If you are considering purchasing a pre-construction condo in Toronto, then this guide is for you! We will review everything you need to know to buy pre-construction condos and houses from the down payment and cooling-off period to occupancy and closing costs. Buying a condo is a huge commitment, so you must be equipped with the right knowledge before you get started.
Down Payment Needed to Purchase a Pre-Construction Condo
Just like when you buy any other type of real estate, a down payment is needed to purchase a pre-construction condo. The primary difference between buying a condo that has not yet been built is that the down payment requirements are much higher.
When you buy a resale condo, you can move forward with closing with as little as 5% of the purchase price. In this case, however, you must have at least a 20% down payment to buy a pre-construction condo.
For example, if the sale price of the pre-construction condo is $600,000, you need a down payment of at least $120,000:
$600,000 x 20% = $120,000
The down payment will be broken up into smaller installments, and the schedule will be determined by the deposit structure. Typically, you will owe 5% of the balance at each major milestone. Here is an example of a deposit structure for pre-construction homes:
- $2,000 payment when you make the offer
- 5% after 30 days
- 5% after 90 days
- 5% after 180 days
- 5% when you occupy the condo
Using our example sale price of $600,000 above, you would owe $30,000 at each of these milestones. Note that there is usually a small payment required when you make the initial offer - this typically reserves your specific condo.
You'll notice that a larger portion of the down payment is due early on. As you get closer to completing the condo, you may be able to negotiate the fee structure and extend your payments.
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What is the Cooling Off Period for Pre-Construction Condos?
Purchasing a pre-construction condo is a big decision. It is a significant commitment, both in terms of financing and time invested.
As a result, there is what's called a cooling-off period. When you put the deposit down on your new condo, you have some time to think about your decision and get your finances in order. It gives you a chance to make sure that you are ready to move forward and allows your lawyer to review the Agreement of Purchase and Sale.
Not all provinces offer this, and the number of days you have will vary depending on where you live. In Ontario, the cooling-off period is 10 days, but in British Columbia it is only 7 days. Other provinces allow the builder to set the timeframe available.
What Are The Closing Costs for Pre-Construction Condos?
The purchase of a pre-construction condo also includes closing costs. Let's review how much you should budget for this and what additional fees are involved.
The expenses you must cover between the time you make the offer on the pre-construction condo and the day you close are called closing costs. These typically include legal fees, mortgage insurance, home inspections, and land transfer tax.
For any home purchase, you should budget between 2% and 4% of the purchase price to cover closing costs. When it comes to buying a pre-construction condo or townhome, however, the closing costs can be even higher.
You may be subject to higher fees because to cover the following:
- New home warranty plan enrollment: $900 to $1,200
- Development and educational levies: $200 to $4,000
- Utility setup: $50 to $500
- Assignment fees: $3,000
As you can see, some of the ranges for these additional fees vary significantly. Not every pre-construction condo or require all of those additional costs, and everything will be unique based on the builder and location.
Make sure that you review the closing costs during the cooling-off period and ensure that you budget to keep this extra cash on hand.
What Are Occupancy Fees?
This term is sometimes referred to as phantom rent, and it is exclusive to Ontario. It governs the rules for when you move into your condo before the rest of the building has been completed.
In other words, the buyer can move into the unit but does not yet fully own it. This is called interim occupancy. At this point, you receive your key and begin paying the builder for the time that you occupy the condo. However, no mortgage is issued, and the transfer of land has not yet occurred.
How Much Are Occupancy Fees?
The occupancy fees generally consist of the following: the interest portion of your purchase price plus estimated monthly taxes and maintenance fees. The total should be very similar to what you will be paying every month during the first few years of the mortgage.
Unfortunately, these monthly payments will not go towards your mortgage - they go to the builder. The goal is to allow them to break even during the occupancy.
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Resale v.s. Pre-Construction Homes
Now that we've reviewed the pros and cons of buying a pre-construction condo in Toronto, let's compare it to buying a resale unit. If you have decided that condo living is right for you, the first decision you have to make is whether you want to purchase a resale condo or build a new one.
Buying a resale condo is usually the most straightforward option. You can move in as soon as you close, and the financing is much easier to understand - all you need is a pre-approval, and you can calculate your monthly payments. It also allows you to see what you're buying since you don't have to guess based on a floor plan.
One downside to a resale condo is that you may need to put money aside for renovations if the unit has been lived in for some time. You could also find yourself in a bidding war with other buyers, and you may soon find yourself out of your initial price range.
The only way to guarantee that you are the first person to live in the unit is to buy a pre-construction condo. You get to customize things like the flooring, cabinets, and appliances, and since everything is new, you will not need to put money aside for renovations.
The cost for pre-constructions condos is fixed - so you do not have to worry about outbidding other buyers, and you also get to spread out your down payment over the construction timeline.
This option is not perfect either, though, and you will have to factor in additional costs like builder fees, occupancy fees, and more. You also face the risk that the project gets cancelled or experiences significant delays to completion, meaning you can't move into your condo!
A third option for buying a condo is called an assignment. This involves buying a pre-construction condo from an individual rather than directly from the builder. The assignment process can be very complex and you typically have to reimburse the original owner for any deposits they have made - plus a profit.
Things to Know Before you Buy
Before you buy pre-construction condos in Toronto, there are a few things you should know. This includes how much they cost, which neighborhoods have the most condos, and other basic statistics about the area.
