Secrets Of Buying A Pre-Construction Condo
Buying a Pre-Construction Condo in Toronto
When buying a pre-construction condo, you are buying the right to purchase a unit which will be completed in 3 to 5 years at today’s set price. This is a great way to invest your money without having to worry about a mortgage right away and to participate in appreciation without actually owning the physical asset. The competitive Toronto market will also cause rents to continue to increase while you’re waiting, further improving positive cash flow.
Buying a pre-construction condo is quite different from the resale process. In the resale process, you are sent an MLS listing, you go see the property, if you like the property you make an offer, you negotiate, the offer is accepted, you provide the deposit, and then close the property in 30 to 60 days. When buying a pre-construction condo, you select a property plan on paper and sign a contract that provides you with the right to purchase the unit at a later date.
There are 2 different dates to note when buying a pre-construction condo, the occupancy date and the registration date. The occupancy date is when the developer gives you the keys to your property. The registration date is when the title is transferred to you and take ownership of the property. This system in Ontario is meant to protect buyers because it forces the developer to complete the building as agreed to (for example, let’s say when the 10th floor was completed, the builder decides that they want to stop the building on the 40th floor and not complete the remaining 10 floors because they will make more profit, this significantly changes the overall construction and maintenance costs for the remaining units). The timeline between the occupancy and registration can be anywhere from 3 months to a year.
During Occupancy, you pay an occupancy fee which is made up of your maintenance fee, property tax, and the interest only portion remaining on the outstanding balance for the unit.
3 Things you want in your contract
The right to assign.
It is strongly advised against selling your unit on assignment because you are always better off closing the property first. But circumstances can come up that are out of your control so the right to assign allows you to sell your purchase right to someone else. This is a clause you are never looking to use but will be happy it is there if you need it.
2. The right to lease property during occupancy.
Making sure you have the right to lease during the Occupancy period since this allows you have an incoming cash flow to immediately cover your expenses.
3. A development charge cap.
Development charges are fees charged by the city and imposed on land redevelopment projects to help pay for the capital costs of infrastructure that is needed to service new development. Charges typically vary based on the number of bedrooms in the unit. Developers pass these charges onto the consumer in the selling price but they do not know what the exact amount will be since these charges will occur in the future. Including a cap on the development charges eliminates the risk of having to pay unknown fees in the future if development charges rise significantly, in which case the developer would absorb the cost.
Send your lease to your lawyer
You always want to have your lawyer review an agreement of purchase for a pre-construction condo so that they can help you understand your legal obligations, what any extra costs may be (like meter hookup charges, admin charges, etc. on final closing), and if there are any clauses you need to be aware of.
10 Day Cooling Off Period
After signing any pre-construction condo agreement, there is a 10 day “cooling off” period. This is a law in Ontario that gives you 10 days to rescind your purchase and to walk away from a condo purchase without any penalty or obligation. This law does not apply to new home sales, only new condo sales. This also provides you and your lawyer with time to review the agreement, and gives you extra time to closely calculate what the final costs will be.
Tiered deposit system
When purchasing a pre-construction condo you provide payments through a tiered deposit system. Similar to a conventional resale purchase, the deposit for a pre-construction condo is normally 20%. But rather than providing the 20% deposit on day one, it’s typically spread out over time:
Day one : a cheque of around $5,000 which will not be cashed until the end of the 10 day cool off period,
5% at the end of 30 days,
5% at the 3 to 4 month mark,
5% at the 6 to 9 month mark,
And the final 5% between the 12 month to 18 month mark.
These payments are given in the beginning of the project as post-dated cheques. This gives you the time to accumulate the 20%, set up a line of credit off your principal residence, or dispose of other assets to come up with the rest of that down payment.
The cheques are deposited into a trust account held by the developer’s lawyer. This money is completely separated, protected and is not accessible by the developer at any time.
What happens next?
You wait! If for example you were to sign the deal now, the building would not be completed until some time between 2021 and 2023. All you’re doing between now and then is making sure your funds are available for when the cheques will be deposited in the first year or so. Typically a couple years later the builder will reach out to you so you can select the finishing touches for the unit.
