People always have questions about buying a pre-sale condo, and for good reason, it’s a different process than buying a typical (re-sale) condo.
When you purchase a pre-sale condo, you’re buying the unit directly from the Developer and often before construction has even started, if not, it’s typically before construction has finished. You and the Developer are making a contractual obligation with regards to a specific unit: they promise to build it, and you promise to buy it, with a big caveat: You don’t get to see the unit until it’s in your possession. Here’s what you need to know about buying a pre-sale condo.
What to Know about Buying a Pre-Sale Condo
Financing on Pre-Sale Condos
Add a 5% GST to the final sale price. The price you see online, or the price given to you at the Sales Centre, will require an additional 5% GST tax.
Developers Might Negotiate. It’ always worth trying! If the development is in high demand and it was recently released for sale, they may not negotiate, but if they have already started construction or are almost done, they may be more willing to negotiate. Sometimes Developers offer “decorating allowances” rather than price drops. For example, this means that instead of lowering the price by $10k, they’ll offer you a “decorating allowance” of $10k which is a credit you receive upon completion. This allows the Developer to advertise the sale as full price without having to disclose to other Buyers that the final price was actually $10k less. Sketchy, but it happens. If they don’t negotiate the price, they might be willing to negotiate certain upgrades.
Developers Increase their Prices as the Construction Continues. At least, this has been the case for the last few years as the Real Estate Market has been increasing. The least expensive time to buy a unit is before the Developer starts constructions, as the prices typically increase as more units that are sold and as construction progresses. I’ve had some luck with Buyers purchasing the last unit for sale in a building once the building because at that point the Developer is eager to close the file on the development.
Financing will only be a pre-approval. With regards to mortgages, Buyers can receive a pre-approval that they qualify for a mortgage on the property, however, the mortgage doesn’t kick in until the unit is finished years later. This means that if your financial situation changes (i.e. lose your job or lose your down payment, or buy a second property in the meantime) you may no longer qualify for the mortgage – however – you’ll still have to complete the purchase of the property. Keep in mind that new Government Policies or Mortgage Rules can seriously affect your affordability, and what rules might be different at the time of Completion can be hard to predict if it’s still years away. A few months before the completion of construction, you can lock in a pre-approval.
Learn the Deposit Structure. New Developments have a different deposit structure than a typical purchase, which is outlaid in the Disclosure Statement. Typically, the Developer will ask for 1% of the purchase price upon signing the contract (you’ll get this back if you don’t go through with it), another 9% of the purchase price after the 7 day due diligence period, and then a further 5 or 10% a few months later. Buyers should make sure that they will have these funds when needed.
Due Diligence on Pre-Sale Condos
Presentation Centres will have visuals of what the building will look like, floor plans, examples of the materials and colour schemes to be used and potentially an example suite and 3D model of the building. Use these tools to get a sense of where your unit is in the building, what your outlook will be, how the unit will be laid out and where everything else is in the building (parking, storage, garbage, amenities, elevator, front door, etc). When you’re there, you always want to ask a Developer’s representative what you can expect for the unit you’re buying – sometimes presentation centres show you what a unit looks like with all the upgrades to finishings or with higher ceilings than you can expect.
Buyers automatically* get 7 days for due diligence. What this means is once you are in agreement with the Developer to purchase the unit, and have signed the contracts, the Buyer gets an automatic 7 days to decide if they will be going through with the purchase. This gives the Buyer time to review their financing, go through the Disclosure Statement and do any further research on the building and neighbourhood. (*This is the case at the time of writing this blog – this policy may change so ensure a “recession period” is built into the contract prior to signing).
Important Information for Pre-Sale Condos
Developer’s cannot start selling units or advertising prices until the “Developer’s Disclosure Statement” is filed in the Land Title Office. This document details everything about the project – from the people involved, to the components of the building, to the deposit structure, to preliminary strata details, to the legalities of the situation. This document is long, and Buyers should go through it with a fine tooth comb, inquiring with their Realtor and a Lawyer about any questionable details.
The Completion Date can be delayed by the Developer. The Developer can delay the completion date of the project (due to construction delays, weather delays, etc) for as long as necessary, and you have no recourse.
