Whether you’re a first-time buyer or a seasoned investor, when it comes to investing in preconstruction condos and homes, you’re dealing with a whole lot more legal and accounting issues than a regular sale. If you’re looking to purchase a preconstruction condo and sell it before it’s complete, then this guide is for you. If you are looking to purchase a freehold home and assign it, forget about it. Builders almost never allow assignments on freehold homes. For freehold preconstruction, you will have to close on the deal and then resell the home.

How much money do I need to start?

If you’re purchasing the home as a primary residence, you only need the deposits, a mortgage to cover the balance of the purchase price, and money set aside to cover closing costs (on a $400,000 home, you would need 5.5% of the purchase price to cover closing costs, and approximately 15-20% to cover the deposits). But, if you’re buying the home as an investment, you need enough money to pay the deposits, the resale commissions, and the HST (on a $400,000 home, you would need 15-20% to cover the deposits, 5% to cover the listing and cooperating agent fees, and 13% to cover HST before you can claim an HST rebate).

When is the best time to buy?

The best time to invest in a preconstruction condo is at the development’s first release. The later you buy into the project, the more you will pay. Spring and Fall are the busiest months for preconstruction launches.

Can I resell a preconstruction condo before it’s built?

Selling it before the building is registered with the city is called assigning the contract. Technically, you are assigning the original purchase contract with the builder to a new buyer, who will complete the purchase with the builder. It’s very important to do this correctly, because you can forfeit your deposits if it’s done wrong. If you advertise the home for sale without the builder’s consent, the builder can arbitrarily terminate the contract and keep all your deposits. Even if it’s just listed on Kijiji…

Is there demand to resell my preconstruction condo?

Selling before the building is registered saves you a lot in closing costs, because you don’t have to pay municipal and provincial land transfer taxes, utility hookups, development levies and a few other fees. All-in-all, it’s a savings of a few tens of thousands.

Although, if you’re selling an assignment, the new buyer will need to have a substantial deposit. They need enough of money to cover the deposits you put down, the closing costs of approximately 5.5% of the new purchase price, plus extra in case the bank appraises the home for less than the new buyer paid.

It much easier to resell a preconstruction condo if it’s in a good building, in a good area, where the developer has already sold out. It’s also good if the condo has a good floorplan, premium finishes, and is well-placed within the development. Read our guide to picking the best units available here.

Warning: no one will buy a contract with too many liabilities.

If you do not cap the development fees and related levies, do not expect a new buyer to take on your mistake. The new buyer might take on the contract, but will only agree to cover a certain threshold of additional fees. You would be liable to pay any excess fees. Example: if you purchased a condo without capping the additional closing fees, the buyer might agree to take on some of the costs in their offer. The clause in the buyer’s offer will say: “The assignee agrees to pay the additional costs as outlined in line X in the agreement, up to a maximum of $10,000, after which the assignor is liable to pay any excess fees.” For an overview of the additional closing fees found in builder’s contracts check out this blog.

An example:

You buy a property for $400,000 in 2017.
You can’t resell it until the builder gives us permission to advertise it, which is usually granted when the building is sold out and very close to being completed. Lets say 2020.

In 2020, you ask the builder if you can assign the unit, and the builder says “yes, but we want a 1% cut of your sale price.” The builder is thinking, “if you’re making money off us, we’re going to make money off you.”

At the end of the day your total out of pocket costs are:

Deposits to the builder: $50,000 (est)
Listing and Cooperating brokerage fees: $25,000 + HST
Builder’s assignment fee: $5000 (est.)
Lawyers fees: $3000+HST (est.)
HST on the purchase price: Which you claim back after the sale. Your accountant can estimate your rebate.
Income Tax / Capital Gains: The financial gain might be calculated as income tax rather than a capital gain. Again, speak to your accountant.
And additional fees like Interim Occupancy Rent, and potentially a portion of retroactive land taxes, and maintenance fees.

Summary

It’s really important to embark on a purchase like a preconstruction investment with great care and professional representation. Realtors are by the builder. We can point out additional costs and hidden fees that you might incur. We can also help navigate hiring the right professionals to minimize the HST you pay, and to minimize the liabilities found in your contract with the builder. If you need help with your purchase, please contact us.