these tips will help to buy a perfect condo!
A very helpful article. I also appreciated Bob’s warnings about the pitfalls of pre-construction. Lots to think about. Thank you.
100% agree with the content. The information is quite helpful for those who wish to buy a condo in Toronto. As the value of condos in market is increasing day by day so buy a pre-construction condo is quite a good thought rather than you pay high amount for the same condo later.
Now that I’ve read Bob’s comment, pre-construction doesn’t seem like such a good idea 🙁
Liza Amiria says:
Appreciation for pre-construction condos is a major draw. Investors pay a discounted rate to begin with, and this rate is based on current property values. The sales price doesn’t change over the course of construction (though units sold later will certainly reflect an increase). By the time the building is ready for residents, everyone who bought in during preconstruction has already gained equity.
Lewis Wheeler says: