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As housing prices creep ever higher, and with serious supply constraints across the GTA, it is no surprise that prospective home-buyers are increasingly considering Pre-construction condos.
Pre-construction condos are units in projects that are yet to be built, as opposed to “ready” condos that are already built but have never been sold before. “Resale condominiums” are units that have been lived in already, typically in older buildings, and are up for sale by a current owner.
Due to the promissory nature of pre-construction projects, the fee structures can be a bit more complicated compared to resale condos.
This article will shed light on the most common deposits and fees buyers need to be aware of when buying a pre-construction condo.
Down-payment & Deposits
Generally, pre-construction condos require a higher down payment than resale condos. Whereas a 5% down payment is the norm on resale units, pre-construction units usually require 20% or more in down payments.
At first glance, this may seem prohibitive for many buyers. That is why developers offer what is known as a “deposit structure”, which is basically an installment plan for the down payment.
A typical deposit structure for a 20% down payment would look like this:
- $5,000 with the offer
- Balance of 5% due in 30 days
- Next 5% in 90 days
- Next 5% in 180 days
- Final 5% at occupancy
This makes it much easier for a buyer to arrange and afford the down payment, since its broken up over many months.
Many developers even offer limited-time, pre-launch deposit structures that are even more buyer-friendly e.g. split over 365 days instead of 180 days.
(Competition for these pre-launch “VIP” incentives can get pretty intense, so signing up for a program like our Insider’s Club is always a great idea!)
Deposits tend to be higher at the beginning of a project, as banks and lenders that finance these buildings usually set that out as a requirement. Closer to completion, deposit structures tend to be more flexible, and it is usually possible to negotiate a fee structure with the builder to extend or even reduce your payments.
After putting down a deposit on a pre-construction condo, buyers are entitled to a “cooling off period” – a short period of time to reevaluate their purchase decision. In Ontario, the cooling off period is 10 days.
This is when buyers should get their finances in order and make sure they are ready to go ahead with the purchase.
They should also have their Agreement of Purchase and Sale reviewed by a real estate lawyer, so that they are not caught by surprise by builder-specific clauses.
If a Buyer changes his/her mind (for any reason) during the 10-day cooling off period, he/she can back out of the contract and have the deposit returned without deduction.
Closing costs are additional expenses that buyers need to pay for, which are levied between the time that they make the offer and the day that they close.
These costs include home inspection fees, legal fees, land transfer taxes etc.
It is suggested that buyers budget and save an additional 1.5% – 4% of the purchase price of their homes, in order to cover these closing costs. For pre-construction condo units, that number can be even higher.
When you buy a new condo, you may be subject to additional fees, including:
- Development and educational levies ($200-$4,000)
- New Home Warranty Plan enrolment fee ($900-$1,200)
- Utility hook-up fees ($50-$500)
- Assignment fees (if you sell before final closing, or flip your unit) ($3,000)
- Occupancy fees
These additional costs are project- and builder-specific, and some may even be included in the sale price of the unit (e.g. see HST below).
During the cooling off period, buyers should have their lawyer review the Agreement of Purchase and Sale to determine which additional closing costs will be incurred.
It is recommended to use a real estate lawyer who has dealt with the same project developer in the past, since they would be able to better anticipate any issues that they have had in the past while closing other client’s deals with that developer.
Condo Reserve Fund
When buying pre-construction, buyers will need to contribute at least two months of condo fees to the condo’s reserve/emergency fund. This is usually levied at the time of closing.
Again, read (or have your lawyer read) the Agreement of Purchase and Sale carefully!
When the condo is built and a buyer’s unit becomes ready to be moved into, there is a period of ‘interim occupancy’, where the Buyer can “take possession” i.e. move into the unit, but not yet own the unit.
This is because titles cannot be transferred until the WHOLE building is complete. Only after completion will the unit ownerships be handed over to buyers. Buyers can start making mortgage payments after that.
During the period of interim occupancy, the Buyer does not yet own the condo; they simply pay the builder an amount roughly equal to what their mortgage payment + condo fees + taxes will equal.
Many buyers choose to take advantage of the occupancy period and move into the units, especially if at the time they are renting a place where the rent is higher than the occupancy fee for their new unit.
However, the drawbacks should be noted: most of the building’s amenities will not be open for use, and there will likely be a lot of noise in and around the building, as the builder finishes other units and general sections of the building.
Buyers can elect to avoid occupancy fees by paying the entire purchase price with cash at the occupancy date. However, these terms must have already been put into the Agreement of Purchase and Sale before the end of the cooling off period.
Unlike resale condos, pre-construction condos are subject to HST, which builders generally factor into the purchase price of the unit and pay on behalf of the buyer.
However, if a buyer will be living in the unit themselves, they will likely qualify for an HST rebate. Note that most builder prices assume this, and so this rebate is often already factored in as well.
For investors, there is also a rebate opportunity, but to be eligible they need to rent the condo out for at least a year, with adequate proof of doing so
It is highly recommended to get professional legal advice about potential HST rebate qualifications beforehand.
The Final Word
With so many fees and closing costs, it is no surprise that many pre-construction condo buyers find themselves facing larger than expected bills around closing time.
However, with due diligence and legal advice, any buyer can confidently navigate these waters and land their brand-new, dream condo home.
If you’re a prospective first-time homebuyer on the fence about making the leap in 2019, consider that mortgage rates are in a great place right now, and that the Canadian government has made it a bit easier to afford a home in 2019.