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Pre-construction condos are very popular nowadays, especially in the city of Toronto. And that's because there are some obvious advantages when buying a pre-construction condominium. But there are also several disadvantages and risks associated with them. If you want to find out what they are, you're in luck because that's precisely what this blog is about. Or, you can also watch the YouTube video below.
What Is A Pre-Construction Condominium?
So let's step back and define a pre-construction condo and what makes it so unique. Essentially, a pre-construction condominium is a condo that has yet to be built (compared to a resale condo already built and lived in by an owner or tenant). A developer will sell units of this condo on plan. In other words, you can't actually view the unit you're purchasing because you're buying off "paper," which essentially means you'll buy a unit based on a floor plan the developer presents. Yet, sometimes the developer will showcase a model unit in their showroom, allowing you to get a basic idea of the builder's style and sample finishes. But buyers should take caution that the unit they purchase may vary significantly from the model presented.
So what makes a new condo so unique? Well, as I mentioned, you're buying off "paper," which means your decision to purchase is made solely based on a floor plan. So there are some unknowns going in, like your view, common areas, etc. Also, unlike a resale home or condo, the buyer may live in a construction zone at the time of move-in if the condominium is not completely finished.
Photo courtesy of Adobe
Advantages of Buying A Pre-Construction Condo
Let's take a look at some of the advantages when considering a pre-con condo, which there are many:
- New units may have lower price points that are below both market value and lower when compared to resale units. This is beneficial in 2 ways. First, it's the more affordable option for those who are entering the market, like first-time home buyers, and second, buyers may benefit from an appreciation standpoint because most builds take 2-5 years to complete, so it is likely the unit you purchase will appreciate during this time (well, obviously depending on market performance).
- You'll also have the flexibility to choose between different unit packages along with the opportunity to select various custom upgrades and finishes (which sometimes come at an extra cost)
- You'll also benefit from Tarion New Home Warranty protection, whereby it maintains a warranty on your new purchase for seven years.
- You may also have the option of an extended deposit structure whereby your down payment is spread over a period of time, like over several months.
- Also, you'll move into a brand spanking new home that's never been lived in.
- And lastly, and this doesn't happen with resale condos, you'll have a 10-day cooling-off period which begins as soon as a buyer receives a copy of the signed Agreement of Purchase and Sale. So if you change your mind and decide not to purchase the condo within ten calendar days, you can cancel, and the developer has to refund the full amount of your deposit.
But this 10-day cooling period is also important for another reason. It's an opportunity for you to have your real estate lawyer review the signed Agreement. They will be able to dissect it and look for any items not in your best interest, which may not be apparent to you upon signing. And also they may even be able to negotiate on your behalf.
Limitations of Buying A Pre-Construction Condo
When buying a pre-construction condominium, you must be aware of the following risks:
- There could be a potential delay in the project. So when a developer states occupancy is scheduled for May 2025, for example, delays could push this date out a few months or even by a few years.
- There's also the possibility of cancellation, whereby the developer cancels the entire project after collecting your deposit (This is a whole topic we'll examine shortly).
- Another potential limitation is regarding mortgage interest rates. If the construction period spans several years, mortgage rates could increase significantly during this time, which ultimately results in increased monthly payments for buyers.
- And lastly, there's the risk that a buyer faces significant lifestyle or financial changes during the construction period, which may affect their ability to maintain their commitments, for instance, job loss or health issues.
So buyers need to consider, assess & discuss these potential risks when buying a pre-construction condo.
Photo courtesy of Adobe
Cancellations - Can The Developer Cancel The Project?
Why do cancellations happen? Well, they can happen for several reasons, but the most common are the following:
- If the developer doesn't meet the minimum number of unit sales, or
- if they fail to obtain the necessary permits & development approvals, or
- if the developer is unable to secure financing for the project.
However, it's important to note that cancellations are permitted if disclosed in the addendum of the Agreement of Purchase & Sale. So it's important to review the addendum to identify whether or not there are early termination conditions.
And with regards to buyer deposits, Tarion may protect up to $20,000 if the builder cancels under the conditions I just mentioned, so long as the buyer qualifies under Tarion's deposit plan.
How Your Real Estate Representative Can Help
Many people need to be made aware of this, but buyers may be able to have your real estate agent represent them when buying a pre-construction condominium. When you visit the new condo's sales office, this will work to your advantage. Unlike the sales staff at the builder's sales office, a real estate representative will protect your best interest, whereas the staff at the sales office works in the developer's best interest.
Your agent will also negotiate the Agreement of Purchase and Sale on your behalf. This is an advantage because they are skilled negotiators, again looking out for your best interest. They can also provide advice on the best source of action, while also identifying risks and limitations.
As well, and this is something I like to do, your agent can take you to visit the builder's past projects so that you can get an idea of their quality and workmanship.
They can also recommend other professionals that will assist you in the process, like a real estate condo lawyer, which will be essential in completing the sale.
Overall, they will help you become an informed buyer to help you make better decisions.
Photo courtesy of Adobe
If you still have questions regarding status certificates or real estate in general, don't hesitate to contact my team directly at [email protected] or call our office in Toronto at 437-388-3733.
*Header photo courtesy of Adobe