14 Things You Need to Know Before Buying a Pre-Construction Condo

14 Things You Need to Know Before Buying a Pre-Construction Condo - Casual Money Talk #personalfinance #realestate #investingHello, my name is Flora and I am a recovering real estate addict.

After explaining in 1,438 words why it’s no longer feasible for us to buy a rental property this year, I have relapsed.

Everything started when I received a text message from my mom.

She sent over a link to a new condo development in Montreal, touting that the starting price is close to $160,000 for a studio (before taxes and expenses).

$160,000-ish for a 300-something-square-foot condo is considered a great deal, especially in the up-and-coming neighborhoold of Griffintown.

Because my mom and I routinely share real estate listings and news with each other, I didn’t think too much of it, and mentally brushed it off as another opportunity I would unfortunately have to pass up.

Two days later, my mom nudged me again via text.

“Are you interested?” She wrote.

I looked at my phone in utter bewilderment.

Could we afford it? Could we qualify for a sufficiently large mortgage?

We spent the next 30 minutes hashing out the financial details.

And just like that, I was back on the real estate market.

Because I’m all the way here in Toronto, and my mom lives in Montreal, she volunteered to do the leg work — visiting the presentation center, liaising with our real estate agent, etc. In return for her help, I offered a kickback.

To say that I wasn’t looking forward to getting a rental property would be a total lie. I see it as a necessary step towards our net worth goal, so I was filled with glee and renewed hope.

The next thing I knew, the suite has been already sold.

But before I even had time to feel disappointed, our agent informed us of another similar condo development project that has just launched, offering similar deals.

They offer 4 studio layouts that fit my budget. I’ll describe them briefly (numbers have been rounded up):

Option #1: A 320 square foot studio on the first floor that comes with a 200 square foot terrace. Hands down, it’s got the best layout out of the 4 options. Price: $210,000 after taxes.

Option #2: A 280 square foot studio that comes with a 70 square foot balcony but has the nicest view of them all. Price: $190,000 after taxes.

Option #3: A 350 square foot studio that has no balcony. Price: $190,000 after taxes.

Option #4: A 410 square foot studio that comes with a 90 square foot balcony. Price: $210,000 after taxes.

We were initially very much drawn to option #1, because of the large terrace, and the nice layout that makes it possible to carve out a living room.

But it’s not without issues:

  1. It’s right beside the elevator, which means that it could get noisy at all hours of the day.
  2. It’s on the first floor, that means we’re potentially subject to less sunlight, more noises (both from pedestrians outside and from the basement parking).
  3. Because it’s in a tight corner, the view off the terrace is almost completely obstructed by the neighbor’s balcony and wall.

Ultimately we didn’t go with that one, we went with #4 instead because it’s the biggest, and it’s the best deal on a price-per-square-footage basis.

We gave our real estate agent the go-ahead, and I waited impatiently for the contract to arrive in my inbox.

At this point, my anticipation has been built up. Part of me already started envisioning life as a landlord, and the other part of me remains pessimistic that the deal will fall through somehow.

When the contract finally arrived – 2 full business days later – I was ready to pop the champagne with my husband.

But as soon as I saw the first page, my enthusiasm vanished: the price has shot up by almost $20,000.

The next day, our agent got in touch with the sales office, and confirmed our suspicion that the developer had decided to jack up the price at the last minute, because 60% of the building had already been sold within a week.

We took a hard pass on that one.

At that point, even if they backed down on the price increase, there was no way I would felt confident signing that contract. Buying pre-construction units comes with many risks as it is, and no way would I be willing to take chances on a developer that already showed a complete lack of integrity.

When I hit “send” on my cancellation email, I felt both relieved and disappointed, but mostly relieved.

I’m not throwing in the towel on the whole “buying pre-construction” idea, because there are actual advantages to investing in condos before they’re built:

  1. You don’t need to have all the funds available upfront, as you only need to pay deposits in 5%-10% increments leading up to the closing (which is usually in two or three years).
  2. Your unit could appreciate as the building is being built, before you even need to worry about paying the mortgage. If that’s the case, you can choose to flip it before closing (but make sure that your contract allows you to do so).
  3. You get a completely new place that you could customize and personalize to your own liking, from flooring to kitchen backsplash to colors of the cabinetry.

On the other hand, buying a pre-construction condo isn’t nearly as straight-forward as buying a resale equivalent. So if the pre-construction market interests you, here are 15 things you need to be aware of before you dot the i’s and cross the t’s:

1. Pay attention to the deposit structure

Financing works a bit differently when you’re purchasing a pre-construction condo compared to buying a resale: you’re required to fork over 15% to 25% in total deposits, and there’s near-zero flexibility on that (sometimes builders might be willing to extend deadlines if the project is sold out, but don’t count on it).

