It is without a doubt that Toronto’s pre-construction market for condos has seen its fair share of increase over the past 10 years. Here are 10 things you need to know before falling in love with that unit as an investor or a buyer:
1. The Deposit Structure – While purchasers of resale condos in Toronto generally provide a deposit of 5% (or less) upon signing of the agreement, builders generally require significantly higher deposits in order to fund the construction – often as high as 15 or 20%. Usually a set amount $$3,000, $5,000, etc.) is required when the agreement is first signed (signing fee), and the balance to 5% is due within 10 or 15 days. From there, there are various ways the remainder of the deposit is paid – for example, an additional 5% at 30 days, 5% at 90 days, 5% 180 days, or sometimes the deposit is timed with the phases of construction (5% when they break ground, 5% on occupancy, etc.). The point being made here is that you pay close attention to the deposit structure to make sure it fits your budget and financial plan for the time period specified by the developer. Like always, purchasing a property as an investment or to reside in takes consistent planning.
2. The 10-day Cooling Off Period – In Ontario, every purchaser of a new condo has 10 days to reconsider or rescind their purchase (This is called Right to Rescission). Note these are calendar days and not business days. During the 10 day cooling off period, a Buyer should/could arrange to get financing pre-approval and have the signed agreement reviewed by their lawyer. If the Buyer changes their mind (for 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. The Interim Occupancy Period – When the condo is built and ready to be moved into, there is a period of ‘interim occupancy’, where the investor/buyer can take possession (in other words, move into the unit). During the period of interim occupancy, the investor/buyer does not yet own the condo; they simply pay the builder an amount roughly equal to what their mortgage payment + condo fees + taxes will equal. No transfer of land has occurred yet, and no mortgage has been given or registered to the unit. Keep in mind that monies paid during this period still goes towards your equity in the property so this should be considered a good thing.
4. Registration of the Condo – Once a building has passed all the city inspections and gone through all the processes to become a legal entity, condominiums are officially registered. During this registration period, condo ownership is transferred to the Buyers, mortgages come into effect and Buyers officially become owners (a.k.a. the closing). This registration period can take anywhere from 3 months to 2 years (though usually it happens 4-8 months after people begin to move in for the interim occupancy period).
5. Condo Fees in new buildings are usually set arbitrarily low – This is partly because they are estimated years in advance of the condo being built, and partly because they don’t know the actual costs of running the building just yet. A side note to investors, is that its is possible that condo fees in new buildings can increase during the first 2 years, usually 5-10% (being moderate), considering this imperative, its only smart that you also consider spreading that cost over the next 12 months period to your tenant considering the limits set out in the Residential Tenancies Act.
6. Builder Closing Costs – When the unit is officially registered and you close on the purchase, you’ll be responsible for the closing costs like all properties in Ontario. There are ‘builder adjustments’ that apply to all new construction projects and include development and education costs, HST on appliances and utility connections fees. These builder closing costs can easily amount to 1-3% of the original purchase. This is where The StarionCondos Team comes in.
There are VIP incentives that come with capped closing cost there by saving you the investor/buyer any surprises at closing. In other cases, because we buy units for our clients in bulk, we are able to negotiate a capped or reduced closing cost on projects that don’t have those incentives and we ca negotiate a lower capped closing cost on projects that do have those incentives. We are able to bring about these enormous savings because of the relationship we’ve built up with reputable developers over the years.
7. Assignment Clauses – This is a very crucial piece and there are so many scenarios that can be considered here but the bottom-line is that for an investor or buyer that decides to make a quick sale and profit from the increase in value of the unit they’ve purchase before closing, the Assignment clauses on every project is super important.
An assignment clause is put in place by the developer to protect the integrity of the project so that only qualified buyer that are willing able to hold the property till close come to the table. The developer does this because its is more administrative work for the developer to deal with a change in ownership while still doing a whole lot more for the project. A developer wants to sell the unit and consider it sold till closing. So they put the assignment clause to curb investors from assigning the unit before closing. This clause comes with a price tag which in most cases will be high enough to deter anyone from choosing to assign the unit before closing. Some developer have used this assignment clause as an incentive to attract buyers and investors by offering free or capped assignment clauses. Price tag on an assignment clause makes the assignment marketable or not. Obviously, the higher the assignment fee, the less a buyer will be willing to take on this assignment as the buyer will most likely have to pay this amount at closing.
Here’s how we help in this regard. Again relative to having buy up a relationship with the developer, The StarionCondos Team can negotiate a lower or capped assignment fee if you are an investor that is looking to assign the unit before closing (we never really recommend this strategy). So if you’re looking at taking over someone else’s contract via an assignment, look to see if the original purchaser capped the amount of these costs when they originally negotiated the unit. Otherwise, make sure you have lots of money put aside for closing costs.
8. The Condo Reserve Fund – When you buy pre-construction, you’ll need to contribute 2 months condo fees to the condo’s reserve fund (the emergency fund). This usually happens at the time of closing.
9. HST – new condos are subject to HST. If you’re an end-user (you’ll be living in the unit yourself), you’ll likely qualify for an HST rebate. If you’re an investor however, you may have to pay HST upon closing. Make sure to get legal advice about whether you qualify for the HST rebate before you buy a condo.
10. Choose your team wisely – Lastly, remember that the person at the sales centre works for the builder and their job is to get the best prices and conditions for the builder, not for you. The StarionCondos Team helps you negate the best deal and clauses on so many levels considering that every project is different. We also connect you with financing and legal professionals to help make up your team of advisers for any project. We put our knowledge and relationships to work for you.
If you’re considering investing/buying a pre-construction condo, make sure to contact The StarionCondos team (The STAR Team) for guidance in making the decision of a lifetime.