There are pros and cons to any real estate decision, and pre-construction vs. resale is no different.
Ultimately, the decision comes down to your risk tolerance, what kind of investment you want to make, and what you want out of your real estate experience.
Pre-Construction: How Does it Work?
Pre-construction isn’t just for Toronto condos; entire communities are bought and built through pre-construction financing. You can find pre-construction townhomes, rowhouses, semis and detached homes all over the GTA.
Development firms will put in the early leg work before putting up project units for sale; this includes land surveying and securing, architecture drawings, designing floorplans, and creating marketing materials and branding.
After this initial work, builders put the units up for sale. It’s not just an open free-for-all; first access units goes to friends, family, and connections of the firm. Then the developer brings in “platinum agents” – the real estate agents that they’ve built a strong relationship with over time.
Platinum agents often have a list of ready buyers looking for pre-construction properties, making this relationship a win-win. To note: when buying pre-construction, you don’t pay Realtor fees. The builder pays them for you!
After the early-access round, the rest of the units are open to other real estate agents, and then finally, the general public.
As time goes on, the units get more expensive. By the public round, usually 80% of units are sold, and the prices have gone up by about 10-30%. Developers need to pre-sell these units in order to secure their own financing, and so incentivizing these early sales with discounts and bonuses (more below!) is key to the project’s success.
Understanding the deposit system is also important. You can secure your unit with 5% down. But the rest of your 15-20% down payment is due over time, usually in 5% increments at 60, 90, and 120 days.
You also need to know how important the incentives are, which we’ll go into below, as well as the risks associated with pre-construction.
Finally, there are two dates you need to know: your occupancy date, and the closing date.
Your occupancy date is the day you get the keys to your unit; but you don’t own it yet. Instead of beginning to pay your mortgage, you actually pay a rental fee of sorts (called an occupancy fee, or “phantom rent”) to the developer.
The project’s closing date is the day the project officially moves hands from the developer to the unit owners.
The time difference between occupancy and closing can be weeks or months. Developers are only able to push back these dates so much until they start having to pay delay costs. These will be outlined in your contract.
What Kind of Incentives Can My Agent Get?
Next are money-saving incentives, which are usually caps on fees. Fees are paid on closing, and can add as much as $20,000 (or more!) to your purchase price. And it’s all due at one time.
Fees come from a lot of sources: Interest, administration fees, bedroom levies, Tarion fees, and city-mandated fees to cover the cost of increasing density and public services. There’s also a type of fee called Section 37 levies in Toronto, which is when the developer adds a park or other public space in order to have the City approve another aspect of the project (such as an additional floor, or a bylaw-bypass).
Your agent can – and should – negotiate to cap these fees so you don’t get stuck with a massive bill on closing. Caps can be as low as $0 but are more likely to be around $10,000 for a Toronto condo project. However, some developers do not allow assignments in their projects. If this is the case, you need to evaluate your end goal. Do you want to rent out your unit? Then this will cost you a few months of lost rent. Are you the end user? Then it likely won’t impact you.
Builders may also offer incentives such as parking discounts, a free locker, a year of covered maintenance fees, etc. These kinds of incentives are financial; for example, a parking space in downtown Toronto can cost between $45,000 and $100,000 to purchase outright. The best way to evaluate these kinds of incentives in an investment decision is to compare their cost and convenience with the purchase price.
Condo assignment is the ability to “sell” your pre-construction unit before the building closes. It’s an escape plan in case something unexpected happens and your plans or lifestyle changes, and normally there’s a hefty fee associated with assignment. Your agent can negotiate for earlier occupancy or free or reduced assignment fee.
What Kind of Risk is Associated With Pre-Construction?
Risks include the developer changing floorplans or the entire project; usually, pre-construction agreements give builders the power to remove your unit or change its floorplan in the construction process.
Projects are almost always delayed. The estimate occupancy date for buyers is a “best-case scenario”, and doesn’t account for issues in securing land, financing, materials, or other construction delays.
Projects can also get cancelled. While normally this means you get your deposit refunded, in the case of bankruptcy of the development firm, this doesn’t always happen. Also, you would only get your deposit refunded – meaning that there’s no covering for lost time or the increased cost of real estate over that time.
Fortunately, Ontario protects its consumers with a mandatory 10-day cooling-off period. During this time, you’re able to get the documents reviewed by a lawyer or consult any other stakeholders involved. If the unit doesn’t feel like a good investment, you can cancel the paperwork during this time and get your deposit back.
Maybe we can also include a paragraph like this somewhere: )There is a 10 days grace period after signing for a unit called ‘cooling off period’. You will have 10 days to review all the documents signed with your lawyer. If the unit doesn’t seem like a good investment you can return the unit and get the deposit back from the builder no questions asked).
The agent will know whether there are any projects coming up that suit your needs, what pitfalls to avoid, and what developers to work with.
The Realtor should also help you evaluate your current situation to decide whether pre-construction is the right choice for you. In many cases, the lower price is a driver for buyers, but the wait time might be too much. Your Realtor will help walk you through the pros and cons to decide what’s the right choice for you.
Want to know more? I’d love to talk about pre-construction with you. Send me a message and we can book a no-pressure, totally-free information meeting. Looking forward to it!
Let’s get started…