Risks Associated with Buying Pre-Construction
Buying pre-construction real estate is really a leap of faith. As much as five years could pass from the time you sign the offer until you get the keys to your unit. Many "moving parts" could affect how long it takes, and how profitable your investment will be. The following are some examples.
The State of the Economy Today and in the Future
If you buy a pre-construction condo today as an investment with the hope that the future value will be much higher, you're banking on the assumption that the economy will be healthy and keep growing. How can you forecast economic fundamentals in the future? While it might seem like an arduous task, using the REal Experts Property Analyzer will guide you and empower you to make the right decision.
Above and beyond condo regulations and by-laws, changes to the law – from local by-laws right up to federal laws – can have a considerable impact on the future value of your condo, especially if these occur during the construction phase. Federally, laws on foreign ownership of real estate can change. Regionally, land-use policies can change. Locally, property taxes can change, which may have a severe impact on the desirability of your property, if and when the time comes for you to sell.
Strikes and Work Stoppages
Prolonged strikes for trades or government can significantly delay the time it takes for your project to be completed.
The Availability (or Not) of Skilled Labour
The general quality of the local construction work force can have an impact on your condo building, but even more important is availability. If there is a shortage of skilled trades, rising costs and delays are more likely.
Builder Reputation and Construction Quality
Look for a builder with a reputation for completing projects on time and with high-quality standards. That good reputation should be consistent across many projects. Keep in mind that builders that don't have their own construction team could have different trades with different construction managers, meaning that it can be difficult to judge quality from previous projects. Construction quality is impossible to guarantee when buying pre-construction, which is why it presents a huge risk when buying. Since there is no way to see into the future, steps can be taken to mitigate risks – that means doing your due diligence.
Changes to the Neighbourhood
Neighbourhoods that are going through "gentrification" or renewal are in a process of great change. Perhaps the neighbourhood has had a high crime rate, or many of the amenities that draw people to a neighbourhood have been missing (parks, schools, shopping, mature trees), or there was a lot of noise from traffic or construction. These can all be turnoffs to end-users if the area hasn't fully transitioned by the time the building is complete.
Other things to consider in rapidly developing neighbourhoods is your potential view. It's possible that a new building will pop up and block your fantastic view. Zoning by-laws could change suddenly, with the effect of eliminating desirable neighbourhood features (such as restaurants and bars) or encourage undesirable characteristics (such as a new landfill site).
Builders' contracts are thick and complex documents, certainly more daunting than an agreement for the purchase and sale of a typical single-family home. It is imperative you hire an experienced lawyer to review your contracts, a lawyer who has represented clients who have purchased condos.
Taxes and Fees
New-home buyers in provinces such as Ontario and B.C. got a bit of a shock when the Harmonized Sales Tax (HST) was introduced in 2010. New homes had previously been subject to the 5 per cent Goods and Services Tax (GST), but with the introduction of the combined federal and provincial sales tax, new-home buyers were suddenly left to deal with a substantial increase (12 per cent in B.C., and 13 per cent in Ontario) in the cost of buying a property, without anything in return. Since changes in taxes can be made at the whim of a local or provincial government, they must be taken into account. Taxes can come in many forms. One form, charged by local governments, is development charges. Development charges can range from education levies and regional development levies to municipal levies, and can add a substantial amount to the cost of the property.
Along with taxes and development charges, closing fees are also higher with new condos than resale condos. Closing fees are normal with any real estate transaction, but newly built properties are subject to many more fees, including new-home warranty fees, paperwork fees, legal fees, utility hookup fees, and more. Some charges, such as those for guest suites or superintendant suites, are buried in the condo maintenance clause. What's worse, fees and taxes are constantly changing, hidden in the builder's contract, and very hard to calculate beforehand, and many cannot be financed by banks (meaning you have to be prepared to pay for them on top of your down payment).
Today, many developers start pre-selling their condos before zoning changes and approvals are given by the city. When a developer pre-sells a substantial number of the units in a building, they are able to get financing to complete their project fairly cheaply, which allows them to sell the units at an affordable price. This carries an inherent risk, though, since in some cases the city will reject a developer's plan. If this happens, any buyers will have their deposits returned.
Excerpted from Investing in Condominiums: Strategies, Tips and Expert Advice for the Canadian Real Estate Investor. Copyright (c) 2011 by Brian Persaud and Randy Ramadhin. Excerpted with permission of the publisher John Wiley & Sons Canada, Ltd.