This is because condo developers need the buyers’ money in order to fund the construction project.

The typical deposit structure in Toronto looks something like this:

  • $5,000 upon signing of the contract
  • 5% of the purchase price in 30 days
  • 5% of the purchase price in 90 days
  • 5% of the purchase price in 180 days
  • 5% at occupancy

But every contract is different.

Read the fine prints of your contract, make sure that you could fulfill the payment obligations, and budget for any unforeseen closing expenses.

2. There is a cooling-off period

Did you know that there is a cooling-off period during which you could rescind your offer without penalties?

Yup. If, for whatever reason, you change your mind during the cooling-off period, you can terminate the contract and have your deposits returned in full. Isn’t that a godsend?

In Ontario, the cooling-off period is 10 calendar days (you should check the specific rules and regulations in your state or province), and kicks in after you sign the purchase agreement.

What you should do during the cooling-off period:

  1. Have the purchase agreement reviewed by a lawyer.
  2. Obtain pre-approval from a mortgage lender.
  3. Research the builder and the neighbourhood if you haven’t already (I’ll address these in more details later in this article).
  4. Get second opinions from close friends and families, especially those who have bought pre-construction condos themselves.
  5. Play the devil’s advocate to uncover any issues you might’ve missed previously.

The key is to conduct thorough due diligence to ensure that you’re making an informed and smart investment decision that you won’t regret later on.

3. Get ready to play the waiting game

Builders typically provide an approximate completion date, but due to unforeseen circumstances, it is not uncommon for the target move-in date to be extended several times – sometimes by several years.

The delays can be frustrating if you plan to move in as soon as humanly possible.

Based on my experience, add at least 1 extra year to the completion date your builder has provided to get a more accurate estimation.

Also, I can’t stress enough the importance of understanding your agreement of purchase: delays and builder penalties should be outlined in it, if there are any.

If you find yourself in the unfortunate situation of dealing with building delays, consult your lawyer to see if there is any provincial (or state-level) compensation for delayed move-in that you could be entitled to.

4. The only constant is change

Sadly, when buying a pre-construction condo, what you see on paper isn’t always what you get.

Developers have a fair amount of leeway to make significant alterations to the units and the building itself as they see fit – adding and subtracting floors, changing layouts, moving the locations of the amenities, etc.

Theoretically speaking, buyers are protected from any “material changes”, but don’t be surprised if what you assumed would be considered “material” actually isn’t.

Only one way to tell: study the sales agreement, prepare to be flexible, and seek recourse if it’s available.

5. Your condo fees could increase

Monthly maintenance fees for pre-construction condos – which pay for the upkeep of common areas and amenities, exterior maintenance, security, etc – are usually set deceptively low.

This happens for 2 reasons:

  • The condo developers want to entice more buyers.
  • The advertised maintenance fee is estimated several years in advance, not always based on the actual cost of running the building.

Expect condo fees to creep up by significant amounts during the first 2 to 3 years of occupation, usually between 10% to 20%, depending on previous years’ expenses. So keep that in mind when you do your cost-benefit analysis.

6. Beware of closing costs & other hidden fees

The closing day should be an exhilarating time.

But before you pop the champagne, remember that you’re still on the hook for some closing costs that you might not be aware of (since they don’t apply to resale units).

These costs could include: taxes on new appliances, utility connection fees, 2 months’ worth of condo fees (to be added to the condo’s reserve fund), legal fees, title insurance, property tax adjustments, etc.

These can easily amount to 1-3% of the original purchase price.

7. Taxes, taxes, taxes

Unlike resale, you have to pay taxes on your pre-construction condo. Bummer!

If you plan to live in the unit yourself, you might qualify for a HST rebate in Canada. However, the same does not apply to investors.

I would strongly encourage you to seek professional legal advice to ensure that you’re able to recoup your HST, if you plan to make the condo your primary residence.

8. Research the condo developer

If my story above could serve as a cautionary tale, the key lesson you should take away is that the condo builder (and the sales team they hire, by extension) REALLY matters.

The difference between a quality builder and a shady one is basically night and day.

If you buy from a reputable developer, you can sleep easily at night knowing that they’ll deliver a quality product on time. With a less-than-stellar builder, there could be endless drama and surprises, causing unnecessary headaches and mini heart attacks.

In the most extreme cases, I’ve read stories of cancelled condo projects that left 1,100 buyers in limbo, or worse.  

