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There are many things to consider before buying a home that hasn’t been built yet. (Nathan Denette/THE CANADIAN PRESS)
There are many things to consider before buying a home that hasn’t been built yet. (Nathan Denette/THE CANADIAN PRESS)

Mortgages

The joys and pitfalls of preconstruction ownership Add to ...

Buying a home that is already built is much more straightforward than investing in a preconstruction condo, house or townhouse – an important heads-up to first-time buyers in particular.

While there are advantages and disadvantages to both established and yet-to-be-constructed housing, “if you don’t have an appetite for risk, you’re better off buying an existing home,” says Murtaza Haider, an associate professor in real estate management at Ryerson University’s Ted Rogers School of Management in Toronto.

Big cities such as Toronto and Vancouver tend to get the most attention when it comes to raising awareness about buying preconstruction homes, which could simply be no more than blueprints on paper or computer renderings, but it is a topic relevant across Canada, “anywhere demand for housing is outstripping the supply,” adds Dr. Haider, also an adjunct professor at McGill University in Montreal.

The spiralling growth of new-home building across the country is reflected in recent Canada Mortgage and Housing Corp. (CMHC) figures, which show the number of residential housing starts (including single-detached and multiunit homes) rose from 205,521 units in February to 211,342 units in March of 2017 – their highest level since September 2007.

Dr. Haider, Toronto real estate lawyer Bob Aaron and other experts cite these among the potential advantages of buying homes before they’re built:

• You usually have time to raise the money for it (commonly, you only need to make a percentage of the down payment in increments leading up to the closing, generally in two to three years).

• While your home is being built, it is rising in value (barring economic or other unforeseen circumstances).

• You would be the first owner of a home that you have input into where it is located, how it is put together, including a pick of finishes and materials (from flooring to cabinetry, for instance), and a chance to add personalized elements, such as lighting, closets and window coverings (although usually at extra cost).

• Warranty programs across Canada (including Tarion Warranty Corp. in Ontario, the Alberta New Home Warranty Program, and the Halifax-based Atlantic Home Warranty Program) for new-home builds offer protections that can include delayed occupancy and delayed closing coverage, deposit protection, and coverage for labour and materials needed to fix faulty workmanship or construction.

But reality can be different than what is in the owner’s imagination.

Mr. Aaron, for one, warns against making a purchase simply based on viewing the display model of a condo, townhouse or house.

“When you leave the builder’s office, your eyes are starry because, except for the fact it hasn’t been constructed yet, it would be your place,” he says. “But you’ve got to do your homework. You have to make sure you know what it’s like to move into a brand-new place, you have to have patience, be prepared for the extra costs and not to have all of your expectations met – because [for instance] the place may end up not having the view you thought it would have or it ends up much smaller than you thought.”

Sabrina Heyde, a 32-year-old Ottawa lawyer, has experienced both the anguish and joy of purchasing a preconstruction home.

“I wanted the benefits of buying a home built with new materials and warranties, and the peace of mind that comes with that, while avoiding the pitfalls of buying an older home with possible unknown or latent defects,” Ms. Heyde says from her downtown office in the nation’s capital.

In 2011, she signed a contract and put $20,000 down on a $269,000 two-bedroom condo after researching the areas that had the most potential for property-value appreciation. It took three years for the condo to be completed. Since then, she and other owners have been in a legal fight with the builder. She warns preconstruction buyers to look out for costs above what were in the original agreement.

While Ms. Heyde researched the builder, she says she should have done more digging. “I looked up the builder and found only the builder’s own grand and glowing promises and no real reviews.” She also suggests prospective buyers research real estate agents and don’t hire one who works for the same brokerage as the builder.

Despite a bad first-purchase experience, Ms. Heyde decided to invest in another preconstruction home that she researched more thoroughly – a downtown studio condo by a different builder. She says she has had nothing but positive experiences both during the construction process and after she moved in in January. She is renting out her first condo and plans to sell it down the road.

