1. Invest in a Builder before you invest in a Building.
This is a universal truth that I tell all my clients. Investing in Pre-Construction becomes inherently less risky when you invest only into reputable builders who have a solid track record of executing on their development plans in a timely fashion and without too many delays. You also want to take a look at what happened post-closing with developments that the builder completed successfully in the past. Keep in mind, this isn’t exactly pre-construction specific, it’s important when investing in resale to consider the builder as well – as that can give you more insight into why the building may or may not be the best investment you can make. There’s a couple of important factors to take a look at when investing into a builder and their reputation:
Did they complete their buildings? How delayed were they?
Delays are inevitable with Pre-Construction, it’s just how it is. Me, personally, I like delays. First off, the more a project delays, the longer you have before you need to close on the condo, all the while you’re leveraging the appreciation of the property market 5 to 1 (assuming you have 20% down, as is the case with most pre-construction developments). Secondly, if delay notices are handled improperly, which they typically are, you’re likely eligible for up to $7500 as a delayed occupancy rebate, thanks to Tarion. 3 to 8 months of delays from the initially marketed occupancy date is typical, and in my opinion, acceptable – but if a developers past projects continually get delayed a year or more, that may potentially indicate poor financing or other issues.
Did their buildings stand the test of time? What about the maintenance fees?
Take a look at projects that the developer completed 5+ years ago – are the projects in good standing financially today. Look for red flags like special assessments or huge maintenance fee increases. While it may not be entirely the developers fault, and could be the result of poor management; you’re looking for trends here, not outliers. Consistently good quality buildings, with good resale, and stable maintenance fees are all green lights
2. The 10 Day “Cooling” Period
The 10 Day cooling period is mandated by Ontario law on all new condominium purchases in the province, and it gives you an advantage in the Pre-Construction market that you just don’t have in Resale. When you buy a new condo from a developer, you have 10 calendar days from the date of signing to decide if you want the unit or not. The 10 day grace period has no obligations, no penalties, no “gotcha’s”.
I recommend using the 10 Day cooling period to your advantage. In Toronto’s rapidly growing market, buildings sell out on average within 3-6 months from the date of sales. Typically, builders increase their prices regularly and change incentives as they open up sales to the public. The 10 day cooling period allows you to reserve the price, the incentives, and ensures the builder cannot sell the suite to anyone else or change the price on you.
There’s two things I recommend doing during your ten day cooling. First, have a lawyer review your Agreement of Purchase and Sale with the builder to give you the scoop on closing costs & what the fine-print legal-jargon says. Secondly, take a look at other options. Go look at another comparable pre-construction project, and compare the prices and incentives to be sure you’re getting a good deal.
3. Interim Occupancy vs. Closing: what’s the difference?
Interim Occupancy is when you get the keys and can move into your unit – but technically, you don’t own it just yet. With new condos, you have two ‘closing’ dates:
What is Interim Occupancy for Condos in Toronto?
The first is Interim Occupancy, when you get the keys to your unit. Occupancy for owners is staggered, usually a couple of floors per week, that way everyone isn’t moving in on the same day. At this point – the condo building isn’t registered yet. If you bought with a good builder, typically registration and final closing will happen within 6 months after interim occupancy. Some builders, like Tridel, are notorious for moving extremely quickly and efficiently to get their building registered quickly.
What are Interim Occupancy Fees?
You don’t have the title to your unit until registration, so your mortgage doesn’t start just yet. During interim occupancy, you have to pay the builder to occupy the unit. Some people call this “rent to the builder” or “phantom rent” – but simply put, it’s just:
Your monthly condo maintenance fees
The interest payment on the 80% borrowed for the purchase (assuming 20% down). The builder uses the Bank of Canada key rate to determine your interest payment, and the payment is made to the builder directly.
During the time of interim occupancy, your monthly carry costs will actually be lower than after registration because you haven’t started the principal payment on your mortgage yet.
What is Final Closing?
Final closing is when the Builder registers the Condo Corporation with the City. This is when your bank pays the builder the 80% balance, when your mortgage starts, and when you receive the title for your unit. This is also when final adjustments and closing costs will be calculated and paid, such as legal fees, land transfer tax, and any other closing costs as outlined by your Agreement of Purchase and Sale.
4. Closing Costs: Development Fees & Levies on Your Investment
If you’ve ever heard “Pre-Construction Horror Stories”, they were likely referencing some outrageously inflated closing costs that were levied against the buyer on final closing. These are rare, but they do happen – however, they only happen to people who didn’t do their due diligence, bought with an untrustworthy builder, or worked with Realtors or Lawyers who don’t specialize in Pre-Construction condos.
