Pick or Pass: What You Need to Know About Pre-Construction Condos (That Sales Reps Might Not Tell You)

From a legal perspective, buying a pre-construction condo can be an even more involved process than buying a resale property as there are many additional aspects to consider – which is why in Ontario consumers are given a 10 day cooling off period to think about their decision, and consult with their lawyer before they are locked into the agreement. This cooling off period is put forth in Ontario’s Condominium Act  and allows you to back out of the deal within 10 calendar days for whatever reason you or your lawyer see fit.

When you visit the condo sales office and showroom it’s easy to get caught up in the modern amenities and finishes that the sales representative is boasting, but it’s important to keep in mind that there are many considerations to make when purchasing directly from the developer.

 

BE IN THE KNOW ABOUT THE INS AND OUTS OF PRECONSTRUCTION HOME BUYING

LEVIES AND CLOSING COSTS

When you purchase a new property there are additional costs to consider that you will need to have available in cash upon closing by way of levies and other closing costs. Levies are charged by the city to the builder who passes this fee down to the buyer – there are a variety of levies, e.g., park levies, school levies, road levies, etc.

Levies are charged because the city will need to develop roads and parks and add capacity to schools for each new home and new inhabitant that comes into it. The additional closing costs would be for items such as Tarion Warranty, new utility hook ups, and administration fees paid to the developer. These fees can amount to thousands of dollars due on closing.

The best way to protect yourself in terms of unexpected costs when it comes to preconstruction homes is to have the development fees capped. What this means is that you and the builder will come to an agreement for the closing costs related to levies and the builder will only charge this number to you even if the costs are higher. Typically today we are seeing levies capped anywhere from $5,000-$10,000 depending on the property.

 

MAINTENANCE FEES

The monthly maintenance fee for condos (usually displayed in a per square foot charge) given to you by the builder is an estimate of what they think the fees will be. This fee is typically guaranteed by the builder for the first year, at which point the fees can (and usually do) change. Something to keep an eye out for with maintenance fee estimates provided by the builder is if they seem low in comparison to similar buildings in the area and also have similar inclusions. It’s possible for the builder to artificially keep the maintenance fees low for the first year, meaning in the second year there is potential for a high fee increase to make up for the low fee the year prior.

 

HST

Although typically HST is included in the purchase price, there are situations when it would not be, e.g., if you are purchasing the condo for investment purposes and will not be moving in. That said, if you are purchasing for investment, you should be aware that you may be required to pay HST on top of the original purchase price on closing.

 

ASSIGNMENT OF CONTRACT

Assignment of your contract would mean that before you close and take possession of the home, you sell the rights to your contract (usually at a higher price than what you originally paid for the unit). This is quite common with investors, but can also be very important for end users purchasing a pre-construction property years before it will be completed.

Although you may think you know what your life situation is going to be like in 2-3 years, it’s very possible that you may have changed jobs, had a child, or want a smaller or larger home due to various other factors by the time your new property reaches completion. You can close on the condo and then sell it afterwards, but by closing and having the title transferred to your name you will be subject to pay the levies, closing costs, and land transfer taxes - all of which you can avoid by selling the rights to the contract.

Always ensure you have the builder insert a clause that allows you to assign your property, and have them put a cap on how much this will cost to do (because their team and lawyers will need to re-do the paperwork, there is almost always a cost). Typically we have seen this capped at approximately $1,000-$2,500.

 

TARION WARRANTY

There are two important points I would like to make about Tarion Warranty (full info at: http://www.tarion.com), but first let’s start by explaining what it is:

For 40 years, Tarion has provided new home warranty protection to more than two million Ontario homes.  We serve new home buyers and new home owners by ensuring that one of their life’s biggest investments is protected.  Almost every new home in the province is covered by a new home warranty. This warranty protection is provided by Ontario’s builders and lasts up to seven years.”

The Tarion Warranty protects almost every new home in Ontario against builder deficiencies and also protects consumers when builders fail to fulfill their warranty obligation. The most important part about this sentence is that almost every new home is protected – which means it’s possible that the pre-construction project you are purchasing isn’t, and it’s important to know about this ahead of time.

Who’s not covered? Condominium conversions (i.e., condos that are converted from factory buildings or other historical landmarks, etc.), renovated freehold homes, previously occupied homes, some owner built homes, homes built on existing foundations, seasonal homes, and some common elements condos.

What’s more is that Tarion also provides deposit protection for purchasers. It’s very possible (as we’ve seen before) that even in this market, a condo project might fail; the developer could go bankrupt, or they might not sell enough units to get financing from their lender. If this happens, Tarion protects your deposit for up to $20,000 for condominium properties.

Where the issue lies with this is that many developers are now requiring a 20% down payment, meaning that $20,000 deposit protection only basically covers the amount you are putting down on the first $100,000 of your purchase – and I don’t know about you but I haven’t seen any homes available for sale in that price range.

 

SCHEDULED COMPLETION

Although the developer will always give you an estimated completion date, it is very commonplace for this to be pushed back as construction delays arise. In addition to issues with construction and building permits, it’s important to find out when the developer plans on breaking ground.

In most cases developers are funding some part of their project through a loan and to be able to qualify for this loan they need to have a certain number of units sold. This way the lender can see how many contracts the builder has and how much money they will be bringing in by way of deposits to ideally help as a down payment for the project. That said, if the developer is having a hard time reaching this number, it is very likely they won’t be able to get their funding until that point and the completion date will ultimately be pushed.

In addition to the above, when evaluating a condo project it’s important to consider other factors such as: standard items and inclusions for each unit (not every condo comes outfitted with electrical light fixtures in the ceiling of the living room and bedroom), noise and odor reduction measures (not only between the units, but between the units and any possible retail space the condo has on the first floor) and parking (is it owned by unit owner or does each unit have one space to be used exclusively).

Although the developer’s sales associate is fully capable of assisting you in the purchase of a unit, I would always recommend having your own representation, a buyer agent, to help you navigate through the aforementioned factors. Picking someone who is familiar with pre-construction sales, the developer and the neighbourhood the building will be in is integral to ensuring there are no unforeseen surprises upon closing. 

Nicole Harrington is a Sales Representative with Realosophy in Toronto. She specializes in using data and analytics to help her clients make smarter real estate decisions, concentrating on Toronto and the GTA, and hosts her own website: SheSellsToronto.com

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