Ms. Heyde gives this advice for others looking to buy a prebuilt home: “Don’t rush the single most expensive, most important purchase of your life. Do your research. … Find people who have already bought and moved into homes constructed by your builder and ask them what the worst part of their purchase was. If they say mould, flooding, fire, cooling, heating or foundation – or customer service – consider it a deal breaker and just walk away.”

Be prepared

Here are some other things you need to know before buying a preconstruction home:

• Prepare for the full down payment: While you can buy a resale home with as little as 5 per cent down (with mortgage insurance), purchasing a preconstruction one normally requires a larger down payment, such as 20 per cent. Commonly, you would put down a 5-per-cent sales deposit, and pay the balance of the down payment in instalments (at perhaps four, nine and 18 months into the purchase).

• Work with a lawyer: Get legal advice both before and after signing any preconstruction home contract. For condos, there is generally a cooling-off period – a time frame (generally seven to 10 days, depending on the province where you live) when you can cancel your contract and get any deposits back. Mr. Aaron, who commonly assesses preconstruction home contracts 40 pages long or more, says the cooling-off time is specific to condos unless written into an agreement for any other type of home.

• Get ready to wait: It is not uncommon for targeted move-in dates to be extended several times and by many months, as a builder could legally cite “unavoidable delay” situations, such as building-trade problems. The warranty program in your province will spell out what delayed move-in compensation, if any, you are entitled to and under what circumstances.

• You may be able to lock in your mortgage rate for a longer time: Builders tend to work with preferred mortgage providers, who, if you qualify, would give you a special interest rate locked in over an extended period, compared to what a lender not associated with the builder would allow. Check whether the expiry date for the locked-in rate has a chance of being extended if your home’s completion is extended. You also do not have to stick with the lender preferred by the builder.

• Manoeuvring the GST/HST: If your preconstruction home is your primary residence, you could qualify for rebates of the GST/HST, which apply in general to “taxable sales of real property based on the province in which the real property is situated,” according to Canada Revenue Agency. If you rent out your preconstruction home without first moving in, you may be on the hook for thousands in government taxes – check with your lawyer on ways you may be able to recoup that money.

• Budget for closing costs, and expect surprises: Your real estate, legal and mortgage professionals can help you determine how much extra you will be paying in closing costs – which are on top of what you are paying for the home itself. Roughly, these extra costs can add from 1 to 3 per cent or more to the price of your home, and typically include legal fees, enrolling in the provincial warranty program, title insurance, property tax adjustments and land-transfer taxes (First-time home buyers may get some breaks on land-transfer costs). Other charges may include fees to keep track of your deposits, for using the electronic land registration system and for utility meter installations. You may be able to work out an agreement with the builder to cap so-called unlimited charges.

• Prepare for the PDI: The predelivery inspection – the first time the buyer will see the home in its finished form – is usually done two weeks to a month before the move-in date. During the PDI, a representative for the builder will walk you through the home, helping you check out all the features and systems (including mechanical, heating and air conditioning). While many builders say there is no need for you to bring another party to the PDI – such as a home inspector you hire at your own cost – you typically can bring along anyone you feel may help you in the inspection process. The builder’s representative will carry a form to mark down anything you feel needs fixing or changing, or may have been left out from the original sales agreement, and the builder must follow through on addressing them – before you move in, but sometimes after. Warranty programs tend to have special PDI checklists available online that break down what will be inspected and tips on what to look for.

• Prepare to pay “rent” on your condo before you “own” it: In the case of a preconstruction condo, you do not officially own it until the building is registered – which happens when it is mostly all lived in and passes conditions set out by the provincial land registry office. The registration process can take three months or longer, after which the title of your condo will be transferred to you – and that is when any mortgage or other payments you make are put towards ownership. While awaiting registration, you will be able to move in – during this “interim occupancy” period, you must pay monthly “occupancy fees” (a type of rent that will not be put against what you owe for the condo) to the builder. Each month’s occupancy fee incorporates the interest portion of the balance owing on the purchase price, the condo fees and a portion of your property taxes.

Sources for the tips include provincial warranty bodies, Canada Revenue Agency, consumer and builder sources, real estate experts.

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