Buying a pre-construction condominium in Ontario has its risks and benefits. First, the buyer must be aware that the project that they are purchasing may not be built at all. The builder, like the purchaser, must meet certain conditions to commence construction of the project. Such conditions are obtaining permits from the City, ensure compliance with local by-laws, financing to ensure that the builder has money to build the property among the few. For this article let us assume that the pre-construction condominium project will be build.
Benefits of Buying a Pre-Construction Condo
There are several benefits for buying a pre- construction condominium from a developer. As you are purchasing a property that may not be ready for a few years, this allows the buyer to save up for a downpayment, allowing the buyer to enter the market with very little money down. Some developers may allow as low as 5% down with the contract to secure a property. Some developers may require a higher down payment amount, but the deposit structure is broken down into lengthy periods. This gradual deposit structure allows the buyer to save up money for the next deposit date. The other benefit of purchasing a property from developer is that the buyer can select their own finishing’s and get a brand-new property without previous owner’s deco input. Lastly, due to uncertain delivery date the buyer may also benefit from equity accumulation. The property will be ready after a few years and during that time, should property values increase, the buyer would benefit from that increase. The buyer can rest assured that the purchase price with the developer is guaranteed, therefore the price will not increase when the value of your property increases.
Risks Associated with Pre-Construction Condos
There are also risks associated with purchasing a pre-construction condominium that the buyer should be aware of. Due to uncertain delivery date of the property, usually two- three years in the future, many things can change in the market as well as the lives of the purchaser. Mortgage rates could increase drastically therefore may make the purchaser ineligible for the mortgage when the closing date for the condo is set. Property values could decrease and as a result appraisal for financing purposes may come in less than the purchase price requiring the purchaser to dip further into their savings to make up the difference between the appraised value and the contract price. The other risks could be associated with the purchaser daily life such as loss of work or job relocation.
Once the purchaser has considered both the risks and benefits of purchasing a pre-construction condominium the buyer should consider getting a mortgage pre-approval to know the limits of their budget. With letter of mortgage pre-approval in hand, the buyer can decide to proceed with the purchase. Once the agreement of purchase and sale is signed with the developer, the buyer will have a 10-day cooling off period. This time should be used by the buyer to discuss the agreement with the lawyer and negotiate its terms. It is imperative that the buyer retain a lawyer to review the agreement as it will help the buyer understand their rights and obligations contained therein.
Legal Considerations: The Role of a Real Estate Lawyer
It is imperative to take your newly signed agreement with the developer to your lawyer for review before the 10-day cooling off period is expired. During that period the lawyer will go over the agreement with you and point out potential pitfalls that should be addressed while the agreement is still conditional, and the buyer has an opportunity to walk away from the deal.
Financial Aspects and Hidden Costs
One of the first thing to be reviewed with the buyer is the financial aspect of the agreement. It is important to note that the purchase price noted on the agreement is not the final price that the buyer will be paying for the contract. There are many hidden costs noted in the agreement that should be discussed before making a decision to proceed with the purchase. Additional expenses incurred by the developer are passed down to the buyer in addition to the purchase price. Such expenses include cost of a Tarion Warranty, utility connection and development charges among others. While some expenses, also known as adjustments, have a set price attached to them others are left open ended. Therefore, unless capped, there will be no limit beyond the amount paid by the builder, that the purchaser will be burdened with. A lawyer would go through all the adjustments and request from the developer to cap the expenses to a certain amount. Some builders may already offer caps on adjustments while others wait to be notified by the buyers’ lawyer before offering the incentives of lower adjustments.
