When purchasing a pre-construction home, it is imperative to know where to start and what to pay attention to.
1. Mortgage Pre-approval
It is important to know your budget and affordability. Whether this is your first home, or you are an experienced home buyer, a mortgage pre-approval is one of the first steps you should take in the home buying process. Getting your financing in place before you begin looking for a new home is crucial as this will save you valuable time so you can target your home search according to your budget. Obtaining a mortgage pre-approval costs nothing and is simple to arrange with any bank or credit union.
Not only is it important to have pre-approved financing, but buyers must also ensure that their budget can handle a rise in interest rates – this is something Canadian banks have implemented in recent years called a “stress test.” While a buyer’s budget may work when calculated at today’s mortgage rate, it is essential to ensure that it still works even if rates rise by one or two percent by the time the home completes.
2. Hidden Costs
One of the most important things to watch out for when purchasing a pre-construction home are the hidden fees. There are known costs to be factored in, like legal fees and land transfer taxes, but less often considered or advertised by the developer are the hidden closing costs. Although the listed prices make buying from a builder a viable option, many inexperienced buyers are unprepared for the extra fees they may encounter such as development charges, assignment fees, utility hookup fees, driveway deposits, warranty costs and even tree planting charges. In addition, if you purchase upgrades from the builder, they are often set at a premium and are often double the regular price when you buy them from the builder. Builders also tend to auction ravine and pie-shaped lots at an inflated price. On average, you could be looking at an additional 9-10% of closing costs that cannot roll into your mortgage. Most reputable builders will not attempt to hide any closing costs from you. However, it never hurts to do your due diligence and have a lawyer review the Agreement of Purchase and Sale so that they can request caps on certain costs.
In addition to the above, new homebuyers can expect to pay out of pocket for things such as a fence, air conditioner, appliances, and window coverings, just to name a few, which may seem insignificant, but can really add up.
3. Intended Use of Property and HST
Apart from the hefty hidden costs, new homes are subject to additional Harmonized Sales Tax (HST), increasing the home price. The determining factor on whether or not you qualify for the HST rebate on closing is whether you or your immediate family will be living in the new home or if you are an investor who will be renting out the property after closing. Keep in mind that the builder’s price in your Agreement of Purchase and Sale is based on an assumption that you are using the property as a Primary Residence. The good news is that you can qualify for an HST rebate if you or an immediate family member live in the pre-construction home rather than renting or selling it to prospective buyers. In the situation when you decide to purchase the home as an investment property and rent it out, you are required to declare this intention to the builder at the time of closing through your lawyer. You will then be required to pay the HST due, up front on closing, which can substantially add to your closing costs. Once the closing is complete, you can apply to have the HST rebate returned to you directly from the relevant government authority if you satisfy certain requirements.
4. Deposit Structure
While pre-construction homes tend to have flexible deposits, most developers now want you to pay deposits of as high as 10 to 20 percent when signing an agreement. Payments are usually spread out over a period of time. While purchasing pre-construction affords you more time to come up with the deposit, given its spread out payment structure, you are still entering into a lengthy contractual agreement.
5. Model Home /Floor Plan
What you see may not be what you get. You are buying something on paper, and the builder usually reserves the right to make some changes to your unit – some with and some without your consent. Therefore, what you end up with could be different from what you actually purchased.
6. Occupancy Period (Condominiums)
Most buyers do not know that closing is actually a two-step process with new construction condominiums. The first closing is the occupancy or interim closing. This is the date you get the keys and take possession of the unit; however, ownership is not yet transferred to you. You begin to pay the Builder a monthly amount comprised of the monthly common expense, interest on the deferred purchase price and an estimate of the monthly realty taxes.
The second closing is the final closing, and this is when the Buyer becomes the registered owner of the property and begins making its mortgage payments. The final closing date can be anywhere from a few weeks to over a year after occupancy.
7. Completion Date
The completion date is a moving target. Most contracts provide an estimated completion date which is generally a year or two away. However, the contract will stipulate that the date is subject to change by the builder. Thus, the builder may extend the closing date many times up to a specified “outside completion date” which may be several years past the original estimated closing date. In the meantime, the purchaser is on the hook to buy the home for what may feel like an indefinite period of time.
8. Market Value
A pre-construction agreement is essentially a contract with an uncertain delivery date. While the price paid to the developer is guaranteed, the buyer does not receive a guarantee that the market value of the home they purchased will be equal to or higher than the agreed purchase price. As a result, the buyer carries the risk of market fluctuations, and absorbs the losses if the market value goes down.
9. Legal Advice/Negotiation
If you are purchasing a new condominium, you have an initial 10 days under the Condominium Act to terminate a sales agreement. However, if you are buying a freehold property from a builder, you do not have a 10-day cooling off period, but you can still make your agreement conditional on lawyer approval. During this time, make sure to review your purchase agreement and have your lawyer negotiate the terms. It is imperative that you always retain your own lawyer to represent you on the closing. Make sure to do your due diligence, or as the saying goes, Caveat emptor; buyer beware.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 130 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.