Purchasing pre-construction homes is becoming increasingly popular in Toronto nowadays but what does buying a pre-construction home actually entail? What exactly is the difference between buying a pre-construction home versus re-sale? We'll answer these and many other questions in the following article.
Pre-Construction Homes
Buying a pre-construction home means buying a house or a condo either before or during construction, so long as the purchase takes place before the building is ready. Floor plans, price list, brochures, and other building details are usually shared with prospective buyers to aid in making a decision when purchasing.
Here are a number of considerations to keep in mind when purchasing a pre-construction or a new development property:
Completion Date Delays
Although you are typically given a year by which the building or home is expected to be completed, it's very common for projects to be delayed from a few months to a few years. So if timing is important to you, you might want to consider a resale property.
Hidden Costs
Aside from the purchase price and the deposit you pay while the property is being built, there is a set of other costs on closing that you wouldn't expect when purchasing a resale property. Some of these costs include development charges, additional lawyer fees, and various taxes - which can increase your purchase price by 1-3%.
Project Variances
Given that developments take place over a long timeframe and not all details pertaining to a project are set in stone, there is a good chance that there will be some variances between what was promised when purchasing your pre-construction home and the final state of the home. Examples of this would include changes in the quality and colours of finishes, changes in the retail stores or brands that were planned to open in the building (if applicable), and even minor changes to the physical appearance of the building.
Occupancy Fees
When you purchase a brand new condo and finally get the keys to your suite, many buyers are surprised to find out that their new home is not theirs yet. Although this is an exciting phase in the new home ownership process, it is actually not the “ownership” phase. It’s called “interim occupancy” and it allows a builder to finish construction while also organizing an orderly move-in process for what could be hundreds of buyers.
During this interim occupancy phase, the owner is responsible for occupancy fees. The occupancy fee consists of three components: (1) interest on the unpaid balance of the purchase price of your condo, (2) an estimate on the municipal taxes for your unit, and (3) a projected common expense contribution to keep the building running. The fee is usually charged monthly and requested in the form of post-dated cheques made out to the developer or vendor.
How long you stay in the interim occupancy period depends on how long it takes for the builder to register the building and deliver the units. This could range from a few months to over a year. Arranging your mortgage and finances is usually done during this period prior to final closing with the builder, which is when title is registered under the unit owner's name (the end of the interim occupancy phase).
Assignment Rights
It's important to know the assignment right you have when purchasing a pre-construction property. In most cases there is an assignment clause in the purchase agreement. An assignment clause allows you to “assign” your purchase to another buyer before your unit/the building is complete. It's important to look at the pre-construction agreement to check the availability of an assignment clause and how it’s structured.
In some cases there is a fee associated with it (ranging from no fee to $10,000) and/or if the builder will only allow assignments once they have reached a certain percentage of units sold. Some clauses could state that the assignment can only be done to a family member or during certain years (one year before completion). Either way, it’s extremely important to know what kind of assignment right will be available to you before purchasing a unit.
Larger Deposit
Unlike a resale home that may be purchased with as little as 5% down, pre-construction homes typically require a larger deposit which is usually around 20% but in some cases can be lower (e.g. builder incentives). However, this deposit is generally spread out over a few years, depending on when the project is built with each instalment commonly being 5% of the purchase price.
Increase in Maintenance Fees
At the time of purchase developers usually give an estimated cost of maintenance fees per square foot. However, it should be noted that these maintenance cost estimates are usually a lower estimate and it's common for the maintenance fees to increase a couple of times in the first few years the building is built.
HST
Unlike resale condos, new-build condos are subject to HST, however your purchase may qualify for the GST/HST New Housing Rebate program. To learn more about this rebate you can visit our article Understanding the Harmonized Sales Tax (HST) in Real Estate.
Tarion Warranty
The Ontario government, through the Ministry of Consumer Services, has empowered Tarion, formerly known as the Ontario New Home Warranty Program, to administer and enforce the Ontario New Home Warranties Plan Act and Regulations. 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. It is backstopped by Tarion, which serves Ontario’s public interest by enhancing fairness and building confidence in the new home buying experience. For more information regarding the Tarion warranty click here.
Research The Property Developer
When it comes to purchasing a home that is yet to be built, it is critically important to know who the developers of the project are and what experience they bring to the table. A few example questions to ask include: (1) How many projects has this developer built in the city? (2) Has the developer had any issues or problems with previous projects? (3) What experience does the developer have with building the type of home you are purchasing?
If the developer is experienced and has a proven track record of successful development in the city you are purchasing in then you should be reassured. To learn more about the top developers in Toronto feel free to read our article on the Top 10 Condo Developers in Toronto.
Summary: Pre-Construction Home vs Resale Homes
In summary, the following table outlines the key differences between buying pre-construction & resale home purchases:
| Factor | Pre-Construction | Resale |
|---|---|---|
| Price | Prices are predicted based on the property completion date | Based on current market prices |
| Property Selection | Based on floor plans, brochures, and feature sheets | Ability to view the property in person |
| Rental Income | Cannot be rented out until property completion | Property can rented starting from the day you take possession |
| Deposit / Down Payment | Usually a 20% deposit with a payment structure over a few years | A minimum downpayment of 5-20% depending on the price of the property |
| Mortgage | Mortgage not required until property completion but a pre-approval could be required. | Mortgage required on closing day. |
| Occupancy Fees | Responsible for occupancy fees until final closing | Not Applicable |
| Closing Costs | Additional closing costs related to development costs and levies | Standard closing costs |
For more information regarding pre-construction home sales, please click here.
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