According to Altus Group, which collects data on the construction sector, builders sold 36,429 new condo units in 2017, smashing the prior sales record of 29,132 condo units set in 2016. Conversely, builders only sold 7,700 new single-family homes, the lowest number recorded since the firm began tracking construction trends over a decade ago. Fueling this growth are buyers who are priced out of the market for single-family homes and investors who are looking to cash in on rapid price increases in condominium units.
However, buying a pre-construction condominium is not without its risks. While you always need to review the specific terms of your agreement of purchase and sale, from my experience, these are the most common risks when buying a new condominium unit:
1. The size, dimensions, ceiling heights, layout, floor plans, views from the unit and other data shown on marketing materials are approximate only. There are no guarantees! You will not be entitled to an abatement or refund of the purchase price based on the precise area or final configuration of the unit.
2. The builder can substitute materials from those provided in the plans and specifications for those of equal or better quality. This will occur, for instance, if certain building materials are no longer available.
3. The builder can unilaterally decide not to complete any “upgrades” or “extras” that you purchased. If this happens, the builder’s only obligation is to refund the cost of such items.
4. The builder can cancel the development in a number of situations. For example, the deal may be conditional on the builder obtaining satisfactory financing, selling a specific percentage of units, obtaining zoning approval or being satisfied with the economic viability of the project. If any of these conditions are not met, the builder can cancel the deal and all you get back is your deposit plus interest at a prescribed (low) rate.
5. The builder can delay occupancy on one or more occasions, potentially adding up to several years before you have the right to terminate the deal or receive delayed occupancy compensation. In one agreement I reviewed recently, the “outside occupancy date,” being the latest date by which the builder must provide occupancy, was 5 years after the “first tentative occupancy date,” being the earliest date by which the builder expects to be able to provide occupancy. And that date was almost 5 years from the date the deal was signed. You could be looking at 10 years before you get possession of the unit!
6. New condo purchases are completed in two stages. The interim or occupancy closing takes place when the unit is ready for occupancy. At the interim closing, you receive possession of the property under an occupancy agreement which is similar to a residential lease. The agreement requires that you pay the builder a monthly fee (an “occupancy fee”) similar to rent which is the total of the estimated monthly common expenses (“maintenance fees”), plus 1/12th of the estimated annual property taxes for the unit, plus interest on the unpaid balance of the purchase price (at a rate prescribed by Ontario law). The second stage takes place when the entire building is certified for occupancy and the Land Titles office is ready to register ownership. At the final closing, you become the registered owner of the unit and the mortgage you have arranged is advanced. You may be required to take possession of your unit while a large portion of the building is still under construction, and many of the building amenities (common elements) are not be completed.
7. You cannot sell the unit before the final closing (often called an assignment sale) without the builder’s consent, which can be arbitrarily withheld. Likewise, you cannot lease the unit during the occupancy period. While the builder is often willing to relax these restrictions, there are usually a host of conditions. For example, you may only be able to sell your unit if the builder has sold all of the units of the same model and size, or sold a certain percentage of all the units in the project. You may have to use the builder’s real estate agent, you may be prohibited from advertising the unit on MLS, and you will definitely have to pay additional fees.
8. The purchase price is not the amount that’s payable on closing. There are numerous closing costs that you will be responsible for at the final closing, which can add up to tens of thousands of dollars. The builder is often willing to put a cap on some of these charges, but you can still expect to hand over a much larger sum than the amount set out in the purchase agreement.
9. HST is payable on all new home sales in Ontario. However, there are certain government rebates that you may be entitled to. The purchase price includes all applicable HST rebates on the assumption that you are eligible for them. However, if the unit is an investment property, meaning you do not intend to reside in the property as your principal residence, you will not be entitled to the rebates. On closing, you will be required to reimburse the builder for the rebates that were included in the purchase price.
The good news is that you have a 10-day “cooling off period” during which you can have the agreement
reviewed by your lawyer. Builders are often willing to make amendments to the agreement which may
minimize your exposure. If you decide not to proceed with the purchase, you can cancel the agreement.
There is generally no extension of the 10 days, so it is important that you act quickly if you’ve had a
change of heart.
Are you considering buying a pre-construction condo? If so, contact me to find out how I can help you through every stage of the process, from negotiating a fair agreement to closing the purchase and mortgage.