What are some of the most important factors to consider when purchasing a Pre-Construction New Home or Condo:
Pros:
Deposit Structures:
Depending on the Builder/Developer, the Deposit Structure can vary in terms of amounts and also timelines. These deposit structures can benefit the buyer by allowing you to invest this money already in a safe trust account awaiting closing while also allowing you to save up more money to put as a down payment on future closing.
An example of a deposit structure would be :
$5000 on Signing
Balance of 5% in 30 days
5% in 60 or 90 days
Totalling a 10% deposit awaiting closing
Some builders require a larger deposit while some others allow for an extended deposit period.
Market Value
Although this point can very quickly be turned into a Con or a disadvantage if the market decides to crash or values begin to decrease, the pre-construction industry has seen significant increase in value by the time a project is completed and therefore many have been able to now own a property that is worth much more then the day they purchased it.
Warranty
When you purchase a New Construction Build, you are guaranteeing the fact that you will be the very first owner of the property. You are also going to be protected by a new home warranty which will protect you from the various things that go wrong with a property at least for the first few years.
Resale
Although this point can very quickly become a negative, many builders allow for you to be able to assign the purchase of your new home even before closing day. That means if you purchased the property but it is only going to be ready in 3 years, you have the ability to sell your contract before you even gain possession and any profit gained may be yours. Keep in mind that this will highly depend on whether or not the builder will give you permission. You may also be subject to HST, Capital Gains and other costs.
Cons:
Financing Approval
It is more difficult to guarantee financing on a new build. The main reason is because there are so many more variables and risks involved. Most mortgage brokers will get you a pre-approval thats good for 3 months. When you are dealing with a property that will only be ready and closed in 2 or 3 years so much can go wrong in between and therefore guaranteeing your financing is not so much of a “guarantee”
Market Value
Although market value can be a Pro or an advantage when purchasing a new build, it can very quickly become a disadvantage if the market were to crash or if Real estate values begin to decline. Remember that when you sign a purchase agreement with a builder, you’re liable to close on that deal no matter your financial situation. So for example if you purchase for $600K but 2 years down the road that same property is only valued at $500K you are still paying $600k or you risk not only losing your deposit but also being sued by the builder, its more common then you think.
Another negative point on Market Value is the fact that even in Today’s crazy values in the Re-sale market, New Home Builders pricing is not always cheaper then re-sale, on the contrary, many times Builders have priced their properties to already reflect their inflated future value.
Fine Print
Most builder agreements are put together for the sole purpose of protecting the Seller, in this case, the Builder or Developer. These agreements often provide very little protection to the buyers. It is important to not only review the terms of any agreement but to also have your lawyer review these terms as well. Many times builders will place some terms in the agreements that might not be readily available for example not being able to assign (sell) the agreement , extra costs etc.
Development Charges
Many Builders have found a way to mitigate their development charges by offer incentives or putting a Cap on their development charges but you must keep in mind that there are extra costs associated with buying a new build. Here are some examples:
- Water Meter Charges
- Hydro Meter Charges
- Warranty
- Driveways
- Fences (will be dealt with afterwards and as extra cost to buyer)
Expected Closing
There is almost always an advertised “expected closing” for a project, but it is important to know that these dates may and often do change. Most of the time the builder has every right to extend closing with no compensation to the buyer. This may make planning your future home a little difficult as the actual closing date can be very unpredictable.
HST & Capital Gains
The HST portion of a sale of a New Build is often discounted or Refunded/Rebated if the purchase is for your PRIMARY RESIDENCE. If you are buying a new build for the purpose of investing whether it be that your going to rent it out when its ready or going to Sell the property you must take into consideration that the government may come after you for the HST portion you should have paid when purchasing. You are also liable to pay Capital Gains Tax on any increase in value.
Builder Reputation
This is another point that can either be an Advantage or a Disadvantage. It is important to know and to research the Builder/Developer’s Reputation and to have a look at their past projects. Not to say that buying from a fairly new builder will be problematic or that buying from a reputable one will be smooth sailing, it is extremely important to know who you are buying from and if they have had issues delivering their projects in the past
There are many more important advantages and disadvantages to buying a Pre-Construction new build and we would be more than happy to discuss these further with you and answer any questions you may have.
