11 Things you shall Know before Buying a Pre-Construction Condo in Toronto

Pre-Construction Condo in Toronto

Toronto’s Pre-construction Market is one of the leading markets in North America and If you are thinking of buying a pre-construction condo in Toronto, you have come to the right place. Here are 11 things you shall know before buying a pre-construction condo; 

1. Deposit

The deposit structure is one of the many reasons why investors choose pre-construction condos. The average deposit is 20% but there is flexibility in the deposit structure. The buyers 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. And the best part is that they don’t have to worry about taxes, maintenance, mortgage payments, insurance, and tenants.  While buyers of resale condos in Toronto often provide a deposit of 5% upon signing of the agreement, builders generally require significantly higher deposits in order to fund the construction, many times as high as 15 or 20%.

The deposits are usually paid over a period of one year, however, each project is different. A general deposit structure will be 5% at signing, which is liquidated as soon as the conditional period in the offer expires, followed by  5% within 30 days, then 5% within 60 or 90 days and finally 5% either within 120/240/365 or on occupancy. The is the most popular deposit structure however some builders will have incentives where they offer 5% a year or $1000 monthly for 5 years.

2. 10-day Cooling-Off Period

Most pre-construction sales contracts in Ontario give a 10-day cooling-off period to the buyer following the day you receive your signed copy of the offer to reconsider their purchase. During the 10-day cooling-off period, which are calendar days and not business days, it’s advised to get the contract reviewed by a lawyer and also arrange to get financing pre-approval because, after 30-60 days, you will be requested to provide your mortgage pre-approval letter. You shall involve three parties in your purchase: your realtor, your accountant, and your lawyer. Your realtor will be able to get you the best price and incentives whereas your accountant will let you know your tax liabilities, and finally your lawyer will make sure you understand the contract thoroughly.  If the Buyer changes their mind due to any reason during the 10-day cooling-off period, they can back out of the contract and have their deposit returned without any deduction.

3. Delays

Most pre-construction projects are delayed and although builders will provide an expected completion date for the condominium, it is seldom that condos are completed on time. Builders set their closing date early because it’s easier to push the date back for construction delays than it is to bring the closing date earlier. Builders are given two chances to push the date back for their own delays. If there are any delays outside of their control for instance strikes, they can push the closing date back without consequence beyond their original two breaks. In short, Builders have the right to delay for all sorts of reasons and for surprisingly long periods.

4. Material Changes

Builders have a fair amount of liberty to make changes to the amenities, the site plan, and even the unit layout, even after they have pre-sold them. There are multiple examples of builders adding or subtracting floors, changing layouts and deciding that the rooftop pool should now be in the basement. The “ideal case scenario” put by the developers is in the marketing material, however their agreement mention that the final product could be altered. Some of the usual changes are structural changes such as adding a structural beam to your unit and less often but more disturbing changes are changes to amenities such as spas, pools and gyms etc. The bigger names in construction such as the Tridel builders, seldom remove any facilities because they are popular for their amenities-rich condos but you can expect this from smaller builders who have to remove amenities to make the building feasible. So always ensure that you have thoroughly read the sales agreement and be ready to be flexible.

5. The Interim Occupancy Period

What is unique about the pre-construction condos is that there are theoretically 2 closing dates; the date when the condo is ready for occupancy and the second date when the title transfers. During the interim occupancy period, the buyer does not yet have the ownership of the condo but he pays the builder a stipend that is close to what their mortgage payment, condo fees, and taxes combined will equal. There is no transfer of land yet and also no mortgage has yet been given. This interim occupancy period often lasts an average of 6 months, from a minimum of a few months to as long as two years. Since during this period, the condo unit does not belong to you yet, you can not rent the property or complete renovations unless you have the builder’s written consent. In case you have purchased the condo as an investment, it is important to get consent to lease the unit during the period of interim occupancy added to the sales contract.

6. Low initial Condo Fees in new buildings

The price of condo units in new buildings is often set arbitrarily low because of two major reasons; firstly they are estimated many years in advance of the condo being built and secondly because they aren’t aware of the actual costs of operating the building. One might even expect this to be a sales strategy too. Nonetheless, you shall expect condo fees in new buildings to increase considerably during the first 2 years, usually by 10-20%.

7. Condo Registration

After a building has passed all the city scrutiny and has been through all the procedures to become a legal entity, the official registration period for the condominiums is initiated. During this period which can last anywhere from 3 months to 2 years, condo ownership is transferred to the Buyers and mortgages come into effect. 

8. Pre-construction Closing Costs

Pre-construction condos have an additional closing cost compared to regular resale condos. After the unit is officially registered and you close on the purchase, you would be expected to pay all forms of closing costs that don’t apply to resale units. These closing costs are directly related to the sales contract and apply to all new construction projects and comprise development and education costs, utility connection fees and HST on appliances. Even if you round off the additional costs, you shall expect to pay around 5.5% of the purchase price to close. And as per some reliable sources, the development fees might double in Toronto in the near future. In case you are looking at taking over some other person’s contract through an assignment, keep in mind to see if the initial buyer capped the amount of closing costs when they were originally signing off the contact of the unit with the builders. Or else, do ensure that you have kept aside a substantial amount of money for the closing costs.

9. Condo Reserve Fund

Often at the time of closing, you will be required to contribute two months of condo fees to the condo’s reserve fund, also known as the emergency fund when you purchase a Pre-construction condo

10. Maintenance Fees

 Following two years of ownership, you shall expect the maintenance fee to increase by 10-20%. Because for the first two years after the condo closes, the builder is responsible for any shortcomings in the budget. Therefore the majority of fees in the condo budget start only after a few years from occupancy.

11. HST

Pre-construction condos have an additional closing cost compared to regular resale condos. After the unit is officially registered and you close on the purchase, you would be expected to pay all forms of closing costs that don’t apply to resale units. These closing costs are directly related to the sales contract and apply to all new construction projects and comprise development and education costs, utility connection fees and HST on appliances. Even if you round off the additional costs, you shall expect to pay around 5.5% of the purchase price to close. And as per some reliable sources, the development fees might double in Toronto in the near future. In case you are looking at taking over some other person’s contract through an assignment, keep in mind to see if the initial buyer capped the amount of closing costs when they were originally signing off the contact of the unit with the builders. Or else, do ensure that you have kept aside a substantial amount of money for the closing costs.

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