Buying Resale or Pre-Construction – Pros & Cons

By: Sylvia Smith

Buying Resale or Pre-Construction – Pros & Cons

Tags: TORONTO REAL ESTATE, TORONTO REALTOR, VAUGHAN REAL ESTATE, REALTOR, RESALE, PRE-CONSTRUCTION

 

When purchasing a property there are notably two different purchasing options: pre-construction and resale.  There are a number of benefits and disadvantages to each option.

What is pre-construction?  A pre-construction property is a property that you are purchasing either prior to construction even starting or when construction of the property is not finished.  Whereas a resale is a property that is already built and is ready to move in.  In this case, you are purchasing from who owns or most likely has lived in the property. 

Buying Pre-Construction Property Pros and Cons 

 

 

There are advantages and disadvantages to purchasing a pre-construction property. 

 

Pre-construction Advantages: 

 

  1. CUSTOMIZATION & ORIGINAL OWNER BENEFITS  - A big benefit is being able to customize and select your own finishes such as colour scheme, flooring, and cabinetry.   The other advantage is that many buyers really like the idea of being the first to live in the property and knowing that everything is new. 
     

  1. DEPOSIT DUE OVER A PERIOD OF TIME – The deposit is typically paid over a period of time. For example, the first deposit is due by the 7 days after the rescission period, the second 30 days out and third 60 days out and sometimes deposit is spread out over 2 or 3 years. This is a huge benefit for buyers that don't have the full deposit upon acceptance of the offer as they can continue saving. 
     

  1. MORE TIME TO SAVE UP FOR THE DOWN PAYMENT – As construction of the property can take 3 – 5 years buyers have more time to save up for the downpayment.  You pay the builder a series of payments as the deposit and the remainder of the down payment is not due until the completion date.  If you don’t have enough saved for the down payment when you purchase the property this can be a huge advantage particularly if you expect your income will be higher over the next years which will allow you to save more for the down payment 
     

  1. PROPERTY VALUE APPRECIATION – The property value will most likely continue to appreciate during the construction phase and before you take possession of the property.  

 

 

Pre-construction Disadvantages: 
 

  1. NOT BUILT YET - You are buying based only on floor plans without actually seeing the finishes, the layout, or outside view or elevation of the property (if a home).  All the measurements that the developer provides are estimates and are subject to change.  So you will not be 100% of what you are purchasing until it is built.   
     

  1. THERE IS ALWAYS A RISK THAT MORTGAGE INTEREST RATES MAY INCREASE AND MORTGAGE RULES MAY CHANGE Given that the property will probably not be ready to take possession anywhere between 3 – 5 years out there is always a possibility that mortgage rates may increase.  Buying a pre-construction is risky because you can’t lock in the mortgage rate at the time of purchase and you will have to have a sense of confidence that you will still qualify for the mortgage once the construction is complete.  If you have job insecurity or are thinking of switching jobs, careers, or becoming self-employed then pre-construction is probably not the ideal purchase option for you. 
     

  1. HIGHER DEPOSIT RATES  - Yes, deposit payments are normally spread out over a longer period of time but they normally add up to 15 to 20% of the purchase price by the time you take possession of the property, depending on the builder's deposit structure (whereas resale is normally a one time deposit of  5% of the purchase price. 
     

  1. UNCERTAINTY ON CLOSING DATE With a preconstruction property the closing date is not set in stone and there is no guarantee.  There is always a chance that the builder doesn’t sell enough homes or condos to proceed with the construction, or there could be delays in construction due to many factors.  If you need to sell your current home it can be a challenge to line up the closing dates as the developers have the right to delay the closing dates. 
     

  1. THERE WILL BE ADDITIONAL DEVELOPMENT COSTS TO CONSIDER AND SAVE FOR – The builder will also charge additional development charges that will be outlined in your purchase agreement that can easily add up. The city normally charges the builder development levies and these charges are normally passed on to the buyer (it is important to have a cap on these fees in your agreement of purchase).   

 

 

Considering Pros and Cons of Buying a Resale Property 

 

 

Buying a presale property is the most straightforward way to buy a home or condo and also reduces the uncertainty that exists when buying a pre-construction property. 

 

Resale Property Advantages: 
 

  1. YOU GET TO SEE THE TANGIBLE PROPERTY  - The best part about buying a resale property is being able to see what you are buying, and being able to walk through the property, see the layout and how big the rooms are and see the finishes and the surroundings of the property – if home backs onto other homes or a road, etc. (if buying a home).  All the measurements that the developer provides are estimates and are subject to change.  So you will not be 100% certain about what you are purchasing until it is built.   
     

  1. YOU CAN MOVE IN SOONER When you purchase a resale home or condo you can move in at any time that you are able to negotiate with the seller as your closing date.  So you can possibly move in within weeks or within 6 months depending on your closing date.  Resale property move-in dates are a lot sooner than with pre-construction purchases.  
     

  1. SMALLER DEPOSIT – With a resale property your deposit is typically 3 – 5% and is payable once the offer is accepted.  This is a smaller amount than the deposit for pre-construction properties. 
     

  1. TEND TO BE MORE AFFORDABLE -  Resale properties tend to be more affordable than pre-construction as builders bump up the price of pre-construction a bit to take into account a moderate inflation rate while the property is being built and normally buyers can’t negotiate the sale price with the builder.  Whereas depending on the real estate market buyers can negotiate the sale price of a resale property with the seller. Plus buyers have a greater selection of affordable options as resale properties come of all ages and a buyer could possibly purchase an older property that needs a little updating for a much cheaper price than a new pre-construction property.  

 

Resale Property Disadvantages: 

 

  1. NOT BRAND NEW AND NOT ABLE TO CUSTOMIZE BEFORE TAKING POSSESSION If the property has been lived in for a couple of years you may need to do some updates or renovations so you will need to have money budgeted and set aside for this.   
     
     

  1. PRICES AREN’T FIXED  – This can be perceived as both an advantage or a disadvantage depending on if it is the sellers’ or buyers market.  When prices aren’t fixed in a sellers’ market there is a possibility that you will end up purchasing a property in a bidding war (with multiple offers) and as a result, end up overpaying for a property.  However, if you are not in a bidding war market then you may be able to purchase for a lower sale price than the asking price.  Selling prices for pre-construction purchased from a builder tend to have fixed prices. 
     

If you are considering purchasing a property determine what option works best for you and your particular situation.  If you are purchasing the property as a home your personal circumstances and preferences come into play.  However, if you are purchasing a property as an investment my recommendation is to purchase a resale as you will be able to rent out shortly after closing and have the rent start paying down your mortgage rather than waiting 3 – 5 years and during this time period your resale property purchase will continue to appreciate in value - this is a huge benefit from an investor's perspective.  So it makes so much more sense to purchase a resale and enjoy double compounding of your money: mortgage pay down and property appreciation. 
 

If you are looking to purchase an investment property or a home and would like guidance on what option would work best for you, give Sylvia Smith a call.  She would be happy to walk you through the pros and cons and give you suggestions on what option may be best for you. Thinking of buying or selling, or investing give Sylvia Smith your local realtor a call.