Tips for selecting finishing touches
The process of selecting your finishes and upgrades is incredibly easy! Typically you select all of your finishings online but there are often sales centres with designers to assist you if you needed. Once you’ve completed selecting your finishings, you just checkout and pay with a credit card as you normally would online.
When buying for investment, there’s no need to do significant upgrades to your unit and typically you just want to select the standard finishing packages.
However there are some upgrades that are strongly recommended to select because they can only be performed during the construction process and will add significantly to the value of the property:
Bedroom outlets in the ceiling: Always pay extra to have outlets for light fixtures installed in all bedroom ceilings if the plans do not include them. This adds significantly to the functionality of the room, frees up tight floor space and will allow the unit to show much better when showing prospective renters, leading to a faster turnaround time and potentially a higher rent value.
Patio BBQ gas lines (if they are offered). Toronto by-laws prevent people from propane barbecues on their balconies so to legally have a barbecue, you must have a dedicated gas line. This is a rare feature and can add significant appeal and value to your unit.
Different stages of building completion
Different builders turn over possession of the unit to the purchasers at different stages of building completion. Some like to give over units when the building is, “hotel ready” (i.e. you wouldn’t know that there is still construction going on in the building). Other builders will hand over the keys when the building still looks raw and unfinished in the common areas.
Occupancy lottery
Something you can’t control when investing in a pre-construction condo is the time of year during which you will get the unit. April to October is a great time of year to get occupancy, however November, December, January, and February are slower months and you may find yourself with a month or two of vacancies before tenants move in.
Even if you have a specific date on your agreement as to when you should expect to be able to take in tenants, it’s very common for construction to be delayed. It’s important to be aware of this and factored into your budget.
Transferring the title to you
Once the building is complete, the title will be transferred to you. At this time you will need to arrange mortgage financing and pay the additional closing costs, such as the land transfer tax. You will go to your lawyers office, complete paperwork and the title will be transferred to you.
Now this is the exciting time because you can leverage financial tools that are available to refinance the property, tap into the equity that has been building in the property and look at purchasing another pre-construction condo which can turbo charge your growth of wealth.
HST on pre-construction condo purchases
Developers always charge clients the HST on all condo purchases which is set into the price. Upon closing, your lawyer can immediately claim an HST rebate if you will be moving into the unit or shortly after upon proof of renting the unit, so you will eventually get this money back. Luckily, your lawyer will take care of everything. All you have to do is send them the lease!
What do you do about deficiencies?
A deficiency is any item that is damaged, incomplete, missing items, as well as anything that is not functioning the way it is intended and could include: drywall damage, missing outlet covers, unfinished transitions, incorrect upgrades/finishings, to name a few.
It’s important to always do a pre-delivery inspection before you get your unit to identify any deficiencies. The developer is obligated to fix these issues, but if they don’t, then you are covered under the Tarion Warranty; a new home warranty that covers :
Deficiencies inside the unit for 1 year,
Deficiencies in the walls for 2 years,
And any problems with the foundation for 7 years.
“Who should I buy a pre-construction condo from?”
You should be buying a unit from someone that has investment experience. You want someone who’s gone through the process, who can guide you through each step of the way and can help you grow your investment asset into a multi-property, multi-unit portfolio that is worth millions of dollars.
You also want to get first access into a project which many Real Estate Agents and Brokers don’t have. By being the first buyer you’re buying in the first launch, which means you’re purchasing at the lowest possible price point and getting first selection of suites. This gives you the best possible investment return on the property you're buying in. You want to be working with someone that has worked with various builders in the past and can help guide you through different projects and let you know where some of the pitfalls are and what changes could be happening down the road.
It’s important to do your homework. First I suggest you watch my Master Class in Condo Investing. It’s a great resource where you can see my own personal journey on how I’ve grown my portfolio from an initial one condo on West Queen West, to 11 condos and a triplex in the High Park area. You can then book a consultation with me and we can sit down, talk about your goals, and I can show you how you can build your own portfolio so that you can build generational wealth, and financial freedom