Should You Buy Pre-construction?

By: Sylvia Smith

Should You Buy Pre-construction?



The Preconstruction Market for condos in the Greater Toronto Area is one of the leading markets in North America.  The market slowed down in the earlier part of the pandemic but is once again on fire.  Immigration will continue to place pressure on housing prices with increased demand and a continued shortage of housing to meet demand.

Whether you’re an experienced real estate investor, or a first-time buyer, buying a pre-construction condo is somewhat different from buying a resale condo.  A pre-construction Realtor can help you avoid unnecessary stress, unreasonable contract terms, and avoiding hidden costs.  In addition, a preconstruction Realtor can also get you access to developments that are not yet available to the general public often saving you as much as 10% and getting you other incentives (such as parking, locker, reduce, or no assignment fees).   Working with a Realtor that has access to preconstruction condos just makes sense as our fee is already built into the sale price.

GTA Market- Sellers Market

  The City of Toronto is officially one of North America’s fastest-growing cities.  As a result, we struggle with meeting the demand for housing which is putting upward pressure on condos and housing prices as well as rents.  Construction just can’t keep up with demand due to the increased population growth due primarily to increased immigration.  With increased demand and a short supply of condos, we are seeing increased sales and rental prices.  This is why many investors are choosing to invest in condos.   The suburbs are also feeling the appreciation and increased demand for condos as well. 

While many Buyers purchase pre-construction condos as their first home, they also make great investments due to the appreciation.

Here are some things you need to be aware of before purchasing a preconstruction condo as a home or investment:

1.  Deposit

Purchasers of resale condos generally provide a 5% deposit upon acceptance of an offer, builders normally require higher deposits in order to fund the constructions – typically it is 20% of the value of the condo but buyers also earn appreciation on 100% of the value of the condo or home over the 3 – 5 years that is taken to build.  During these 3 – 5 years you do not worry about taxes, mortgage payments, maintenance, insurance, or tenants.   Deposits are normally staggered over a period of 1 – 2 years but every condo project is different.  

A general deposit structure may look like this:

•   5% of the 20% at signing of the purchase agreement which is as soon as the conditional period in the offer expires
•   5% within 30 days 
•   5% within 60 or 90 days
•   5% either within 120/240/365 or on occupancy

The above deposit schedule is the most popular but some builders will have incentives where they offer 5% a year and many other variations. 

2.  10-day Cooling Off Period

In Ontario, every purchaser of a new condo has 10 days after receiving your signed copy of the offer to reconsider your purchase.  During this 10 days cooling-off period, you should have the agreement reviewed by a lawyer and also get your financing pre-approved.  Should the buyer change their minds for any reason during the 10 days cooling-off period, they can back out of the agreement of purchase and their deposit will be fully refunded. 

3.  Possession Date Uncertainty 

Builders provide an expected completion date for the condominium, there is a chance that the condo will not be completed by this date.  Builders have the right to delay closing for all sorts of reasons – they are legally given two chances to change the closing date.   However, if there are delays that are outside their control, they can push the closing date back without consequences beyond their two legal changes.  An example of delays beyond their control include strikes, etc. 

The actual delays and builder penalties (if any) are outlined in the agreement of purchase and sale.  It isn’t uncommon for delays to happen for many reasons so you need to be aware of the possibility of delays.

4.  Interim Occupancy Period 

When the condo is built and ready to be moved into, there is a period called “interim occupancy” where you can move into the condo.  During this period of interim occupancy, you do not officially own the condo; you simply pay the builder an amount roughly equal to what your mortgage payment, condo fees plus taxes would be.  During this time no transfer of land (or registration of title) has yet occurred, and a mortgage is not yet given.

During the interim occupancy, the unit does not belong to you yet.  You are not entitled to rent the condo or complete renovations unless you have written consent from the builder.  If you purchase the condo as an investment, it is important to get permission to lease the condo during the interim occupancy added to the sales agreement.  

5.  Maintenance/Condo Fees 

Maintenance/condo fees are normally initially set low. That is primarily because condo fees are estimated years in advance of the condo being built and the builder may not know the exact costs of maintaining and running the building.  As a result, there could be a little uncertainty in what the condo fees will be – expect condo fees to go up 10 -20% after the first 2 years of ownership.  The builder is responsible for shortfalls in the budget for the first 2 years. 

6.  Condo Registration

Once the condo building has passed all the city inspections and gone through all the processes to become a legal entity, condominiums are officially registered.   During the registration period, the condo owner is transferred to the Buyer, mortgages come into effect and the Buyer officially becomes the owner of the condo.  The registration period can possibly take 3 months to 2 years but normally it happens within 4 – 8 months of Buyers moving in for the interim occupancy period.

7.  Builder Closing Costs

When the condo unit is registered and you close on the purchase of your condo you will be responsible for closing costs that do not apply to the resale of condo units.  These builder adjustments apply to all new construction sales (condos and houses) and include development and education costs, HST on appliances, and utility connection fees.  The builder's closing costs can easily amount to 1 – 3 % of the original purchase price.  If you are considering purchasing someone else’s contract through an assignment, it is important to verify if the original purchaser capped these costs when they originally negotiated the purchase of the condo.  

8.  Condo Reserve Fund

When purchasing a pre-construction condo you will need to contribute 2 months of condo fees to the condo’s reserve fund (the emergency fund for repairs and maintenance).  This normally takes place at the time of closing.

9.  HST

Unlike resale condominiums, new construction condos are subject to HST.  If you are planning to live in the condo unit you will qualify for an HST rebate (most builder prices assume you will be living in the condo unit so this rebate is already built into the price.   However, if you are an investor, there is a similar rebate, but you’re only eligible if you rent the condo out for at least one year.  

Buying a pre-construction condo or home is not as straightforward as buying a resale home or condo.  The person at the sales center works for the builder and their job is to get the best price and conditions for the builder and not for you.   This is why it makes sense to work with an experienced Realtor that can guide and assist you with the purchase of a pre-construction condo or home. 

Contact Sylvia Smith if you have any questions about purchasing pre-construction property.