Real Estate Q+A: What you should know before buying Pre-Construction

New Build HomesWhether you’re buying a new house, a condo or a townhouse, buying directly from the builder has been a popular choice for many in Ontario. Almost one third of all homes sold in Canada each year are brand new. So what’s the appeal? If you’re someone who prefers a move-in ready home rather than a property that will need some updating, buying a property off a plan means you can customize your home. You will also be able to take advantage of higher energy efficiency ratings and often higher quality of building materials. New build properties will also offer lower maintenance costs and no issues with plumbing or knob-and-tube wiring.

But buying new can be a tricky and confusing process, especially if you’re a first time buyer. Just recently I was chatting with a friend about a square footage issue in a new build condominium. Her friend had recently bought a new condo unit in west Toronto and unfortunately learned too late in the game that his 80 sq.ft. terrace was included in the total square footage of his 500 sq.ft. condo. 80 sq.ft. doesn’t seem like a lot, but if you’re already nervous about the sofa to flat screen TV viewing ratio, it’s a big deal. So here are a few pointers to help you out in the new purchase, if you’re considering buying directly from the builder. Read on to find out why you should be wary of the show home, what to do if your new place isn’t ready on time, how to save big money on upgrades, and most importantly, how to make sure that the dream home you’re expecting is the one you actually end up getting.

Signing an Agreement of Purchase and Sale –  This Agreement will take the house, condo or loft off the market and guarantee you the price and terms agreed upon at the time of Purchase. A deposit cheque will be required at this time. Whether you’re buying a new detached home or a condo, the purchase agreement is the legally binding document that spells out what you’re getting and the conditions of the sale. It’s full of fine print and legal-speak, and if you sign without legal representation, you risk being bound to terms you don’t understand or don’t want. More importantly it destroys any chance of re-negotiating the terms of the sale.

10 day cooling off period If you’re buying a condo, within 10 days after you receive both the Agreement of Purchase and Sale signed by both you and the Developer and the Disclosure Statement, you have the right to change your mind. This is called your “Right of Rescission”. During this 10-day period make sure that you check your financing options. A lot of new condominium sites offer capped rate programs that are well worth considering. Most purchasers take their Agreement and Disclosure Statement to a lawyer so that they fully understand their legal obligations. Lawyers generally won’t charge an additional fee for this service if you’re using them for the final closing. If you don’t like what they find, you can back out of the deal. Unfortunately, there’s no such period for freehold homes, and many home builders demand that you sign a contract on the spot to secure your sale price or lot selection. Try to avoid this situation if possible, but if you must, at the very least insist on adding a clause that makes the deal conditional upon approval by your solicitor.

Don’t fall in love with the model suite or show home – Most people fall in love with the show home, but you have to realize that most, if not everything, you see in that model home is an upgrade. Upgrades are a major portion of a builder’s 10% to 20% profit margin because the industry standard is to charge double the sub-trade’s fee—a cost that is passed directly to the buyer.That means the $8,000 granite countertops you ordered really cost your builder $4,000. That doesn’t mean you should never order an upgrade, but you do need to be clear on what is an upgrade and what isn’t—and do a little bargaining so you don’t get taken for a ride. With new builds there is no room for negotiation on the base sale price, but there is room to negotiate the price of your upgrades.The rule of thumb is the more upgrades you spring for, the bigger the discount you should negotiate. When buying pre-construction, colour selection begins shortly after the commencement of construction. You will be contacted by the Developer’s consultant to arrange for an appointment. At this time you will select colours and finishes (carpet, tiles, cabinets, countertops, etc.) and may also arrange for any upgrades or specialty items.

Don’t trust the floor plan – When choosing a floor plan make sure that it’s easy to furnish and keep it resalable. For example in a condo, don’t change a big suite from a 2 bedroom plus den to a 1 bedroom with 1 bathroom. There will be less interest when you want to sell and most buyers won’t want to renovate it back to its original state. Going back to that chat with my friend, condo sales staff will often include balcony or terrace measurements as part of the total square footage. New home sales staff will provide square footage based on measurements of external walls. You can’t rely on their verbal assurances, on the floor models, or on the sale pitch or brochure. Unfortunately, many new home decisions are based solely on brochures or artist renditions. Remember, it’s best to get every detail in writing. In fact, the builder has the discretion to change (within reason) an image, or floor plan, or layout without your approval. It’s best to asking for a breakdown of room sizes and plan details, and get that in writing. If there’s a substantial difference between what you’re sold and what you get, you can either negotiate a price reduction or try to get out of the deal.