If you plan on buying the condo as an investment property, look for an area with low vacancy rates. The lower the vacancy rate, the higher rent prices you will be able to charge - and you will have a better pool of tenants. Toronto's vacancy is very low at 1.8% compared to the national average of 3.3%. Think about it this way - you have close to a 99% chance of finding a renter for your condo!
Another thing to consider is that the cost of single-family homes continues to rise in the area. As those properties become more unaffordable, more people will consider living in a condo. This is part of the reason that Toronto and Vancouver make up a staggering 54% of all condo sales in Canada.
The price of the pre-construction townhome should also be a consideration. According to Urbanation, these condos or an average of 30% more expensive than comparable resale units.
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Pros and Cons of Pre-Construction Condos in Toronto
There are pros and cons to any investment, and pre-construction condos are no exception. Here are some of the most important factors you should weigh before making your decision:
Pros of buying pre-construction condos in Toronto
1. Spread Out Your Down Payment
When you buy a pre-construction condo, you can break up your down payment based on the deposit structure. This will allow you to improve your financial situation as the condo is built while still purchasing a home at today's prices.
2. Customize your Unit
One of the biggest benefits of buying a new condo is that you can build it with your exact preferences and style in mind. The customization you choose can not only improve the unit's resale value, but it can also allow you to find a home that includes everything you are looking for – without having to settle. You can choose everything from the color palette and cabinets to the appliances.
3. Everything is New
With a pre-construction condo or townhome, everything is brand new. You will have access to the latest technology, new appliances, and up-to-date plumbing, heating, and electrical systems. This will prevent the need for repairs immediately when you move in, which can be expected when you buy a resale.
4. Live in a Higher-End Neighborhood
As we mentioned previously, the cost of single-family homes in Toronto has only continued to rise. If you would like to live in a higher-end neighborhood without breaking the bank, a pre-construction condo is a great option.
Living close to downtown Toronto will give you easy access to public transportation, restaurants, supermarkets, and more. In other words, it may be more economical than purchasing a house in the area.
5. Reduced Cost of Living
When you live in a condo, the maintenance costs for the entire building are shared. This will save you money when it comes to things like shoveling snow, laying salt, or maintaining common areas. The best part is you will not have to take care of anything yourself!
Cons of buying pre-construction condos
1. It is Expensive
Buying a pre-construction condo is significantly more expensive than purchasing an existing one. You may end up paying over 20% more than you would on a comparable resale condo!
Likewise, the nicer the amenities, the higher the expenses will be. If you want to design a custom marble countertop in your kitchen or build your dream walk-in closet, the builder will charge a significant fee. These costs can add up rather quickly, and you may get some sticker shock when you see the final purchase price.
2. The Risk of Condo Fees and Assessments
When you live in a condo you are responsible for paying the building fees and assessments. This may be in the form of monthly or quarterly dues that cover maintenance for the common areas, insurance, and upkeep for everything outside of the building.
You are responsible for maintenance within your unit, however, and you must complete the repairs yourself or pay out of pocket. The important thing to note with condo association fees is that they never go away. Even when you finish paying off your mortgage – and you own your unit – you are still required to pay the condo fees and assessments.
Another big risk is the need for an assessment to cover a major repair or catastrophic damage. If something unexpected happens and there is not enough money in the association fund to pay for it, you and the other owners are responsible for covering the costs - whether or not you were involved with what happened.
3. You Have to Share the Space
An additional drawback to living in a condo is that you have to share the amenities and common areas with all of the other owners. You have no idea who your neighbors are going to be, or whether or not those tenants will be changing regularly.
You may be in control of what happens within your unit, but you have a limited choice when it comes to decisions that affect the entire building.
4. Restrictive Condo Association Rules
Since you are sharing the space with all of the other unit owners, condo associations will enact policies that can often be restrictive.
Their bylaws and association rules can limit things like whether or not you can own a pet - or the maximum size allowed. You may not be able to play music after a certain time or use the common areas outside of regular business hours.
Before you purchase a pre-construction condo, be sure that you are prepared to follow the condo association rules once you move in.
5. Your ROI Could Be Lower than Expected for Pre-Construction Condos
You always run the risk that your return on investment (ROI) is less than you expected if you purchased the condo as an investment. It is necessary to compare historical pricing for condos in the area to see if this might be the case - remember that there may be other buildings under construction nearby that could affect your situation.
The same goes for expensive upgrades and customization done at the time of construction. While you may view this as something that increases the value of the unit, it may not translate when it comes time to sell it.
Similarly, the condo fees may have increased significantly during your time as an owner. Higher costs may make it more difficult for you to find somebody that is willing to take on that additional expense. This could result in you having to reduce the asking price to find a buyer.
What if a Builder Cancels a Pre-Construction Project?
One of the most common questions surrounding the purchase of a pre-construction condo in Toronto is what happens if the builder cancels the project.
The answer to this question will depend on the specific agreement of purchase and sale that you signed. It is absolutely essential that you read the entire document because the builder will explain the legalities surrounding this in the contract.
The builder can include what's called an escape clause, which allows them to break the contract based on unforeseen circumstances. Usually, this will also involve returning any deposits you have made, but again the wording in the agreement will determine what will happen.
Almost no builder will issue a contract without an escape clause, so this is just part of buying a pre-construction condo. You can mitigate this risk by researching the builder's reputation and whether they have a history of canceling projects. It usually helps if they do not include assignment clauses in the purchase agreement. In other words, you want to buy in a condo where there is a higher percentage of owners compared to renters!