Welcome to the February 2016 installment of Dear urbaneer, where we assist our clients by answering their most burning housing questions. This month, one of our clients is considering buying a condominium pre-construction and wonders about how the process differs from purchasing a resale.
After much consideration and weighing the pros and cons in my house hunt, I’m toying with the idea of buying a condominium pre-construction. I know that buying that kind of property is a little different than buying a place on the resale market. Apart from the obvious visual differences in selecting a home before it is built, what else do I need to know to make a smart move?
Signed, Brand New, but Bewildered
Here's our response:
Dear Brand New:
Congratulations on narrowing down your choice. It’s a great moment in the house hunt when you can clearly delineate what appeals to you most. That’s a big component of making your way towards landing your dream home. Now - to the actual business of buying that dream home. Before you proceed, take a moment to pause and complete your due diligence before you sign on the dotted line.
As with all things real estate, the best buy is the prudent purchase. That comes with being aware of what you’re getting into. Here is a post about points to consider before selecting a condo as your housing type, called “Five Points To Ponder Before Buying A Condominium”. As you’ve alluded too, there are additional points to mull over when buying that condo pre-construction. We’ve put together a pre-construction condo consideration checklist. Here's what you need to know:
PROS AND CONS
While there are decided benefits to buying pre-construction, there are some pitfalls as well. It’s best to know what your priorities are, and how they align with the potential ups and downs.
Some of the benefits to buying new? You’re the first owner, which is nice. You also have the chance to choose the finishes which suit your aesthetic from the get-go (although, depending on the circumstance, it can be a challenge to modify the floor plans in any condo, period). Because of the time typically between purchase and closing, in theory, you have longer to accumulate your down payment, although the developer will require a series of deposits from your initial purchase until occupancy (which we will touch on below) as opposed to your full down payment. Sometimes, the price point can be more attractive than a resale as well, as developers will offer a discount incentive to early-bird Buyers. Basically, we recommend that if the suite in question has special qualities that aren't easily available elsewhere (high ceilings, a great terrace, killer views, etc.), then it's certainly worth considering a pre-construction purchase. However, if it's not especially unique then the pitfalls may outweigh any advantage to purchasing an unknown.
After all, there are always downsides to consider as well. First, you’re taking a leap of faith. While you can tour a model suite and see floor plans (which often lack specific dimensions), that kind of conceptual thinking isn’t for everyone. Which means you run the risk of being disappointed with the finished product. It’s also possible that you’ll be moving in to your unit before the rest of the building is finished (occupancy starts on lower floors first and move up, and amenity and common spaces are finished last). There is also a certain element of risk involved too. While most times building developments go to completion, there is always the lurking possibility that the development in question may not, which can put your purchase at risk. Here's a story from The Star called Liberty Village Condo Project Canceled, Buyers Frustrated.
Either way, it behoves Buyers to consider these possibilities.
The down payment required by a builder in a pre-construction scenario can be significantly higher than with a resale purchase. Typically, with a resale purchase, a Buyer can put as little as 5 percent down. With a new development - unless the developer is offering a specific program for first time buyers - you may need to put 15 to 25 percent down in a staged series of deposits in order to purchase a suite. The reason for this is builders often have to demonstrate to their own equity-lenders that they're securing sales from bona fide buyers. In this respect your purchase makes you an investor in the project.
This deposit is usually done in portions though - with the total balance required by the time your unit is ready for occupancy. This is broken down into pre-established dollars or a percentage amount with dates at which they're due. Sometimes this is tied in with phases in construction and sometimes not. For example, you might put $5,000 down when the Agreement of Purchase and Sale is first signed, with a balance to 5% due within 15 days. From there you might see a staged series of deposits - like an additional 5% at 30 days, a further 5% at 90 days, and another 5% after 180 days. Occasionally the deposit will follow each phase of construction (a further 5% when construction begins, and another 10% on occupancy, etc.). Either way, if you favour a new build, by and large be prepared to put down more up front then you would with a resale.
PATIENCE IS A VIRTUE
If you are buying pre-construction, you’ve got to be flexible. Builders have leeway to make changes to the units, building and common areas even if they’ve pre-sold the units. The usual criteria is that buyers are protected from “material changes” but that term can be somewhat arbitrary. Determine what exactly that covers when you are signing. Here's one recent headline that caught the attention of many called Condo Developer Freed Slapped With $6.5-million Lawsuit.
Also - plan to hurry up and wait. Expect delays, as new construction is rarely completed on time. While most Developers will provide you with a completion date around 18 months from your visit to the sale centre, this is often the 'best case' scenario. Having spent ten years in the 90s and 00s actively engaged in the sales of new condominium and loft conversion marketplaces, I can assure you there are always delays, but they're not intentional. As a result, the contract will likely allow for delays up to 18 to 24 months for occupancy, and a further 18 months for the building to be registered as a condominium at which point you'll take ownership. The details and penalties associated with builder delays will be outlined in your contract, but expect to be delayed beyond your initial date - and we are talking anywhere from a couple of months to a couple of years in some cases. Along with an extended wait, this means you can't place a mortgage until you can take title, which means you're at the mercy of your lender and the interest rates they're charging for mortgages at the time you're closing the deal.
Whatever the reason, if you’ve reconsidered your purchase, every purchaser of a new condo in Ontario has 10 calendar days to reconsider the purchase. During this '10 day cooling off period', all Buyers should complete their due diligence, including arranging their financing pre-approvals while having the Agreement of Purchase and Sale reviewed by a condominium lawyer. In fact, this is essential. If you change your mind during this time frame, you can extract yourself from the contract and have your deposit returned in full without interest or deduction.