The Size of the Unit can change. The finished unit can be a different size than indicated to Buyers during the sale. Developer’s have an obligation to deliver the unit to the best of their ability, but certain building and design details may change during construction and the Buyer will have no recourse, unless the unit is materially different (i.e. you buy a two bedroom unit and end up with a one bedroom unit). A change in sqft (or an extra post or lost window) does not always constitute something that is materially different. *** A new clause I’ve seen in pre-sale condo contract is one that allows the Developer to increase (or decrease) the final price of the unit if the habitable square footage is more than 3% bigger (or smaller) than promised. If this clause is in the contract, the Buyer would be obligated to purchase the condo at a potentially higher price if the unit is, say, 675sqft instead of 650sqft. Look for this clause in the contract.
Look out for a Price Adjustment Clause. Some pre-sale contracts have a clause that allows the Developer to increase the contract price of the unit you have agreed to purchase if the cost of construction has increased since you signed the purchase contract. The clause would indicate that if the Building Construction Pricing Index rises by more than 4%, the Developer has the right to raise your price by the amount over 4% (and you can’t cancel the contract because of this increase).
The Project can be cancelled. Developer’s can cancel the project if they don’t receive their Development permit, if they don’t receive financing (which typically happens if they don’t sell enough units during pre-sale) or if they decide to change the project significantly. Buyers will get their deposit back in this situation, though the details of this situation will be stated in the Developer’s Disclosure Statement.
Benefits for Buyers of Pre-Sale Condos
Buyers are always* allowed to rent units purchased from Developer’s. One of the biggest benefits of buying a unit directly from the Developer is that Buyers will always be exempt from any rental restrictions in the building (a big reason why investors like pre-sale condos). The Developer files a “Rental Disclosure Statement” for the building which allows the developer to rent out the units if needed, and this right is passed on to Buyers. Rules have changed recently, where this right is now passed on to all future Buyers of the unit until the expiry date noted on the Rental Disclosure Statement. Rental Disclosure Statements typically have a timeline of a 100 years. (*Assuming these rules haven’t changed since I wrote this blog and assuming the Developer’s did in fact submit a Rental Disclosure Statement with a long expiry date).
Buyers may be able to secure extra parking or storage during pre-sale. Developer’s often sell parking and storage spaces as separate entities to the unit. From a value perspective, it is always useful to buy parking and storage, if not more than one, during the pre-sale. You may also be able to specify that the parking spot is a “large spot” or close to the elevator.
Units come with a Warranty. Not only does the building have a 2 year warranty on finishings, 5 year warranty on the exterior and a 10 year warranty on the structure, but Buyers get a 1 year warranty on the interior finishings and fixtures, and can ensure the Developer fixes all deficiencies in the unit (i.e. is there paint on the floor? does the bathroom need more caulking? does the window not latch property? etc). You want to make sure that you have a thorough inspection done of the unit BEFORE you move in, as it’s easier to claim that something as a Developer Deficiency before they can blame the deficiencies on you living in the unit. Also, the new Strata should work together to ensure deficiencies are fixed since one big group asking for changes is stronger than owners asking for it individually.
Buyers have the opportunity to dictate the management style of the Strata. The initial Strata is formed in the first month or two after Buyers tarting moving into their pre-sale condo. I always suggest Buyers join the Strata in their new building since it gives Owners a stronger voice to affect the future of the building. The first Strata Council will create the overall budget which dictates the amount of maintenance and amount of your strata fees. The first Strata Council will also suggest any new bylaws to be added immediately since the standard Strata Property Act Bylaws any new condo begins with aren’t very detailed. A caveat to this benefit is that it can be a lot of work! You need to be diligent about warranty issues, there are typically a lot of Bylaw infractions as owners and tenants learn the rules of the building and lots of decisions need to be made.
Buying a unit pre-sale entails some risk, and given this risk, the units are often cheaper if it’s purchased as a pre-sale. The hope is that the market also increases while you wait for construction to finish, but there are never guarantees!
If you have any questions, don’t hesitate to ask: kristi@realestatevancity.ca.
Kristi Holz
778-387-7371
kristi@realestatevancity.ca