Pre-Construction Homes: Pros, Cons & Other Considerations

Ever wonder why so many newly built homes are pre-construction purchases? Crafting a home to your liking and avoiding hectic bidding wars are just two of the reasons buyers find pre-construction homes appealing. But before you commit to paying for a home that’s not move-in ready—and won’t be for some time—it’s wise to explore the benefits and potential risks that come with this unique real estate option.

Defining Pre-Construction Homes

A pre-construction home is exactly what it sounds like: you buy a home, townhome, or condo before it’s actually built. Your payment is staggered over the build period until the home is complete.

There is a difference between buying a pre-construction home vs. buying a pre-construction condo. When you buy a pre-construction home in a new subdivision, there’s usually a model home available for buyers to examine. In contrast, pre-construction condos are sold before the condo building starts construction, so there’s no model. Builders sell the condos prior to construction in order to secure funding for the build—often, construction can’t start until 50% of the units are sold.

Pre-construction homes are appealing for a number of reasons. With pre-construction homes, there’s an opportunity to personalize finishes, upgrades, and sometimes even layouts before the properties are constructed. These homes can offer modern conveniences and energy efficiency, making them attractive for those looking for more sustainable living options. What’s more, the extended payment time can have financial benefits.

While there are plenty of benefits to pre-construction homes, one potential drawback to keep in mind is the chance of construction delays. These delays can lead to extra costs and unforeseen changes during construction. They can also change your financial situation if interest rates change during the construction period.

It's vital to balance the advantages of customization and newness against the risks associated with potential construction delays—and even cancellations—when deciding if a pre-built home is the right choice for you. By weighing the pros and cons of this investment, you can make a well-informed decision that aligns with your financial objectives.

Are Pre-Construction Homes Cheaper?

Sometimes, yes! This is particularly true for presale condos when it comes to assignment sales in particular, as the builders are incentivized to sell as many units as possible as early as possible to fund construction, but is also true in other developments. Builders may offer all kinds of incentives in order to draw buyers, including design bonuses and free upgrades.

In addition, there’s usually less competition for a pre-construction home than a resale home. While there may still be multiple offers to contend with, the bidding is usually less fierce.

However, you have to remember that the builders are looking to make a profit. The advertised price will be for the base model, which doesn’t have any of the upgrades you’ll see in the pictures. Make sure you know what’s included and what’s an upgrade before you commit. Consider the true value of what you’re getting for your money compared to similar resale properties.

How Does Pre-Construction Payment Work?

Another way pre-construction homes can be cheaper is the payment schedule. Your deposit and down payment are due over time, not all at once. When one of the biggest hurdles to homeownership is saving up for a down payment, this extended payment schedule can make buying a pre-construction home more feasible.

Builders are paid at different stages of the construction process depending on the specific agreement. In some cases, 5% is due upfront, and the rest at completion. In others, the builders get a “draw” for each construction phase, with the lender performing inspections before paying out each draw.

Big Bonus: Customization Options

The ability to customize your property with personalized finishes and upgrades allows you to tailor the space to your preferences, creating a unique space without having to live through a dirty and disruptive renovation. Some developments even allow you to add extra rooms and accommodate custom requests. Customization is one of the biggest benefits of buying new construction vs. resale properties.

In addition, pre-construction homes come equipped with modern amenities, sustainable building materials, and energy-efficient systems. These features not only enhance your day-to-day quality of life but also contribute to long-term savings on maintenance costs.

When you buy pre-construction, you have a unique opportunity to customize aspects like electrical and plumbing systems that are expensive, disruptive, and time-consuming to access later. Making tweaks before the drywall goes in can save quite a bit of hassle down the line. Have a particular home feature you like that’s labour-intensive to retrofit into a resale home? Ask your builder to include it during construction.

On the other hand, opting for the standard finishes and customizing later can offer a wider range of options and prices. For many pre-construction homes, fixtures and finishes are offered as a choice from a limited selection, and the costs to install them through the builder may be higher than can be found with an independent contractor. If you’re prepared to do renovations after the fact, you might be able to save quite a bit of money on cosmetic upgrades.

