Tips for buying pre-construction in Greater Toronto
A. What are Pre-Constructions?
Pre-construction is also known as "off-plan", which refers to a real estate development project that is being pre-sold before it is completed.
B. Pros and Cons of Pre-Constructions
The question of choosing between buying a pre-construction or resale property is one that many buyers think about. Resale property, also known as a second home, is a real estate property that has been built and has at least the first owner. Even though you get firsthand houses when you buy a pre-construct, there is some uncertainty and risk involved. In addition to this, there are many factors that affect the buyer's interest between buying a pre-construction and buying a resale property. Buyers need to analyze which benefits outweigh the disadvantages according to their actual situation.
Pro #1:
No loan required at signing
In Canada, buyers do not need to apply for a loan when signing a purchase agreement for a pre-construction, they only need to consider a loan when construction is almost complete and they are close to moving in. It usually takes 3-5 years for a high-rise condominium to be occupied from the time the purchase agreement is signed. During this time, buyers do not need to worry about getting a loan. This allows for a delayed delivery of the property to improve future loan affordability for buyers who currently have low incomes and limited ability to borrow, but can foresee significant improvements in the future. Many first-time newcomers fall into this category.
At the same time, pre-constructions are more flexible than resale property when it comes to paying deposits, with most developers allowing buyers to take several months or even one or two years to pay deposits in installments. Deposits for local buyers are usually in the 15 to 20 percent range, while overseas buyers often require a 35 percent deposit.
In contrast, buyers of resale property must be financially prepared prior to the purchase, for example, by having cash available for a down payment. If you are not buying a home with full cash, you must take out a loan before closing in order to properly deliver the home, and many banks need to see a down payment is in place to finance the loan. For down payments, local buyers need to have 20% down and overseas buyers need to have 35%-40% down if their income is high enough.
Pro #2:
For new immigrants, it is possible to avoid NRST
NRST, short for Non-Resident Speculation Tax, is paid on the closing day, depending on the status of the buyer. Non-resident buyers of pre-construction with purchase contracts signed after March 30, 2022 who do not meet the exemption conditions will be required to pay 20% non-resident speculation tax by the closing date. (Note: Non-resident buyers who signed a purchase contract prior to this date and do not meet the exemption conditions will be subject to an non-resident speculation tax of 15% at the time of closing of the property.)
Since the closing time for high-rise properties is usually three to five years, some buyers with overseas status, such as work or school visa holders, but are applying for permanent residency in Canada, can sign a contract for the purchase of a pre-sale property first. Then, as long as they obtain permanent resident status when the property is delivered, they will not be required to pay the non-resident speculation tax.
So if you are an overseas buyer and don't think prices will rise by more than 20% while you wait for permanent residency, then consider buying a pre-construction. If not, it may be more cost effective to purchase resale property immediately and pay the 20% non-resident speculation tax. In addition, if you obtain permanent resident status in Canada within 4 years of delivery, you can apply for a refund of the non-resident speculation tax.
For more information about non-resident speculation tax, please read XXX Link URL
Please note: Overseas buyers can apply for a full refund of the non-resident speculation tax if they obtain permanent resident status in Canada within 4 years of delivery of their home, regardless of whether they are purchasing a resale property or a pre-construction.
Pro #3:
Provides financial flexibility
If the buyer of the pre-construction can no longer apply for a full loan, or there are other changes in the family's plans, then the buyer may choose to assign before the closing of the property. An assignment is the process of finding another buyer to replace the original buyer, the assignor, to fulfill the purchase contract with the developer, and the developer of the assignment will deliver the property to the Assignee. This way the initial buyer, the Assignor, is no longer required to fulfill the responsibilities in the purchase contract of the property. For pre-construction buyers who are looking for short-term investment, the assignment of pre-construction prior to delivery can also be leveraged to magnify their returns during periods of rising property prices.
About the transfer of properties, read more URL
Pro #4:
Buying Pre-Constructions can lock in future prices
Parents of minor children who want to prepare their children in advance for their entry into society can buy pre-construction early to lock in future prices. When the children become adults, ask the developer to add the children's names before handing over the property to help them start their lives.
Con #1:
Various uncertainties of Pre-Constructions
There is usually uncertainty with pre-constructions. For example, developers can delay occupancy or, in rare cases, the project can even be cancelled. This is not as good as resale property, what you see is what you get, you can have a controlled occupancy time. Especially for an owner-occupant buyer, buying an pre-construction may disrupt his original living plan.
Thus, the floor plan might be slightly different from the house plan when it is completed (2% error is allowed by law), amenities around the community could also not be perfect. On the contrary, if you pick a resale property, you can carefully examine the quality of the construction of the property, the amenities, and also drive around the neighborhood to see the living environment and make sure you are satisfied before you buy and move in.
Finally, although rare, there have been instances where developers have pre-construction projects or the companies have gone out of business and could no longer build. At that point, although buyers often get back the deposit they originally paid from the developer, the appreciation of the property market during the waiting period is all missed for nothing.
So, if you are a new immigrant coming to Toronto and settling in, it is advisable to buy a resale property so that what you see is what you get and you can pick the neighbourhood you like and move in immediately without the uncertainty of the floor plan affecting your actual living plans.
