So You Want to Buy Pre-Construction?

If you’re in the market for a pre-construction condo purchase, you’ll want to make sure you do your research first. Pre-condo purchases can be hit or miss, and it’s very important to cross your T’s and dot your I’s throughout the process. A well thought out and properly executed purchase, can be a very lucrative endeavor. On the flip side, there are plenty of horror stories related to pre-construction purchases. So what are the ins and outs? What do you need to know? Here are some points to be aware of when considering such a purchase:

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Positives:

Let’s start with the good stuff. There is a reason why investors swarm by the dozens when a new project development is announced. Pre-construction units typically come at much lower prices VS standard re-sale units. This is largely due to the risks associated with buying pre-condo, which we’ll touch on in the “Negatives” section of this post. But the thing to remember is that buying pre condo will cost you much less than a general re-sale unit, and the best part: once the unit is registered and available for resale, it will likely have seen a massive increase in equity. This is why so many investors partake in pre-construction purchases. Many of them intend to sell the property as soon as it’s registered. Others intend to rent out the unit while sitting on the equity and making a monthly income. But this is also a nice option for a first time home buyer, as the prospect of a large increase in equity over a short period of time can be very enticing.

You’ll also be given a cooling off period that will allow you to reassess your purchase, and get your finances in order; you have 10 days after giving the initial down payment to reconsider your offer. This can be a big positive for those of us who make impulsive decisions.

Another positive is the fact that you’ll be the first one to inhabit the unit. This is a brand new unit, so you don’t have to worry about wear and tear that goes unnoticed in the screening process. You are the first owner, meaning all new appliances and designs. What’s more is that you may be given the opportunity to customize certain aspects of the unit, differentiating it from the other units in the building. In turn, this will aid your resale value when you’re ready to sell.

Negatives:

Ok, on to the bad. The biggest issue with pre-construction: time delays! If you need a place to live now, you can forget pre-construction. Time delays are a common occurrence, and can last anywhere from 6 months to a few years. More importantly, sometimes a project is called off all together. This is rare, but it is a risk associated with pre-condo.

On the subject of down payment, you will require a full 20%. Now, this can actually be viewed as a positive or a negative; on the down side, a resale unit can have you paying as little as 5% up front; on the positive side, a bigger down payment means a smaller mortgage which ultimately saves you interest charges, gives you a smaller monthly fee to maintain, and it also allows you to avoid the CMHC Fees associated with deposits that are less than 20%. Moreover, the 20% down payment is typically broken into smaller incremental payments, which gives you more time to source the entire 20%. These incremental payments are referred to as a deposit structure. You will generally be paying something like 3-5K up front, with the balance of the initial 5% in 30 days, another 5% in 90 days, another 5% in 180 days and the final 5% at occupancy (the day you move in).

Lastly, the big negative tied into pre-condo is something often referred to as Phantom Rent. There is a period of time in which you can officially move into the unit, however the building itself is not yet registered, and as a result, you do not yet own the unit. This is referred to as Interim Occupancy.  Interim occupancy can last as short as a few months, or as long as a few years, and you are required by law to pay the occupancy fees. These fees are calculated to be more or less what your mortgage payments will be once the unit is officially yours, but the issue is this: those occupancy fees do not go towards your mortgage. Hence the term “Phantom Rent”.

So, pre-condo purchases can be a very smart investment. With that said, do yourself a favor and work with a professional when considering such a purchase. Be aware of the good, the bad and the ugly. CMG Toronto can help!