Here’s the reality: You need to work with specialists who know what they are doing. In this specific case – you need to ensure that you have someone making sure your developmental and municipal fees and levies are capped.
What are Development Fees & Municipal Levies for New Condos?
When a new building goes up, the population density for the neighborhood increases. The city is going to determine the impact on the neighborhood, and charge the builder a per-unit price in order to fund the local infrastructure needed to support the new residents that the condo building is bringing in. This might mean new streets, new parks, new schools, future transit solutions, etc.
If your Agreement with the builder wasn’t reviewed by a good lawyer in the ten days, and you had an uneducated Realtor guiding you, it’s very possible that your closing costs aren’t capped. In that case, if the City charges the builder $25,000-50,000 per unit (which is not uncommon for most areas in Toronto), the builder will pass that cost along to you on final closing.
However, if your Agreement of Purchase and sale has Pre-Capped closing costs, or if your lawyer amends the contract and has them capped for you, the builder can only charge you that capped cost. For many developments in Toronto, you can expect to get your closing costs capped at $7,500-10,000 for one bedroom units, and $10,000-15,000 for two bedrooms or larger.
The takeaway here? It’s critical to have a pre-construction Realtor and Lawyer on your side when you walk into the sales center. The sales reps that work for the builder represent the builder, you need to have representation on your side. It doesn’t cost you a penny (and no, you won’t get a discount for not using a Realtor).
5. HST Rebates for Investors on New Condos
HST is included in the price when you purchase a new condo in Toronto. If you’re moving into the unit yourself, or one of your family members is, that’s all you need to know.
However, as an Investor, you need to be aware that on final closing, you’ll be charged HST again. Without going into too much detail here, you can get 100% of your HST rebated if you file for it within 1 year and provide the government with a one-year rental lease agreement proving that you rented the unit out. More on that in this video:
6. Assignments: How to sell Pre-Construction Condos before closing.
Assignments are your way out, or your way to cash out, of Pre-Construction units before the unit or building is actually complete. They’re called assignments because you’re simply assigning the Contract between you and the builder to a new buyer – since no real property exists yet.
Assignment flipping is somewhat prominent, but has slowed since the CRA decided that it may start applying income tax to the capital gains on an assignment sale if they determine that your intention was to flip the unit before closing. Regardless, your right to Assign is your way out of a Pre-Construction contract should life change or if you simply want to pull your profits and not close on the unit.
Generally speaking, most builders prohibit the listing of assignments on MLS. For that reason Assignment sales can typically be more difficult than resale condo listings. Many people try to assign their unit themselves through Kijiji or word of mouth, but I highly recommend avoiding this route for a couple of reasons. 1. You’re unlikely to get Fair Market Value and may have to sell well below it to get any interest from low-traffic media like Kijiji and Facebook, and 2. Assignment sales involve a lot more paperwork and legal headache than regular condo sales.
You’re better off having a Pre-Construction Realtor or Team who specializes in assignment sales sell your unit for you (hint: we’re one of them). You have a far better chance getting fair market value for your unit, and the commission paid will generally be minimal compared to the price difference you’ll get versus selling it yourself. Profit aside, assignments can be a bit messy contractually. If you wouldn’t want to risk selling your home or condo yourself, you definitely don’t want anything to do with an assignment sale – many Realtors won’t even take them on for that reason.
7. Fair Market Value
“Pre-Construction Condos are sold at a discount” False. This is one of those assumptions that gets tossed around about as much as, “if I don’t use a Realtor, the builder will give me a discount”.
The truth is – it depends on the unit, and it depends on the development. Some projects are priced at 5% under market value, some are priced at 10% above market value. Sometimes, a project priced 10% under market value has a specific unit or two that’s priced 10% over resale market value.
What I’m getting at here is – you’ll only know if you’re getting a good deal if you look around, keep updated on the market, and work with a Realtor who knows the market.
Buying a Pre-Construction condo with 20% down, or less, allows you to leverage 100% of the asset’s appreciation at a five-to-one ratio. Keep in mind, your downside is leveraged at the same rate – but if you’re not over-leveraged with bad debt, and if you buy at fair-market value or below – you’re going to realize capital gains at a rate that no stock or asset will match provided our market keeps heading in the direction that it has for the past years.
The 1997-2017 20-year year-over-year average for properties in C01 (downtown Toronto) shows near 11.56% appreciation before adjusting for inflation.
Time In The Market > Timing The Market.