Every home purchase comes with closing costs (click here to read Dear urbaneer post: “What Are The Closing Costs For A Property Purchase?"), but a pre-construction purchase requires some additional ones. For one thing, you have to pay HST, which you don’t with a resale (although you may be eligible for a rebate if you're going to personally occupy the unit). You’ll also have to contribute to a condo reserve fund (which is typically two months’ worth of condo fees).
And then there are Developer’s additional costs which are built into the fine print of the contract, which in some cases can add on another 1-3 percent of your purchase price. These fall under the “developer's adjustment” category and can cover a wide range of possible costs. These blanket costs that apply to all new construction can be collected for anything from City development charges, education levies, to utility connections fees.
Bottom line - plan to earmark more funds for closing costs than you would with a resale. Here's a story in MoneySense called How To Buy A Condo. Want to read a sobering account of a Buyer's actual closing costs from a Toronto developer? Here's an email thread where a new $350,000 one bedroom condo had additional closing costs of $31,031.05 (or 8.87% of the purchase price).
SPEAKING OF COSTS
Often, condominium fees will increase substantially after you’ve moved in to your unit. This is due in part to the fact that condo fees are “ball parked” based on an estimated budget created prior to construction. It's also because a lot of time will have passed since it was initially created. There's also the possibility that - for less honourable Developers - they've created a Budget which isn't truly accurate, proposing common fees which are significantly lower than they'll actually be. The ruthless Developers do this in an effort to convince Buyers the common fees will be more affordable than they truly are. Take note that a Developer is only legally obligated to make up the difference in the shortfall between the operating expenses for the first year of the condominium corporation's operations and the budget sum originally proposed. This means - once the dust settles - which may be two to four years after you've made your original purchase - the monthly common fees will be adjusted to reflect the real costs. And rest assured, given the estimates and time delays, those common fees will go up after the first year of registration (sometimes by as much as 40%) and not down - in most cases. Make sure to anticipate this potential extra monthly cost in your budget. Here's an Ontario government piece called Before You Buy A Condo, and a Toronto Star article on condominium fees called Maintenance Fees Take A Toll On Toronto Condo Owners which offer more information.
**Addendum - January 20th, 2018 - Here's an article in The Globe And Mail which documents the rise of Toronto condo fees for 124 new builds from 2015-2017 after their first year of operation called Most Toronto Condo Fees Higher Than Initial Estimates which shows common fees condo fees were higher than estimated in 97 per cent of 124 new buildings he reviewed. Fees were 21 per cent higher on average, while 12 of the projects had fees 40 per cent higher than the marketing estimate prior to construction.
INTERIM OCCUPANCY PERIOD
During the interim occupancy period, the Buyer is allowed to move in to the condominium, but you don’t actually yet own it. This may sound a little confusing - but until the condominium has been signed off by the City as complete and the condominium corporation registered, the ownership cannot be transferred from the Developer to you. During this period you pay the builder 'a rent' directly (as opposed to paying the bank for your mortgage) which comprises the amount that would total your mortgage payment as well as taxes and condo fees. The 'rent' is based on the balance that you owe the developer, so unless you've made arrangements at the time of purchase to put down an even larger down payment, you'll be obligated to pay the Developer. Also, the Agreement of Purchase and Sale will outline the interest rate at which this rent is calculated and, be assured, it will be at a rate substantially higher than the posted mortgage rates. This ultimately helps offset the Developer's carrying costs while he waits in cue for the City to complete its due diligence in ensuring the building was constructed according to Building Code. Here's a story from The Globe and Mail called Condo Buyers Should Prepare For 'Phantom' Rent.
THE REGISTRATION PERIOD
You may be wondering, so, when do I get to own this thing? After the building is completed and has passed all the necessary inspections and legal requirements, the building is then registered, making all things official. At this point, ownership transfers from the builder to you, the Buyer. This is when title is transferred and the mortgage you've arranged starts. Realize that the time period between interim occupancy and ownership involved can be short (as quick as a couple of months if you're on a high floor) or can even extend out to a couple of years. From my experience, in most instances it takes around 4 to 9 months.
BUYING ON ASSIGNMENT
There is also another way to acquire a condo pre-construction - by purchasing it on assignment. In this case, you are buying the condominium from a Buyer, rather than the Developer, before completion. You’ll be subject to all the conditions and variables that we’ve listed, with the exception of the deposits. You’ll have to pay the Buyer directly for the deposits that they’ve already made, in addition to paying for any additional profit that a Buyer is trying to generate. Typically a Buyer would be selling if the prices have increased, and there is negotiating as well as due diligence to be done in this scenario. We're not really fans of this process, as it leaves the potential for a lot of problems. And, quite frankly, we suggest you wait for the condominium to get registered as there's usually a flurry of resales shortly thereafter. After all, all those Buyers who bought 2 to 4 years earlier may have significantly different lifestyle circumstances now, ranging from relocation, to divorce to having children. So be prudent if you're exploring this option. Here's a Toronto Star article called Aaron: It's Difficult To Sell Pre-registration Condo Units.
Finally, there's a brilliant documentary called The Condo Game - from CBC's Doc Zone which is a must watch! It’s highly informative on how the new condominium market operates, with loads of insights.
Whatever your home buying plans, it's essential you have the support you need to make your home ownership experience profitable and enjoyable. A big part of that is gathering as much information as you can to make sure your decisions best fit your needs for today - and tomorrow. At urbaneer, we are proud to be able to share our knowledge, gleaned from decades of experience in the real estate trenches, formal education and research into market data.
Have questions? Please know we’re here to help!
~ Steven and the urbaneer team
earn you trust, then your business
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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