Toronto’s Preconstruction Market is one of the leading markets in North America. You might think it’s hard to go wrong buying a preconstruction condo, but without guidance there are still chances to lose money…
Whether you’re a seasoned investor, or a first-time buyer, buying a preconstruction condo poses some risks. A preconstruction agent can help you avoid unnecessary stress, hidden costs, and unreasonable contract terms. A preconstruction agent can also get you first access into developments, often saving you as much as 10% or more. Since our fee is already built into the sales price, it makes sense to take advantage of our guidance.
The Market: Extremely Sellers/Landlords Market
We are officially North America’s fastest-growing city. Besides the fact we have over 120 cranes in the sky, we’re still building around half the amount of condos we need. Every year, we’re around 19,000 units short. This shortage is exacerbated by the fact a very small portion of Toronto is zoned for high-rises. As demand increases, so do sales and rental prices. This is the driving factor for many investors to choose condos as an investment. While Toronto is leading the condo appreciation, the suburbs are also benefitting from the trickle-down effect.
Opinion: Preconstruction Condos Are For Investment Or Second Homes
While some people buy preconstruction condos as first homes, we are avid believers that preconstruction condos are best suited as second homes or investments. If you are a first-time buyer and want to purchase preconstruction condo, it’s important to buy from a reputable builder.
Imagine preconstruction sales as a bundle of rights. When you purchase a preconstruction condo, you purchase the right to buy the property once it’s built. The builder has the right to make some amendments to the building and condo. The builder also has the right to cancel the project for a variety of reasons. When a project is canceled, first-time buyers are the most impacted group of buyers because they spend years out of the market.
Deposits: 20% is average, but there is flexibility on the deposit structure
One of the reasons why investors choose preconstruction condos is the deposit structure. They can put down 20% of the value of the condo, but they earn appreciation on 100% of the value of the home for the next 3-5 years. They also don’t have to worry about taxes, maintenance, mortgage payments, insurance, and tenants.
The deposits are generally staggered over a period of a year, but every project is different.
- A general deposit structure will be:
- 5% at signing, which is cashed as soon as the conditional period in the offer expires.
- 5% within 30 days
- 5% within 60 or 90 days
- and, 5% either within 120/240/365 or on occupancy.
- The above schedule is the most popular, but some builders will have incentives where they offer 5% a year, or $1000 monthly for 5 years.
Preconstruction Projects Are Launched In Phases: VIP Launches
Builders release their projects in phases. The first phase is sold within the company and is called the, “friends and family launch”. The succeeding sales launches are based on the preconstruction agent’s sales volumes. The more volume an agent sells, the better their access. However, many preconstruction agents have a network of affiliates with who they share access with. At Sotheby’s, we have a dedicated condo forum where agents share their VIP access with each other.
Delays: Delays are inevitable
Most preconstruction projects are delayed. Developers set their closing date arbitrarily early because it’s easier to push the date back for construction delays than it is to pull the closing date earlier. Developers are given two chances to push the date back for their own delays. If there are any delays outside of their control, they can push the closing date back without consequence beyond their original two breaks. Delays outside their control include strikes etc.
Material Changes: Marketing And Reality Are Two Separate Things
The amenities, the site plan, even the unit layout, are all subject to change. The builders put their “best-case scenario” in the marketing material, but their contracts disclose that the final product could change. Common changes are structural changes, which could include adding a structural beam to your unit. Less frequent but very upsetting changes include changes to amenities, like pools, spas, gyms, etc. The bigger builders, like Tridel, rarely remove amenities because they are known for their amenity-rich condos, but smaller builders sometimes have to remove amenities to make the building viable.
Expect the maintenance fee to increase around 10-20% after two years of ownership. The first two years after the condo closes, the builder is responsible for shortfalls in the budget. Many fees in the condo budget only start after a couple years after occupancy.
Closing Date And Interim Occupancy: 2 Closing Dates?
Preconstruction condos are unique because there are theoretically two closing dates. There is the date that the condo is ready for occupancy, and then there is the date that the title transfers. During interim occupancy, you pay the builder a stipend that will be close to the ownership costs of that unit. The stipend is calculated based on a mortgage of 80%, plus maintenance, plus property taxes. Interim occupancy usually lasts a minimum of a few months, and as long as 2 years. On average, it lasts around the 6-months.
It’s important to remember during interim occupancy, the unit does not belong to you yet. You are not entitled to rent the property or complete renovations unless you have written consent from the builder. If you buy the condo as an investment, it’s important to get permission to lease the property during interim occupancy added to the sales agreement.
HST: Sometimes Only Partly Included In Purchase Price
All new condos and homes are subject to HST. Luckily, builders add this HST into the advertised/purchase price. We have 2 different government rebates for HST, and both amount to around $24,000. End-users pay the advertised price only. Investors pay the advertised price PLUS a portion of the HST, that they can later claim back once they lease the property out. The additional HST is around $24,000.
- Investors, speak to an accountant for specific advise on the HST rebate.
- If you are purchasing an assignment (buying a preconstruction contract from a previous purchaser), it’s important to note HST might be due even as the end-user.
Preconstruction Closing Costs: around 5.5% of the purchase price in Toronto
Preconstruction condos have additional closing costs compared to regular resale condos. Even if you cap the additional costs, you should expect to pay around 5.5% of the purchase price to close. Read more about these costs here: The 5 Most Overlooked Hidden Costs In Most Preconstruction Condo Contracts
- Closing costs are directly related to the sales contract. If you go directly to the builder, expect to pay closing fees in excess of 5.5%.
10-Day Cooling Off Period
Most preconstruction sales contracts give you a 10-day cooling-off period after the date you receive your signed copy of the offer. During the 10-day cooling-off period, it’s advised to get the contract reviewed by a lawyer. You should also be certain your financing is in order now, because after 30-60 days, they will request your mortgage preapproval letter.
- Beware, some freehold builders are able to skirt this requirement by offering the contract online prior to sales starting. Frequently, builders of freehold homes in highly desirable neighborhoods will make their contract firm and binding on first signing.
Is buying a preconstruction condo for you?
This type of investment is not for everyone. If you really want to maximize your investment, you need to educate yourself on the risks and the rewards. It’s important to hire the right representation, and buy in one of the first launches.
Are you in a situation to afford this condo in 3-5 years? If you can’t afford the condo in the future, you might lose your deposits. Some builders will allow you to sell your contract to someone else, but others will not.
If you buy a preconstruction condo, the law requires the builder to give you a 10-day cooling off period. Sometimes the builder will make the contract available online and remove this condition in their contracts…
During the 10-day cool off, it’s pertinent that you have the contract reviewed by a lawyer, and get trusted advice from your accountant. There are three parties that should be involved in your purchase: your realtor, your accountant, and your lawyer. Your realtor will get you the best price and incentives. Your accountant will let you know your tax liabilities for this type of investment. And, your lawyer will ensure you understand exactly what the contract says.
Some of the incentives we often get our clients include: Capped closing costs, fewer hidden fees, right to lease during interim occupancy, free maintenance, free rental management, guaranteed rental rates, free parking, free lockers, free right to assignment, free unit upgrades, and more!