The lack of ready to move-in resale homes, might have prompted you to look into pre-construction homes as your first investment. Let’s be honest – both, resale and pre-construction, have their pros and cons, but we won’t focus on that.
Now that you’ve made your choice of investing into pre-construction, let’s make sure you make the most informed decision so you can maximize your returns. In this guide, we give you tips and also answer some commonly asked questions.
But first things first…
When you buy a pre-construction property, you purchase a home or condo that’s yet to be built. It lowers initial costs like repair and appliance replacement, gives you customisation options, and better value appreciation over time. However, construction might be delayed by 6 to 12 months and the builder might ask you to pay occupancy fees, which doesn’t contribute to your deposit or mortgage. We’ve talked about occupancy fees in detail in this blog and highly recommend you give it a read!
Essential Tips for First-Time Pre-Construction Investors
1. Research the Developer
Investigate their track record, including past projects and customer reviews. A developer with a history of delivering quality projects on time can provide peace of mind and reduce investment risks.
Ask on local groups on Reddit or Facebook about people’s experience with developers you’re interested in. Ask them about things you should be careful about and how to negotiate to get the best unit, discount, and incentives.
2. Understand the Costs Involved
Pre-construction investments come with various costs beyond the purchase price including closing costs, development charges, and upgrades, and sometimes occupancy fees.. Make sure to budget for these expenses to avoid any surprises. As an investor, you might not live in the unit after closing, which means you won’t get HST rebate from the government and will have to pay that as part of the purchase price.
3. Review the Floor Plans
Honestly, floor plans can make or break your investment. No matter how well-known and reputable the builder you pick is, they will cheap out on certain floor plans, especially on smaller units – bachelor and 1 bedroom units. Pay attention to the layout, size of rooms, and overall design.
If you’re buying a one-bed unit, check if there’s enough space in the living room for a small work desk, the bedroom is large enough for a queen bed, and the direction of the sun against the unit. In simple words, consider how the space will function for your lifestyle or potential tenants.
4. Check the Location
Don’t just look at the city but also the particular neighborhood. Evaluate its growth potential, distance to everyday amenities and accessibility, proximity to schools, public transport, and commercial areas.
5. Analyze the Market
Look at current trends and future projections of that particular city for factors such as supply and demand, local economic conditions, and comparable property prices. If the pre-construction unit is overpriced by $100,000 to $150,000 than resale units in the area, you will likely have issues securing a mortgage at closing.
6. Know the Deposit Structure
Pre-construction properties typically require a series of deposits during the construction phase. It begins with a small deposit at the time of signing the purchase agreement, followed by a balance to 5% within 30 days. Then, there are staggered payments spaced out every 30 to 90 days with the last chunk due at closing. Beyond this, you might have to pay for decor upgrades.
7. Understand the Agreement of Purchase and Sale
The Agreement of Purchase and Sale (APS) is a legally binding document that outlines the terms and conditions of your purchase. Review this document carefully and consider consulting a real estate lawyer during the 10-day cooling off period to ensure you fully understand your rights and obligations. If the terms put you at a risk, you can back out within those 10 days. Read more about the cooling period in this blog.
8. Consider the Closing Date
The closing date is when the property is expected to be completed and ready for occupancy. Be prepared for potential delays, as construction timelines can be unpredictable. If the project is delayed, a condo builder will offer you occupancy until the official closing date. During this phase, you don’t own your condo unit yet and must pay occupancy fees to the builder, which are not added to the deposit or total purchase price. These fees are used to complete the project and are not profited by the builder. If you plan to buy a condo, choose a higher-level unit. Since buildings are constructed from the ground up, higher unit owners pay less in occupancy fees.
9. Explore Financing Options
Securing financing for a pre-construction property can differ from a traditional mortgage. Speak with lenders experienced in pre-construction financing to understand your options and get pre-approved for a mortgage. If you hold 50 to 60% equity in another property, you can get a HELOC loan. Another option would be to create an investment group, where each person contributes a share, not always equal. Create a proper payment system and written agreements to protect all parties involved.
10. Plan for Interim Occupancy
Interim occupancy occurs when you take possession of the property, especially a condo unit, before the final closing. During this period, you may need to pay an occupancy fee, which covers interest on the remaining balance, estimated property taxes, and maintenance fees. Plan for this expense in your budget as you might pay for 6 to 12 months depending on what floor your unit’s on.
Potential Risks and How to Mitigate Them
1. Construction Delays
Construction delays are common in pre-construction projects in the GTA. To mitigate this risk, choose a developer with a strong track record of timely completions and include clauses in your APS that address potential delays. If buying a condo, buy units on higher floors to reduce your chances or amount of occupancy fees paid.
2. Market Fluctuations
Protect yourself by investing in a location with strong growth potential, a project that isn’t overpriced, and lastly stay informed about market trends. Purchase in smaller markets like Calgary, St Catharines, and Kitchener-Waterloo, where you can expect more growth.
3. Changes in Project Plans
Developers may change project plans due to various reasons, such as zoning issues or material shortages. Ensure your APS includes provisions that protect your interests in case of significant changes to the project.
4. Financial Uncertainty
Your financial situation might change between the time of purchase and the closing date. That’s why planning for the future must be your number 1 priority. If you’re unable to close on the unit, you’ll lose your deposit because you won’t be able to secure a mortgage and will have to sell.
Steps to Take After Signing the Agreement
1. Monitor Construction Progress
Stay informed about the progress of the construction. Regularly visit the site, if possible, and maintain communication with the developer.
2. Arrange for a Home Inspection
Once the property is near completion, arrange for a professional home inspection. The inspector will point out any issues that aren’t as per the agreement and the builder will have to fix them for you. It only gives you peace of mind but avoids any expensive surprises down the line.
3. Prepare for Final Closing
As the closing date approaches, gather all necessary documentation and finalize your mortgage arrangements. Review the closing statement carefully and ensure you understand all the costs involved.
4. Plan for Moving In
Coordinate your move-in date with the developer and plan the logistics of your move. Make sure utilities and services are set up and under your name before taking possession of the property.
Pre-construction investments aren’t scary but need some extra planning. With the right real estate agent on your side, you can expect significant returns and build financial wealth through investments.
Some commonly asked questions by first-time investors:
1. What is the difference between pre-construction and resale properties?
Pre-construction properties are purchased before they are built, offering customization options and potential price appreciation. Resale properties are already built and often require fewer upfront costs.
2. How long does it take for a pre-construction property to be completed?
Typically pre-construction projects take 2 to 4 years to complete. Most projects start construction only after 60% units are sold, so the earlier you book into a project, the longer it’ll take for closing.
3. Can I sell my pre-construction property before it’s completed?
Yes, you can sell your pre-construction property before completion through an assignment sale. In this process, you transfer your rights and obligations to another buyer after the builder approves it. You have to pay $5,000 to $15,000 in assignment fees to the builder.
4. What happens if the project gets canceled?
If the project gets canceled, the developer is usually required to refund your deposits as per Tarion Warranty. However, most times, buyers only get part of their deposit bank. But you don’t have to worry about project cancellations as long as you purchase a reputable builder’s project. We highly recommend you read this blog “what happens if a project gets canceled”. We cover all minute details that most buyers miss out.
5. Are there any tax implications for pre-construction investments?
Yes, pre-construction investments can have tax implications, such as HST and capital gains tax. Consult with a tax professional and a real estate agent to understand your obligations and potential deductions.
Want help building your real estate portfolio? That Pre-Construction Guy has got you covered! Request a free booking today and we’ll get you started.