What to Know Before Buying Pre-Construction Condos

When purchasing a pre-construction condo in Canada, buyers might be surprised by the complexities—even compared to buying a new construction home, pre-construction condos are complicated. From legal to financial considerations, buying a pre-construction condo can be challenging. 

Before taking the plunge into this real estate venture, there are critical aspects to understand that can make or break a decision. Stay tuned to uncover the essential insights that will help guide you through the world of pre-construction condos in Canada.

For informational purposes only. Always consult with an attorney, real estate agent, or financial advisor before proceeding with any real estate transaction.

Quick Notes on Buying Pre-Construction

• Pre-construction condos can offer financial flexibility through their payment schedules
• Thoroughly go over the purchase agreement with a real estate attorney
• Research your builder's previous projects
• Be prepared to plan your finances and occupancy 2–5 years in advance
• Have an exit plan in case your life situation changes before closing

Legal Considerations

When purchasing a pre-construction condo, it is essential to review and understand all legal considerations thoroughly. These can vary depending on your province.

If you’re buying a pre-construction condo in Toronto, for example, you have rights enumerated in Ontario’s Condominium Act of 1988. Throughout the 10-day cooling-off period after signing a purchase agreement, take advantage of the opportunity to conduct due diligence while you still have a chance to walk away. Ensure a real estate lawyer carefully examines the purchase agreement for clarity on all terms and conditions. Understanding the rights and responsibilities stated in the contract regarding possession dates, potential delays, and modifications is essential for a smooth transaction.

Alberta has a similar provision in the Condominium Property Act of 2000, allowing buyers 10 days after purchase to reconsider and back out without penalty. Section 12 has a list of all the documentation you can expect to receive from the developer about the project.

Legal protection plays a significant role in safeguarding buyers against risks and hidden fees and in clarifying options in case of project cancellations or delays. Buyers should familiarize themselves with the laws governing pre-construction purchases, such as the mandatory Tarion warranty protection in Ontario, which offers additional security and coverage for buyers. By staying informed and seeking legal guidance, buyers can confidently navigate the legal aspects of purchasing a pre-construction condo.

Pre-Construction Financial Planning

To effectively prepare for buying a pre-construction condo, plan for the necessary deposits and closing costs associated with the property. Securing a mortgage pre-approval is essential to first understanding one’s personal budget and confirming they can meet the upfront costs. Budgeting for the typical 20% deposit, paid in installments, and expect to pay more in closing costs than the norm (5.5% is not unusual). While these upfront expenses may seem significant, they’re more spread-out than a traditional down payment.

Generally speaking, the average 20% deposit is staggered over a year. For example, your payment schedule could look like:

• 5% upon signing the purchase contract
• 5% within 30 days
• 5% within 60/90 days
• 5% within 120 days/1 year/upon occupancy

Builders may offer incentives that stagger this even further, such as pushing back installment deadlines or a lower monthly payment plan.

This pre-construction payment structure can make pre-construction condos financially appealing, as staggering the payments lowers the financial burden of the down payment. If the final payment is on occupancy, the buyer may even be able to pass it to a different buyer through an assignment sale while still earning profit.

In addition, the buyer earns equity through appreciation throughout the build phase of the project. As many proponents phrase it, buying pre-construction homes allows you to “buy tomorrow at today’s prices.” At the same time, buyers don’t have to worry about mortgage payments, maintenance, property taxes, or condo insurance, as they don’t own the unit yet. Obtaining a mortgage happens at closing, which is after the whole building has been completed.

However, there are some financial factors that buyers should be aware of between signing the purchase agreement and closing on the deal.