Note: There are cases in China where pre-constructions are finished roughly, or where the developer takes the deposit and then runs away with the money. In Canada, this can hardly happen in principle. Because the deposit received by the developer is held in a trust account with a law firm, the developer has no access to the funds, let alone misappropriating them. In addition, there is a non-profit consumer protection agency in Ontario, Tarion, which was created by the province to protect new home buyers from deposits. https://www.tarion.com/about
For example, for freehold properties contracted after January 1, 2018, Tarion pays out up to $60,000 in pre-construction deposits for prices under $600,000, while Tarion pays out 10% in deposits up to $100,000 for prices over $600,000.
https://www.tarion.com/homeowners/making-purchase/deposit-protection
Con #2:
Significant premium for Pre-Constructions
In the Greater Toronto Area, particularly in downtown Toronto, nearly into 2022, the prices of pre-constructions, especially high-rise pre-construction projects, are far higher than the prices of off-plans since March when the Bank of Canada began raising interest rates and off-plan prices began to fall. This is partly due to the significant increase in the price of construction materials, while the current interest rate increase does not affect the interest rate on the loan when the pre-constructions are delivered in a few years. This makes it hardly profitable to "lock in future appreciation at today's prices" by purchasing pre-constructions.
If you are ready for a down payment, are in a good financial position, and have good financing capacity now, you can get a better price on your current home.
C. Process and Precautions for Purchasing Pre-Constructions
In cities such as Toronto, Vancouver and Montreal, high-rise condominiums are popular downtown or around rail hubs. When pre-construction condominiums in these locations are put up for sale, they are often more sought-after. The number of applicants may far exceed the number of condominium units available. In such cases, the process used by the developer to sell the pre-constructions is to accept applications first and then allocate the units. The details are as follows:
01.
The developer publishes information about new pre-constructions
Developers usually do not sell their projects directly to the public, instead they do so through the brokers of individual real estate brokerage houses. Before they are ready to send out new pre-constructions for sale, developers usually create various electronic catalogs, short films, and pictures to introduce basic information about the pre-constructions projects, which are sent to target customers through real estate agents.
02.
Submit application form
After recommendations from brokers, interested buyers will submit an application form through their brokers indicating which units or room types they are willing to accept. The applicant then begins to wait for the developer to allocate the units based on their application. If buyers want to maximize their chances of getting their desired unit and be considered first when the project opens, they can do the following three things when submitting their application form to the developer:
1. Submit the application form as early as possible
2. At the developer's request, a "earnest money" cheque for $5,000 or $10,000 can be sent directly to the developer so that the developer can feel the sincerity of the buyer. If you do not get the unit you want, or if you do not want to make a purchase any more, you can get the cheque back.
3. Submit as many units you are interested in buying as possible, as developers will give priority to customers who accept more units, and often such buyers have a higher chance of reaching a deal. It is especially important to note that Canadian pre-sale properties are sold by suites, not by the area after the unit price is fixed to calculate the total price. Therefore, shrewd developers have adjusted the unit price according to the "quality" of housing type, so that the cost performance and future value-added potential of units in the same project are similar. So for investment buyers, once you think a new development has good value-added potential, you may want to choose a few different unit types instead of sticking to a specific "good type" to increase your chances of being selected.
03.
Selection of buyers by lottery
Once all applications are received, the developer will allocate the units based on the preference choices expressed in the application form. If the number of applicants exceeds the number of units, the developer will organize a lottery to determine buyers who can purchase from among all applicants. The selected buyer will then be notified through his broker of the invitation to sign. However, prior to the lottery, it is often the case that the developer takes care of the "high-end brokers" who have more cooperation and are more effective in selling the properties, and gives priority to their clients' needs.
Another case is that some VIP brokers who have special advantages in taking up properties can agree with the developer to split the property in advance. Buyers can directly see the new units that the brokerage firm has already got in hand through the brokerage firm, and can sign the purchase agreement as soon as they like a particular floor and unit type, instead of passively waiting for the lottery.
04.
Sign the purchase agreement and pay the deposit
Once the buyer receives the invitation to sign the contract, the buyer has to bring the deposit cheque (if not attached when handing in the application form) to the site to sign the purchase agreement at the agreed time. The deposit is usually paid in installments over the next few months to a year or two, so the buyer should write the deposit check for each future installment and give it to the developer at the time of signing. Many buyers do not use checks often in their daily lives, so be sure to have a personal check ready before purchasing a property.
Some developers are accepting electronic signings for buyers who are not in the area and cannot make it to the site to sign. This was very common during the epidemic. Buyers of pre-constructions are required to arrange deposit transfers to the developer's trust account immediately after signing the contract. Some developers also accept deposit payments from overseas buyers via wire transfer.
Once the purchase contract for a property is signed, the developer will often require proof of funds or a letter of pre-approval for a loan to show that the buyer has the financial strength to make the final payment in the future when the property is delivered, whether by paying cash or successfully obtaining a loan from a bank. Buyers can consult a real estate agent who will assist them in the purchase of the property to obtain these certificates.
