Buying pre-construction, whether it’s a condo, townhome, or single family home, can feel very enticing. You get a brand new home, usually in a new area, and you get final say on all your fixtures and finishes. It’s the ultimate exercise in personal choice. Plus, there’s typically a longer lead time from your first payment to when you get the keys, so your costs can be spread out over years rather than months.
However, while there are pros to a pre-construction purchase, there are also some things to keep in mind before finalizing your decision.
Does the process differ between a pre-construction condo and a pre-construction development property?
Cheryl Longmire, a REALTOR® and Certified New Home Specialist with RE/MAX Nova in Halifax, Nova Scotia, has been selling pre-construction for more than 20 years. She says there are some similarities between building a condo and a development property, but overall the process is quite different.
“In a new subdivision, the process is much easier for a purchaser in that they can see what they’re getting in most cases as there generally is a model home,” Longmire explains. “Also, they can walk the lots, make their selections, and make changes to the home plans in most cases to meet their wants and needs. Both purchases are based on buyers viewing samples of finishes or a model home, and making purchases from looking at plans and the seller’s scope of work included.”
The Pros
Incentives from developers
Many developers often offer incentives for pre-construction units. Their goal is to sell out their building or development—Longmire tells us in most cases, “condo developers need to sell 50% presales of the condos before the construction can begin based on financing for their projects”—so it’s not unusual for them to offer design bonuses, or free upgrades on flooring, cabinetry and appliances, etc.
“What buildings offer depends on supply and demand,” says Paul Chan, founder and REALTOR® at Modern Family REALTOR® in Toronto, Ontario. He says typical incentives include “free assignments, caps on development fees, and sometimes parking or a locker.”
Less competition on a specific property
Especially when housing supply is low, buying a resale property can mean multiple offers on the same house. You’re left to the decision of the seller. While there’s competition for a spot in a new building or a new development, the bidding process may not be as competitive as a typical resale home. There’s still some competition depending on the area and the market, but Longmire says pre-construction certainly helps with the competitive bids.
“Last year, builders would build a few homes first then put them on the market in hopes of receiving multiple offers,” she explains. “In Nova Scotia this plan didn’t work in their favour in some cases. Pre-sales of homes not built eliminate the bidding wars for sure.”
Your home is brand new
With a pre-construction build, you’ll have more range to customize your new home to your taste.
“The fact that you get to pick [your finishes] prior to construction means you can [tweak] the layout, choose the colours, and upgrade your finishes,” says Chan.
Therefore, if you’re keen on details and have a specific vision for your space, going the pre-construction route may be right for you. You may also find peace of mind knowing no one else has lived in the space before you.
Did you know when you buy a pre-construction home in Ontario, you’ll receive the Tarion new home warranty—it’s provincial law. This includes financial protection before you take possession as well as protection against construction defects afterwards. Other warranties will be based on the builder and provincial regulations.
“There are numerous warranties from cabinets to flooring from the companies that are constructed and installed by them,” Longmire shares. “On the home there are structural warranties generally for seven to eight years, a one year builders warranty, 20-year dry basement warranty (offered by some builders), plumbing warranties, heat pump warranties, etc.”
You’ll have a longer lead time before moving
There are reasons why a longer lead time might be advantageous. For starters, your home can start building equity before it’s even built.
For first-time buyers, a long lead time can be enticing because it also means an extended down payment or deposit structure. Your down payment is due over time, not right away, which will give you time to continue saving money while building equity.
“It [can help] keep you cash-flow positive because you’re not paying a huge amount upfront,” says Chan.
Considerations
Consider the financial requirements
Down payments are structured a bit differently when it comes to pre-construction homes, which is something you’ll need to factor in when making a decision.
“The down payment is generally 5% of the purchase price and the balance of the home purchase paid on closing,” Longmire explains. “Should a buyer own their own land the deposit is still the same, however the builder is generally paid at different stages of the contract depending on the terms of the agreement. This is called a draw and each stage is inspected by the banks or lenders before the draw is forwarded to the builder.”
There’s also the matter of features and finishes costing extra.
“Most builders lowball the asking prices based on the basic finishes keeping the price low.” Longmire explains. “However, most buyers always want the better selections which increase the prices substantially based on their selections.”
You need to factor in mortgage rates and interest rate spikes
With a pre-construction build, you’ll be locking in your mortgage after your home is complete rather than at the time of purchase. This means mortgage rates may change after you put down your first deposit.
“This is one of the risks we inform clients about,” says Chan. “For example, during [the COVID-19 pandemic], interest rates were around 2% to 3% and now the rates are closer to 5% to 6%.”
On a $500,000 mortgage over 25 years, the difference between a 3% interest rate and 6% interest rate could mean a difference of about $800 a month on your payment. When looking at pre-construction options, be sure to build a budget that accounts for fluctuations in interest rates so that you’re not surprised by extra carrying costs.
That being said, Longmire also tells us “there are some builders that are preferred builders of different lenders so the interest rates can be held for up to two years.”
You need to factor in sales tax
Depending on the province you’re purchasing in, you’ll be required to pay either HST or GST upon closing. Although you may be eligible for government rebates, you’ll still need to come up with the money up front and then apply for the refund afterwards.
You run the risk of your build being delayed or having developments cancelled
One of the biggest risks that comes with a pre-construction unit or property is development may experience serious delays or even outright cancellation.
“There are top developers who are reputable, and are good on timing and structure, so it’s important to do your research,” says Chan.
Keep in mind, unless a development is cancelled, there’s a low chance you will get back your deposit because of a delay.
“It would depend on if this is included in the agreement at the time of the purchase,” Longmire explains. “The builders used to do this but I haven’t seen those terms in an agreement for quite some time. It’s too hard now based on the shortage of trades etc.”
Depending on where you’re located, there may be limitations on how long things can be delayed before the builder is required to provide compensation. For example, as part of the Tarion Warranty in Ontario, “if closing is delayed beyond the Firm Closing Date (other than by mutual agreement or as a result of an Unavoidable Delay), then builders are required to compensate purchasers to a maximum of $7,500.”
Choosing a builder
When it comes to choosing a developer, Longmire says to “find someone you trust and connect with as you’ll be working with their team for the term of the build.” She emphasizes that reputation is everything, so look for a builder with good reviews.
“There are always one or two reviews that won’t be good but that’s expected,” she shares. “I always say that sometimes it doesn’t matter who was the chosen builder for that buyer as they wouldn’t be happy. Expect hiccups as you’re building a home. Remember there are a lot of trades involved and sometimes, yes, the wrong fixture goes into the wrong room. A good builder happily makes the changes as it was [their] trades who made the mistakes and that’s okay. As I said, hiccups.”
We at Oracle Property Group have a wide range or experience working with pre-construction (pre-sale) properties in the Fraser Valley and Greater Vancouver Region. Our team comes with a wealth of knowledge about different developers, navigating the process, and we can help you negotiate the best offer.
The article above is for information purposes and is not financial or legal advice or a substitute for financial or legal counsel.
Article Courtesy or Realtor.ca
https://www.realtor.ca/blog/the-pros-and-cons-of-buying-pre-construction-real-estate/32515/1363