This is why researching your builder is a must. Here are some suggestions on how you could approach it:

  1. Find out as much as you can about the developer. What other projects have they completed in the area? Tarion’s Builder Directory is a great place to start, followed by J.D. Power’s annual “New Condominium Builder Customer Satisfaction Study”.
  2. Search for online reviews, especially on unaffiliated third-party review sites. Yelp and StreetEasy forums are also your friends.
  3. If the developer has completed other residential development projects, talk to past customers who have moved in. Introduce yourself politely, be transparent about your intentions and ask them about their experience working with the builder, and thank them for taking the time to talk to you. Unhappy customers usually tend to be the most vocal ones.
  4. Research the sponsors, partners and financial institutions that back the project.

If at any point, you see any of these red flags below, ask yourself if you’re willing to shoulder the risk:

  1. The builder has no track record or evidence to back up their claims.
  2. The reviews are poor, or if the positive reviews seem illegitimate. Don’t ignore any complaints from past customers about structural issues, customer service, quality of building maintenance, etc.
  3. The builder and any of its affiliated partners have been involved in lawsuits before.

9. Research the neighbourhood

The resale value of your condo (and your quality of life if you plan to live in it) partially depends on the quality of the neighbourhood and the convenience of the location.

If you’re buying in an area that you’re unfamiliar with, take the time to explore the neighbourhood on foot and conduct research online.

Typically, you’d want to pay attention to these attributes:

  • Walk Score
  • Transit options
  • School rankings
  • Noise level at all hours of the day
  • Proximity to local amenities
  • Upcoming infrastructure projects

Last but not least, don’t ignore empty lots around your building. The presence of empty lots could indicate that there will be new construction in the future, creating loud noises and possibly obstructing your view. So don’t let yourself be blindsided.

10. Ask for discounts and perks

From time to time, condo developers provide extra incentives to lure in buyers, especially for high-end units that don’t sell as easily.

Sometimes they lower the price during a limited time promotional event. Other times, they might throw in perks ― free parking space, storage locker, furniture, appliances, rental guarantee, closing cost rebates, just to name a few ― to sweeten the deal.

Depending on the market and the popularity of the development, this isn’t always possible, but it sure doesn’t hurt to ask.

11. Make sure there’s an assignment clause in the contract

From an investment stand-point, when I buy a pre-construction condo, I’d like to keep all my options open. I might decide to rent out the unit or sell it before closing, depending on which option provides the best net return.

However, not all condo developers allow you to sell your contract before the unit is built. This is why having a lawyer review the details of your contract is so crucial: they could confirm if there’s an assignment clause in your contract that makes it possible for you to transfer your contract to another party before closing.

Please note that some builders might charge a fee if you want the assignment clause included in your contract.

12. Model suites can be misleading

Model suites are the developer’s way of putting their best foot forward. They look wonderful, but they don’t always truthfully represent what you’ll get.

Before you fall in love with the model suite, remember that:

  1. Model suites usually have higher ceilings to make the suite appear more spacious and airy.
  2. Model suites often come with upgrades that are not standard in all suites, such as trendy backsplash, quartz countertop, and hardwood flooring.
  3. Model suites are professionally furnished in a way that masks the imperfections of the layout.

13. Study your floor plan

Guess what? The floor plans can also be misleading. The developers usually add furniture onto floor plans to make the space look bigger than it actually is.

Take this layout as an example:

This is the layout of a 370 square foot studio. Based on the graphics alone, you’d think that the bedroom area is spacious enough to accommodate a King size bed, 2 night stands, and still provide plenty of room to move around in.

In reality, that’s far from true: you can barely fit a Queen size bed in it.

Don’t want to be deceived? No problem.

Here’s what you can do:

1. Ask for floor plans with measurements for each area.

2. If you’re comfortable with any graphic design tool (Microsoft Paint could work), remove the furniture from the floor plan yourself.

14. Get everything in writing

This last tip is straightforward, but important enough that I have to mention it: get everything in writing.

Verbal promises by developers don’t count unless it’s in writing. It’s not that developers are dishonest by default, there are a lot of people and moving pieces involved in the entire selling and building process (and it is a long process) that there’s a good chance that verbal commitments could be forgotten by the builder.

Final Thoughts

After I cancelled my recent pre-construction contract, I’ve been thinking a lot about what I want to do moving forward.

Do I want to keep looking for a good pre-construction deal? Maybe.

Should I focus instead on building up my savings? Perhaps.

But one thing I am 100% certain of is that I made the right decision backing out of the contract, even though I know full well that it was a nice deal even with the $20,000 increase in price.

The fear of missing out is real, especially in cities where real estate prices are constantly on the rise, so I’m not going to pretend that it’s easy to walk away from a deal when you know that the next one probably wouldn’t be any better.

But all things considered, I’m much better off not taking a gamble with an unknown quantity.

Category: InvestingReal Estate

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Article by: Flora Pang

Flora is a personal finance blogger, digital marketer, and lover of Lego products. You can catch her rambling about money on Facebook, Twitter, and Pinterest.