Should You Buy a Condo on Concept?
Penelope Graham, Zooacasa
As real estate prices rise and bidding wars become the norm, it’s getting even tougher to buy a home in Toronto. With the inventory of homes for sale at only half of last year’s levels and a supply crisis looming, buyer competition has become especially fierce. However, there are options for those looking to avoid such market pressures.
Buying a home in the pre-construction stage can offer a bit of a price break, and lets buyers sidestep the dramatics commonly found in the resale market. And there are an ever-growing number of projects to choose from; the number of new high-rise builds in Toronto totaled 29,186 in 2016 – a new record and a 30% jump from the year before, reports Building Industry and Land Development Association.
And, as anyone who’s stepped inside a sleek presentation centre can attest, new buildings promise the utmost in convenience living, the latest design elements, and enviable amenities and perks. As the first owner you can even customize your unit, picking from a number of finishes and treatments, or selecting from premium upgrades.
Buying on concept may seem the perfect solution to a Toronto real estate buyer’s woes – and for those seeking an investment property, it can be. But if you actually want to dwell in the unit, pre-construction purchases can come with a lot of cons. Here’s what prospective buyers should be aware of.
Financing Can Be Tricky
Buying into a pre-construction project is similar to purchasing a resale home; you’ll apply for a mortgage and pay a deposit to secure your unit. That’s where the similarities end, though. Unlike a resale home, which already tangibly exists, nailing down a closing date on an uncompleted building can be unpredictable. Your lender will approve your financing based on the financial situation you have now, which can change by the time your home is actually standing. If your bank refuses to fulfill your financing, you’ll have no choice but to get the cash elsewhere, or sell “on assignment”, meaning you can sell the paperwork and deal to another buyer before the official close.
You may also be required to pay a larger deposit, or several installments of deposits, to your developer, compared to the minimum 5% down required on a resale purchase.
Prepare to Wait. And Wait… And Wait.
One of the most common complaints about new builds are the hefty delays. Everyone has heard horror stories of buyers who wait years for their homes to materialize. Delays can happen for any number of reasons – for example, it may take longer than anticipated to sell the minimum number of units, or stricter lending requirements could pose funding challenges for the developer. Work can also be held back by a shortage of available workers, late material deliveries, and unforeseen events or “Acts of God”, such as hurricanes, floods, and fires.
The good news is Ontario buyers are protected to an extent by Tarion, which provides new home warranties and rules for developers to abide by. Part of this is the Tarion Addendum, which you will receive along with your purchase agreement. This document includes a Statement of Critical Dates, which offer a timeline as to when you can expect to live in your home.
However, this schedule gives developers considerable wiggle room. First, there’s the Tentative Occupancy Date, which is when they initially anticipate the building can be lived in. If they blow past this deadline they can set another, as long as they provide the buyer with 90 days’ notice. Should they fail to do so, or if they have a clearer idea of timing, they’ll then set a Firm Occupancy Date, which must be within 30 days of the building’s roof completion. This deadline can also be moved back several times, as long as 90 days’ notice is provided.
Finally, there’s the Outside Occupancy Date, which is the very latest date indicated on your purchase of sale. It cannot exceed the Firm Occupancy Date by more than 365 days, and if the builder misses it, they must now compensate you up to a maximum of $7,500. You now also have 30 days to walk away from the contract altogether and receive a full refund plus interest. That can be cold comfort, though, for someone waiting years to achieve homeownership, especially if the unit no longer fits their lifestyle, relationship, or family needs.
Forget the Best Laid Plans
Your unit’s features and floor plan will be included in your purchase agreement, but that doesn’t mean they’re set in stone. Unforeseen issues cause projects to change all the time, whether that means a new layout, smaller cabinetry, or reduced amenities and common areas.
Defects within your unit are meant to be caught and reported during the Pre-Delivery Inspection (PDI), when the builder will take you through a comprehensive tour of your unit, including the heating, plumbing and ventilation systems. Anything not up to snuff is included on the PDI report to prove it occurred before you took possession, with the onus on the builder to make the needed repairs. You will also be covered under Tarion’s New Home Warranty on various aspects of your purchase, over one, two and seven-year timelines.
The Future of Fees
New builds usually have super low condo fees, which are a huge point of attraction for buyers. However, while you will enjoy a year or two or competitive fees, they’re poised to rise in the short term, as building warranties expire and common elements and amenities start to require maintenance. It’s an important factor to note – could you still live comfortably in your unit if fees rose by hundreds of dollars?
Is New a Fit for You?
If you’ve saved up for the larger deposit and aren’t phased by a lengthy wait, buying on concept can be an affordable way to break into the market, and potentially make a great return on your real estate investment. It’s crucial, however, to manage your expectations when buying into this home type. If you wish to live in your home right away, expect your financial or employment situation to change, or are sensitive to your deposit funds being tied up for the long term, a resale home may be your best bet.
You may also be interested in: Toronto Real Estate: Asking Price vs. Selling Price
Writer: Penelope Graham
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