The other financial aspect of the agreement that is often reviewed is the deposit structure. While this seems straight forward, the hidden pitfall lies in occupancy closing. When buying a pre-construction condominium from a developer, it is important to note that there could be an occupancy/interim closing before ownership of the property transfers to the buyer. Interim closing is very similar to rental agreement with the developer, where the buyer may reside at the property and pay occupancy fees but does not have the right to sell it or rent it out themselves if the property is being purchased as an investment. As such, the buyer pays occupancy fees which consist of an interest only payment on the outstanding amount owning to the developer, maintenance fees and portion of property taxes. It is important to note that fees paid during an occupancy period are not counted towards the purchase price and therefore do not reduce amount owing to the developer on the final closing. Interest on the outstanding amount charged during occupancy is noted in the agreement of purchase and sale usually consists of “PRIME RATE -/+”. During the time when Bank of Canada Prime rate was low, so were the occupancy fees. In today’s economic climate with Prime rate being quite high, the buyer is paying higher occupancy fees without contributing towards the balance of the purchase price. The role of a real estate lawyer in this case is to ensure that the agreement allows for additional deposits beyond the deposits specified in the deposit structure. Thus, allowing the purchaser to put down additional deposits and reduce the amount of occupancy fees. This option is particularly attractive to buyers who do not require mortgage financing to complete the transaction.
Intended Use of Property and Its Implications
Intended use of property plays a pivotal role when deciding to purchase a pre-construction condominium from the developer. Should the buyer intend to occupy the property, the buyer would qualify for a HST New Housing Rebate ( “Rebate”). The amount of the rebate is based on the purchase price, but the rebate peaks at $24,000.00. The word rebate for owner-occupied property is deceiving in the sense that the buyer does not get the amount of the rebate nor is the amount of funds due to developer decrease should the purchaser meet the criteria for the rebate. Rather, the purchaser does not require to bring additional funds in the same amount as the rebate to close. When the property is purchased for the purpose of investment, the purchaser does not qualify for HST New Housing Rebate, and as such would have to budget for additional funds needed to close.
Another aspect of the builder agreement that your real estate lawyer will review with you also depends on your intended use of the property. If the buyer decides to owner occupy the property , occupancy period will give the buyer an opportunity to move into their property. If the buyer is purchasing the condo for investment purposes, then the lawyer should request from the builder that the agreement be amended to allow the buyer to rent out the condo during occupancy period. This will allow the buyer to recoup some of their occupancy fee costs. It is important to note that while some developers may even offer a rental program. Where the buyer would consent to a flat rental fee and the developer shall guarantee rental for certain time period. However, some developers out right forbid rentals during the occupancy period. Therefore, it is vital to retain a lawyer who can negotiate the terms of the agreement that will benefit you and meet your long term financial goals.
Assignment and Resale Options
Ability to assig your contract could be vital to a purchaser should they not be able to complete their obligations under the agreement of purchase and sale. Another benefit of assignment could be selling the property without incurring additional expenses such as land transfer tax and closing costs with the builder. Having a clause in the agreement, that allows the buyer to assign and clearly outlines the assignment requirement is one of the many clauses that your real estate lawyer will review and advice on.
Model Suites and Finishings
Lastly it is important to remember that while shopping for a pre-construction condo and attending at the model home may give an illusion that you are buying a unit that will inevitably turn out to be quite different. Often model suits have a lot more upgrades than the basic models with extended floor plan. The agreement of purchase and sale is clear that while the floor model is enticingly beautiful, the unit selected may not be the same unless the upgraded to the model suit finishings. The agreement is also clear that the developer has the right to change the finishings that you selected. Therefore, when you get the agreement of purchase and sale ensure that you go over all the clauses including a feature sheet that notes the finishings of the unit and the included appliances if any.
It is an exciting time when shopping and finding the right pre-construction condominium that fits your budget and fulfills your long-term investment dreams. The statutory 10-day cooling off period is a critical time that should be used to read through the agreement with your real estate lawyer who can suggest the necessary changes or point out short comings of the agreement. Once the cooling off period lapses the agreement is firm and the purchaser is bound by all the clauses in it. Therefore having a lawyer review the clauses and make suggestions could make a difference between a standard developer agreement and an agreement that protects the buyer and their financial goals.
Considering the purchase of a pre-construction condo involves significant benefits and risks, it’s essential to navigate these waters with the guidance of an experienced real estate lawyer. At MBLAW, we specialize in assisting clients through the complexities of real estate transactions in Toronto. Whether you’re looking to understand the financial implications, legal considerations, or the best strategy for your situation, our team is here to help. Call us for a consultation, and let’s determine the best approach for your specific needs. Our expertise ensures that you make informed decisions every step of the way.