• Marketed Upgrades Are Not Standard. Carefully examine what’s actually included in your purchase contract, as those are the finishes that will actually be present in your unit upon completion. In addition to value differences in materials, condo renovations are not allowed until the ownership title transfers at closing.
• Interim Occupancy. When your particular unit is fit for habitation, you will start being charged occupancy fees, even if you don’t occupy the property. This is essentially a monthly rent paid to the builder until closing and is usually comparable to your homeowner costs once you have a mortgage. The higher the floor your unit is on, the shorter your interim occupancy will be.
• You Can’t Always Rent During the Interim. As you don’t own the unit, you don’t have the right to rent out the unit unless you have written permission from the builder. If you’re investing in a condo for rental income, make sure this permission is included in your purchase agreement.
• Changing Mortgage Rates. Mortgage interest rates today will not be the same as those in several years when the building is completed. If you’re buying in part because of low mortgage rates, you won’t be able to take advantage of them in pre-construction.
• Pre-Approval Windows. Even if you can get pre-approved for a mortgage now, your pre-approval will expire by the time you close. If your financial situation changes and you can no longer secure financing, you’re still expected to fulfil your obligation to purchase the unit, which can cause a distress sale.
• Assignment Charges. Whether you intend to sell before the building is complete or you might find yourself unable to close on your condo, make sure that your builder allows assignment sales and find out what the fee to do so will be.
• Additional Closing Costs. Builders will frequently pass operating costs on to buyers. Development fees (charged by the city to set up municipal services), building loan dismissal, and other charges may be added on top of your normal closing costs, and they may or may not be capped.
• Changing Costs. As these projects take years to complete, the costs of development fees, materials, etc. may change in the meantime. You could be asked to pay more than expected, or the condo project may be revised to be more financially viable. This could include removing building amenities from the plan.
• Maintenance Fees. While condo fees go up as a building gets older, you may experience a noticeable “bump” a few years in. Some fees in the condo association’s budget may only begin after a few years of ownership, as the builder may be making up any shortfalls for the first few years.

Seeking financial advice can help buyers navigate the payment schedule, manage additional expenses like upgrades, and plan for unexpected fees that may arise. Understanding the economic implications of purchasing a pre-construction condo is critical to making informed decisions and avoiding financial strain. By being prepared and having a clear financial plan, buyers can set themselves up for a successful investment in the long run.

Builder Reputation

Researching the builder's reputation is essential when purchasing a pre-construction condo. Explore the builder's past projects to assess their construction quality and after-sales service. Positive reviews and ratings from previous buyers can provide valuable insights into the builder's reliability. It is vital to also evaluate the builder's financial stability, as this can impact their ability to meet project timelines and deliver on promises. A builder with a strong track record is more likely to uphold high-quality standards.

How Long Does it Take to Build a Condo?

Exploring the completion timeline for pre-construction condos is fundamental when evaluating one’s investment in a new property. Completion timelines for these projects typically range from two to five years. While developers often provide estimated completion dates, it’s worth noting that construction delays are common in the industry, potentially leading to timeline extensions. Because it’s easier to push back the closing date rather than pull it forward, many builders set the estimated completion optimistically early.

Builders will outline your recourse for construction delays in their contracts. If a delay is outside of the builder’s control, such as weather or labour unavailability, there’s usually no consequence to the builder, but you may be entitled to compensation after a certain number of qualifying delays.

Understanding this is pivotal for effective occupancy planning and managing financial commitments associated with the purchase. It is advisable to stay in touch with the developer for updates on the project's progress and any changes to the estimated completion dates. 

By being aware of potential delays and actively planning for them, buyers can navigate the construction process more smoothly and make informed decisions regarding their pre-construction condo investments.

Potential Risks of Buying Pre-Construction

When considering purchasing a pre-construction condo over a resale, be mindful of the potential risks involved. Construction delays, as noted above, are expected and allow developers to extend closing dates. Project cancellations can occur, leading to financial losses and the need to find alternative housing. Unexpected costs, such as increased maintenance fees or additional charges, can impact one’s budget. 

Understanding the legal protection available to buyers is vital in case of disputes or project changes. Financial considerations include the possibility of higher closing costs, fluctuating market conditions, and potential changes to the project scope. Before committing to a pre-construction condo, be prepared for the uncertainties that come with such investments and seek expert advice to navigate any challenges that may arise.

For informational purposes only. Always consult with an attorney, real estate agent, or financial advisor before proceeding with any real estate transaction.

Be Prepared When Buying Pre-Construction

Buying a condo in Canada can be like finding one’s way through a maze—it’s exciting but complex. Buyers should dot their i's and cross their t's by consulting a real estate lawyer, planning their finances carefully, researching the builder, and understanding the potential risks involved. With proper preparation and due diligence, buyers can turn their investment opportunity into a successful and rewarding experience.