Buying a pre-construction condo can be helpful mostly because of improved prices versus a project that is ready for imminent occupation. However, purchasing a pre-construction condo often brings certain risks, such as delayed completion, unexpected closing announcements, construction variances and more.
Demand for condo living continues to sky-high in the city of Toronto. The estimates published by the Canadian Mortgage and Housing Company reveal that the ratio of condos to population growth is almost three times greater than in the early 1990s.
Condos have become an increasingly common way for people to invest in the ground floor real estate market. People who undertake to buy a pre-built unit spend five percent of the cost of their condo and then, during the renovation of their house, which is mostly two to three years of time, follow a payment plan that lets them pay 20 percent of the price of their home when it is completed. Buyers prefer the prospect of investing a premium at the present market valuation and experiencing three years of appreciation at home without paying a mortgage.
Before you buy a pre-construction condo, here are some tips we would like to share with you:
How does buying a pre-construction condo work?
When you purchase a pre-construction condo, you may find yourself in a situation where the builder will allow you to move into your unit before the rest of the building is completed, and you will be transferred to the home. Depending on your province, this timeframe is known as your period of occupancy or the period of a temporary occupancy.
Are pre-construction condos cheaper?
Pre-construction condos appear to be cheaper because there is a possibility that the project will be postponed or even cancelled, but this is not always the case today, particularly in some high-demand areas. You’ve got more time to save for your condo. You pay a set of fees to the contractor as a deposit.
10 Tips on Buying Pre-Construction Condos
Tip #1: Find a reliable builder
There’s always a chance of putting money behind something that hasn’t been developed yet. This is why finding a trustworthy developer is the secret. John Pasalis, president of Realosophy Real estate brokerage in Toronto, suggests raising questions such as: “Are past projects finished on time, and if not, how late were they? After the condo was completed, did the developer increase maintenance fees? ”
“Some investors found themselves buying pre-construction units and then, a few years later, the builder just cancelled the project,” said Pasalis.
Tip #2: Location
While it is important to find a trustworthy builder, finding an investment property in the right place is even more important.
Canada’s main two housing markets are Toronto and Vancouver, which account for 54% of overall condo sales in Canada. Smaller Canadian cities do not have the same density as Toronto and Vancouver, which means the demand for condos in those markets is not as strong.
Tip #3: Asses carrying costs
Another significant aspect that any investor should recognize in their business model is the expense of carrying out their investment.
The cost of carrying shall be the overall cost of storing or carrying the inventory. The cost of transporting the condo owner may include mortgages, condo fees, property taxes and insurance. Keep away from investment properties where you have to pay $700 a month as a billing fee. Seasoned buyers typically don’t buy a property where they’re paying more than they do.
One of the advantages of pre-construction condo investment is that owners can rent their finished units to help pay down the mortgage, which reduces the cost of transport.
Tip #4: Be prepared to pay temporary occupancy fees
Under the Ontario Condominium Act, buyers can charge interim occupancy fees for condo maintenance costs between the time the purchaser completes the unit and the time the project is recorded.
For example, if an investor purchases a unit on the first or second floor of a multi-storey condominium building, those units will be completed in front of the top floors and units. The developer will charge the buyers the occupancy rate on the full units (even if the rest of the building is not finished) before the construction is completed, all the units are handed over to their owners and the contractor registers the condo and the company with the city.
Tip #5: Create your business model
If you have found the right builder and the right place, develop a business model.
The business model is the investor’s profit-making strategy. The strategy should include the investor’s product – in this case, the pre-construction condo, the target buyers, and how the investor wants to market the product.
It’s important to think of pre-construction condo investment as your company and write down what it needs to expand. Create a business model with checkpoints such as price, location and whether or not a condo developer has a reputable background.
Tip #6: Work with a specialized attorney with experience
A lawyer with pre-construction condo experience will help you understand the fine print from negotiating closing costs to revising your purchase and sales agreement.. Hundreds of pages of condos can be used for pre-construction contracts, including all changes and condo documents. Know fully and simply your rights and obligations by talking to an expert in the field.
Tip #7: Take advantage of Canada’s 10-day cooling clause
Ontario has 10 calendar days for all pre-construction condo buyers to rethink and withdraw. It is advised that you have an experienced jurist who will review your purchase and sale contract during the 10-day cooling-off period, also known as the ‘rescission period.’ This is also a good time for approval of a mortgage. You may have up to 30 days to provide your hypothetical approval to the vendor after signing the contract, but if you cannot secure a loan and have exceeded the cooling-off time of 10 days, it is possible that you will not be able to return your deposit.
Tip #8: Expect Delays in the construction
Building completion approximations are only approximations. Developers may suffer delays due to unexpected schedule changes such as severe weather, trade-related shortages, and strikes. Delays can happen to the most reputable builder, and unfortunately, you can’t predict this. Deadlines for construction are set out in the Tarion addendum of your purchase and sale agreement but plan for at least 3-6 months of delay.
Tip #9: Find the Deposit Structure
As an industry norm, pre-construction condos usually require a 20% down payment to purchase a home. The deposit structure is issued by the seller and will notify you of the timing of the deposits. For eg, do you deposit 20% in the first year after the contract has been signed or is it spread over 4 years or more? The attractive benefit of a 20% down payment when purchasing pre-construction is the strength of leverage.
Tip #10: Get the assignment clause on your contract
Getting the assignment clause is a great feature, as it allows you to sell your contract to another purchaser before you occupy it. This clause is particularly relevant for investors seeking an ROI, sooner rather than later. It is recommended that you are talking to a pre-construction lawyer, as there is typically some fine printing that may limit your ability or means of selling your condo to another purchaser.
If you’re looking to buy your pre-built condo as a rental investment to concentrate on bare bone features instead of all bells and whistles. The largest floor plans come at higher costs and maintenance fees but do not generally produce substantially more rental income.
Buildings and units with unique features that make them stand out from the competition would have the best resale value in an increasingly competitive market of condo options. Consider finding units and buildings which are fantastic for your purchase, exclusive finishes, high ceilings, green spaces and garage lifts.