05.
10-day cooling period for lawyers to review the purchase contract of the property
For Condominium properties, such as high rise condominiums and condominium townhomes, there is a cooling period of 10 days from the date the buyer receives a completed contract signed by both parties. During the cooling period, the buyer can have the contract reviewed by an attorney representing his or her interests to see if it is fair to the buyer. During the review, the attorney will point out all the points that the buyer should understand or be aware of and explain them accordingly.
If certain terms are considered unfair by the buyer, the buyer can write to the developer's attorney through his or her own attorney and ask the developer to make changes to those terms.
If the developer agrees to the modification, they will amend the agreement and both parties will continue to sign. If the modification is not accepted, the buyer still has the option to proceed with the purchase, or if it is deemed unacceptable, the buyer can indicate that they are giving up the purchase of this uncompleted unit without penalty during a 10-day cooling period.
Special Note: For the sale of freehold properties, such as detached house and owner-occupied townhome pre-constructions, there is no legal requirement for the seller to give a cooling period. Therefore, buyers need to be extra cautious when signing purchase contracts for low-rise properties!
06.
The contract becomes official
If the buyer has no objection to the original contract, or is satisfied with the contract after signing the additional terms and conditions the purchase contract of the uncompleted property will become official and legally binding after the 10-day natural day cooling-off period.
07.
Timetable for the closing of the property
For high-rise pre-constructions, buyers often have to wait up to three, four or more years before the purchase contract for the property becomes effective to the official closing of the property. There are some important dates or milestones during this period that buyers need to be aware of to receive registered mail and emails.
Pre-construction deposit payment schedule
Each developer, or even different projects of the same developer, may use different deposit amounts, and installment schedules for paying the deposit. Typically, the lower the deposit amount, the easier it is for homebuyers to raise capital. For investors, lower deposits also allow for greater capital gains leverage.
For example, the developer of a new development requires a total deposit of 25% from the local buyer. The payments are 5% at signing, 5% at 120 days, 5% at 210 days, 5% at 400 days, and the final 5% at the Interim Occupancy date. Therefore, for the first 400 days, the buyer can expect to spend 20% of the total deposit. The final 5% is only due a few months before the completion of the home, which may be 3-4 years later.
For overseas buyers, most developers require a 35% deposit. For example, 10% at signing, 10% at 120 days, and 15% at 400 days. Usually the less this deposit percentage is required and the longer the payment time span, the more buyer friendly it is.
(Note: During this period, when the building construction moves into interior decoration, the developer will contact the buyer and allow the buyer to choose the color and materials for the interior. Developers often have several packaged color-matching ingredient packages for buyers to choose from. Also, some developers offer fee-based options for certain finishes and trim upgrades for buyers to choose from. (Communication received from developers of this type is often in the form of emails, and buyers are reminded to respond in a timely manner)
Procedures for the closing phase of pre-constructions
There are two important dates for the transition of a property: the occupancy date and the closing date.
Temporary occupancy date: The building of the pre-construction project has been built and renovated and the buyer may collect the keys from the developer. From the occupancy date, owner-occupied buyers can move in. Investment buyers can then start looking for tenants and renting (note: some projects require an application to the developer to rent out before the closing date) however, at this point the title of the uncompleted unit still belongs to the developer, not the buyer.
Closing day: On this day, through the lawyer, the buyer pays the balance to the developer with cash or mortgage before the title of the uncompleted flat is transferred from the developer to the buyer's name. After the closing date, the pre-construction becomes off-plan.
a) Occupancy Notification
Before the property is ready for occupancy, the developer will start sending out emails or registered letters to notify buyers that the temporary occupancy date is approaching and they can start looking for a suitable lender.
b) Interim Occupancy Day
The buyer can begin applying for a home loan when they get the temporary occupancy date notice.
The developer will have two opportunities to postpone notification of the Interim Occupancy Day. The last date of notification is called Final Interim Occupancy Day.
It is important to note that between the Interim Occupancy Date and the Closing Date, the ownership of the property still belongs to the developer and the developer is only giving the buyer an opportunity to move in early until the final closing. Therefore, the buyer will pay a monthly Occupancy Fee to the developer during this period, which is similar to a rental fee, until the final delivery of the property and the transfer of ownership. The buyer cannot refuse to pay the Occupancy Fee regardless of whether they move in or rent out the property.
c) Final Closing Day
On the closing day, the buyer's lender will release the money to the developer. At the same time, the attorneys of both parties will complete the registration of the title transfer of the house.
Usually, the Occupancy date and the Final Closing date will be a few months apart. If the buyer is purchasing a pre-construction on a lower floor of a high-rise, the buyer will have a longer time span between the Occupancy Date and the Final Closing Date. Conversely, the closer the unit is to the top floor, the closer the occupancy date will be to the closing date.
08.
Fees during the delivery and holding period other than the price of the property
In addition to the price of the property, there are other costs that will be incurred when the property is handed over, such as Development Levy, land transfer tax and legal fees. There will be a property management fee if the property is a condominium property after delivery. Property Tax will be levied annually on any property regardless of ownership. For more details on these fees, please read xxx (link)
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