Investment Appreciation

Investors in pre-construction homes can benefit from significant appreciation in property value over time as the real estate market expands, making it a potentially attractive choice for buyers.

As the development progresses and the neighbourhood evolves, the property value tends to increase, offering a potentially strong return on investment for those who choose to invest in pre-construction homes. This appreciation in value can be substantial once the construction is completed and the neighbourhood matures, especially with the right market conditions.

For individuals looking to build equity in real estate and secure a property with promising investment appreciation, pre-construction homes might be a compelling opportunity.

Warranty Coverage

With new home warranty coverage included, pre-construction homes offer buyers protection against defects in workmanship and materials. This coverage may extend to safeguarding new appliances, fixtures, building components, electrical and plumbing, and structural elements like the roof and foundation. The length of the warranty can vary, with some warranties spanning up to 10 years to cover major structural defects.

It’s pivotal for buyers to thoroughly examine the builder’s warranty terms to understand what’s protected—and for how long. Warranty coverage for pre-construction homes can provide peace of mind, assuring buyers that any post-construction issues will be handled by the builder.

When considering purchasing a pre-construction home, the warranty coverage should serve as a safety net, offering reassurance in the property’s quality and durability. By staying on top of the warranty details and the extent of coverage, buyers can feel secure in their investment.

Financing Considerations

When financing a pre-construction property, it’s crucial to grasp the overall financing structure, including the deposit requirements at various construction stages.

Before signing a purchase agreement, be mindful of the financial risk associated with sizable deposits for pre-construction homes. You should also consider the impact of sales tax on a new home, depending on your province; while there may be rebates available, you have to pay the tax first. There's also a possibility that the pre-construction project could be cancelled or face delays, which could impact your buying power in the real estate market even if you get your deposit back.

One very important consideration is that when you’re financing the home purchase, you typically lock in your mortgage rate at closing. While this isn’t a big deal for resale homes, pre-construction homes have a significant delay between purchase and closing. During that time, mortgage rates may fluctuate. Be sure to build a contingency fund into your budget before purchasing pre-construction.

While pre-construction homes may offer lower initial deposit requirements than resale homes, it's important to carefully weigh the risks and benefits. By understanding the financial implications upfront, you can better prepare for the investment journey and mitigate potential challenges that may arise throughout the pre-construction process.

The Risk of Buying Pre-Construction: Potential Delays

As exciting as it is to purchase a pre-construction home, you should be prepared for potential delays from various factors that will be out of your control. Construction delays are common in the world of pre-construction homes and can significantly impact the completion date of your property. Factors such as weather conditions, permit approvals, and supply-chain disruptions can all contribute to these delays, causing uncertainties for buyers eagerly anticipating their new home. This is especially true when comparing pre-construction and resale condos, as there are more units involved.

Weather-related delays—including extreme temperatures and storms—have the potential to slow down the build, leading to an extended completion date. Permit approval delays from local authorities can also hinder progress, causing setbacks in the construction schedule. Additionally, supply-chain disruptions, such as material shortages or labour issues, can further exacerbate delays in finishing pre-construction homes.

Delays can cost you in various ways:

• Increased labour costs
• Potential fluctuations in material costs
• Extended living expenses in your current residence
• Finding a temporary residence if your current one won’t last to completion
• Higher monthly payments if mortgage interest rates rise before closing

With all that said, it’s essential to factor in these potential delays when considering the timeline for moving into your new property and to stay informed throughout the building process.

The Benefits of Pre-Construction Homes Can Outweigh the Risks

As you navigate the exciting world of pre-construction homes, remember that there may be unexpected twists and turns. Embrace the process of building your dream home, knowing that with patience and perseverance, you can create a solid foundation for your future. Trust that your investment in a pre-construction home will ultimately lead to a place of comfort, security, and fulfillment.