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What to Look Out For When Buying Pre-Construction

What to Look Out For When Buying Pre-Construction

Nov 18, 2022 | Buyers

It’s easy to let your imagination soar when you think about buying a pre-construction home or condo. You have many reasons to feel enthusiastic and optimistic. Just think of it. Once your project is complete, you’ll have a spectacular, brand-new house that you can’t wait to show off to your friends! Your new place has the latest and greatest technology, and the idea of being the first person to live in the property is exciting. 

It’s true; there are many benefits to buying pre-construction, especially if you can get in early. However, before you head to your local developer or sign any contracts, there are a few points to consider to protect yourself and ensure your dream doesn’t slip through your fingers.

What Is the Builder’s Reputation?

A builder’s track record is one of the most critical things to consider when choosing a pre-construction project. The best place to start your background research is by checking the Home Construction Regulatory Authority website. You can enter the builder’s name to find out how many other projects they have completed. A quick background check will also tell you if any claims have been filed against them through the Tarion New Home Warranty.

Afterwards, try to visit one of their finished projects in person, where you can see the quality of their work for yourself.

Research the Neighbourhood

Researching your new neighbourhood will give you an excellent idea of whether you’re getting a fair price. How does the purchase price of your pre-construction suite compare with other homes in the area? Knowing what amenities and the vibe you want in your new neighbourhood will be a significant factor in your decision. Pre-construction neighbourhoods are often up-and-coming and will not have much in the way of landscaping or green spaces at first. You will have to use your imagination and visualize what it will look like as it develops.

Where should you buy your pre-construction project? There are so many fantastic places to consider all over the GTA! Some of our other posts might give you some inspiration:

What Is the Future Resale Value?

When buying any property, you want to keep its resale value in mind. Take a look not just at the final price but the cost per square foot compared to other projects in the area. A pre-construction unit in an exclusive location or with a more iconic build is more likely to hold value even if the overall market softens.  

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What Standard Finishes Are Included in Your Purchase?

When visiting a model home, the builder often includes all of the upgrades rather than the standard finishes. It can be confusing to understand what you’re actually getting once all is said and done. Another thing to consider is that most upgrades are not included in the mortgage and must be paid in cash upfront.

If you have to sign up for a lot of upgrades because the base model is poor quality, it is better to keep looking. A pre-construction project with better standard finishes may cost more initially but is still more affordable because it is covered in your mortgage. 

What Is Your Intended Use of the Property?

Do you intend to live in the home yourself? Or are you purchasing the property as an investment to rent out? If you are investing, you’ll want to do a careful cost/profit analysis to ensure you can carry the property for the long term.

Look at how much similar properties in the neighbourhood are renting for. If it is enough to cover your monthly payments with some left over for emergencies, you may have found the perfect investment vehicle.

However, you might think twice if you find that your investment will be cash flow negative. Sometimes, the equity gains make it worthwhile, depending on the market and your ability to cover the monthly costs. 

What does it take to become a successful investor in the GTA? Knowledge is a start. These posts below will point you in the right direction:

Is the Layout Well Designed?

Nothing is worse than a poorly designed condo where the layout is so bad that your sofa is facing your kitchen stove, or there is no bedroom window! It can happen if you’re not careful, even in a new build. A well-designed layout is critical, as is having ample natural light in your home.

Before committing to your purchase, check the design and measure every room to ensure that you can comfortably furnish the space. You will have access to the floor plan, which can help you visualize your area once the unit is completed. 

A Real Estate Lawyer With Pre-Construction Experience is Critical!

In Ontario, you have a 10-day cooling-off period where you can rescind your purchase agreement without penalty. This gives you time to have your lawyer scrutinize the builder’s Agreement of Purchase and Sale (APS), so there are no unpleasant surprises upon your closing date. 

Closing costs on a pre-construction property are greater than a resale home and can amount to tens of thousands of dollars. 

For example, the municipality will charge a builder developmental and levy fee to enhance the city’s growth. The builder will then pass that charge on to you. Your lawyer can help determine whether or not this fee will be capped, potentially saving you thousands of dollars. 

Is the HST Included?

Unlike resale properties, pre-construction homes are subject to HST. Some developers will build it into the price. Still, taxes can get complex, and it’s best to consult with your real estate lawyer or accountant. In addition, you may be eligible for an HST rebate that can help offset some of your closing costs.

What Is Your Timeline?

Flexibility is of the essence when buying pre-construction, especially for your own use. The builder will give you an expected move-in date, but delays are common. Consider how this will impact you if you are counting on the unit to be ready by a certain time. It’s always a smart idea to allow for a buffer and have a backup plan in case you need to arrange for temporary accommodations. 

Are Assignments Allowed?

An assignment means you can sell your contract to another buyer at the current market value if your plans change. This will allow you to recoup your deposit and potentially earn a profit on your investment. Before signing your agreement, we recommend finding out whether there is a provision in the Builder APS that allows for assignment sales.

Curious about how assignments work? You can read more about them in our article right here.

The Advantages of Buying Pre-Construction

One of the most significant benefits of buying pre-construction is that your deposit payments are tiered over time. Like any real estate purchase, the builder will want 20% of the purchase price as a down payment. However, you don’t need to have it all at once. 

For example, you may need as little as $5000 on signing, with another 5% due in 30 days and the final balance in 180 days. Sometimes, the last 5% isn’t due until your occupancy date, which could be years from your original purchase. In any case, the ability to spread your payments out makes your purchase far more accessible than a resale home.

 A pre-construction property can prove to be a worthy and profitable investment as the value nearly always increases by the time the project is complete. Usually, pre-construction is more expensive than a resale initially. However, remember that you are paying for the future value, which typically means you will come out ahead. 

Brand new homes are valued higher than older residences, especially when investing in an exclusive and desirable area.

The Importance of a Knowledgeable Realtor®

Buying any property can be complex, but pre-construction comes with an entirely different set of challenges. We take a strategic approach in helping clients with pre-construction and provide honest and concise guidance based on what you wish to buy, location and price point. 

When buying as an investment, we help you determine what will have the most future appeal to prospective tenants and the highest resale value. 

When buying for yourself, we discuss your needs and wants in detail to help ensure your new home will serve you well for years to come.

Are you thinking about buying a pre-construction project? We want you to feel confident knowing that you’ve purchased from a reputable builder and will advise you as though we were personally buying the property for ourselves. If you’re ready to get started or have questions, feel free to reach out to us today by email or calling 647-293-3785.