Don’t take delays lightly – Critical dates are now included as part of the purchase agreement and contract and are part of the Consumer Service Standard, so if a builder misses these critical dates and requires an extension, a buyer can either agree and seek compensation, or simply get out of the deal. Either way, seek legal advice whenever you’re presented with a request to delay a critical date.

Don’t forget you are moving into a construction zone – If you’re considering a new condo or home purchase take into consideration the impact of ongoing developments. If you bought into the first phase of a three-phase condo development, remember that until all the construction is completed it’ll be noisy and dusty. Combine that with the fact that the area is literally a construction zone for quite a long time, and access points can open and close depending on the phase, and you have a recipe for long-term aggravation. Be mentally prepared for living in a construction site.

Warranty is not for everyone – Most buyers assume that all new-build lofts, condos and homes are covered by a provincial warranty, but this isn’t the case. Only three provinces—B.C., Quebec and Ontario—make warranty coverage mandatory. In fact, those are the only provinces that require new home builders to register with their respective provincial regulator at all. In Ontario, it’s illegal to build without being registered, but in other provinces, where the warranty program isn’t mandatory, builders can simply opt-out of coverage. Often they’ll try to convince home owners that they’re saving them the registration costs.Buyers should be proactive and get their new home warranty in writing. They should also go online to determine if their builder is registered with a provincial regulator as a new home builder. This is particularly important for loft or condo conversions—residential units constructed inside an existing building shell. In such situations, new-build warranties often don’t apply.  See www.tarion.com for more details.

Closing costs are not chump change – When you sign the purchase agreement for your new place, many of the closing costs are estimated. These costs often escalate as you approach your possession date. For instance, you may find large charges that suddenly materialize for hooking up gas and electricity meters, plus mortgage discharge fees, development fees, deposit verification fees. Pay close attention to the adjustments and try to get a cap on certain items and remove others. General rule of thumb is to have 1.5% of your purchase price set aside to cover all of these costs.

Occupancy is not the end – Your occupancy date is when the Developer estimates to have your home completed so that you can move in and live there. You will be kept up-to-date on the progress of the development, and you will receive a revised occupancy date once the actual date has been established. But in a condominium even though you will be moving into your new home on occupancy, you will not be getting title to it until registration of the building and title transfer. Interim occupancy is the period of time from the occupancy date to the date of title transfer and generally speaking this time period can range from one to four months. During this time you pay an occupancy fee to the Developer (also referred to as phantom mortgage) that consists of your maintenance fee, estimated property tax, interest on the outstanding amount of the purchase price. Once the condominium is registered in the land titles office, the purchase transaction will be completed in accordance with the statement of adjustments within your Agreement. These closing adjustments include occupancy fees, realty taxes, common expenses, etc. At this time, your lawyer will receive a transfer of title to your property, in exchange for your payment of the outstanding balance of the purchase price.

Buy at the right time – If you’re buying a new condo or townhouse as an investment, the key is to get in as early as possible. In order to get the financing to start a new project, builders will often raise initial funding through pre-sales. These pre-sales often kick off with invitation-only VIP events. Usually, only high-volume realtors who specialize in the type of building on offer are invited. Once the VIP event is over, the builder will open sales up to all interested realtors, then finally they’ll open the project up to the public at which time often 50% of the units have already been sold and the price has gone up. To get in on these VIP pre-sales you’ll need to work with a realtor who specializes in new developments and be ready to move quickly. If you’re purchasing a freehold home, keep in mind that purchasing at the right time of year can also save you money. For instance, in the GTA, the summer is the best time to shop for a new development. People are on vacation in July and August and don’t have time to look for houses. When things slow down for a builder you have more bargaining power as a buyer. Another good time to look is in December and January, but by mid-February activity starts to pick-up, and deals are taken off the table.

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One thought on “Real Estate Q+A: What you should know before buying Pre-Construction

  1. Pingback: Home Staging: How to Tell It’s Just Pretend | My Place in the City

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