How Does Pre Construction Work
Unless you have purchased a pre construction unit, you probably don’t understand the ins and outs of this unique real estate opportunity.
Compared to a typical home purchase, there are a few more things to take into account. And there are also some things that offer a unique opportunity compared to resale.
On our blog, we cover everything pre construction in a lot of detail. So you can be a lot more informed before, during, and even after your purchase. In this article, we’re going to provide a bit more of a high level on how pre construction works.
By the end of it, you should have a really solid understanding – probably even more so than most real estate agents!
The pre construction process in a nutshell is:
Your Buying Decision Factors
Every real estate purchase – pre construction or not – requires you to have a number of choices figured out. Pre construction just adds a few more in there.
Some key decisions you will want to have made before you start your search:
- Budget (we recommend getting a pre-approval beforehand to have an exact idea of your budget)
- Home type (condo tower, townhome, detached, loft, etc.)
- Number of bedrooms
- Are you planning to live in the unit, or is it purely an investment?
- Do you want parking and/or a storage locker
- Are there amenities you must have versus want to have
- Downpayment total
- When do you want to take possession?
Similar to how we approach resale clients, we always advise clients to split things into a must-have versus a nice-to-have feature.
Things like budget are typically less flexible than exact location or occupancy date.
And without a doubt, many of these decisions play into each other and are market dependent. So, your budget will have a huge impact as to the number of bedrooms you can afford, as well as the exact location.
An understanding of the market prices is important to knowing what you can afford and what to expect from a unit.
While you can find great investment opportunities in pre construction – and typical incentives through a pre construction real estate agent will save you anywhere from $20,000 – $80,000 or more – you aren’t saving a ridiculous amount on the purchase price.
Developers know how to price units, and they are typically around market price, if not a little under.
Where you save money – and where investors make a lot of money – is in the low carrying cost to purchase a very valuable asset. For 20% or less, spread out over 2 – 4 years of construction, you own 100% of an asset (your brand new condo).
Finding The Right Project
Now that you have your decision making factors in place, you should have a much easier time finding the project that checks those boxes.
Of course, your particulars are going to impact how you go about starting your search. If budget is your main concern, you’re going to have to narrow down some areas that fit within that price range. If location is your main concern, then you will have a clearer starting point.
And of course, then you’re going to want to search through pre construction projects that hit your other must-haves and some of your nice-to-haves.
We’ve compiled a list of all of our active projects – ones that we vet based on developer reputation, incentives for our clients like yourself, location, price, and other important factors our clients are looking for.
To make it easier to find what you’re looking for, we’ve broken it down by area and given you clear information about each project so you can quickly decide which ones are the right fit for you and work your way from there.
As we always point out, time is a factor in pre construction, and things are moving very quickly right now. It’s important to be able to find the right project – and the right unit – quickly so you can put in a purchase request and not miss out!
Reserve A Unit
Once you’ve found the best pre construction project for you – and asked us any and every question you need to ask to make sure it’s the right fit for you – time is a factor: the sooner you put in a reservation request, the higher your chances are of getting the unit you want.
There are two kinds of pre construction projects:
- Standing inventory
With pre-sale, the developers have a day where they release a certain number of units. Leading up to that day, they take in what are called worksheets – they’re essentially a request to reserve a unit, submitted on your behalf by a real estate agent.
Pre-sale condo sales are accessible only through real estate agents.
For any typical project, there will be far more worksheets submitted than units available. So, your chances of getting a unit is never a guarantee.
Standing inventory are just units that either didn’t go through a pre-sale process (either were held back by the developer, or the developer never did a specific launch date), and/or they are units that for whatever reason haven’t sold yet.
Standing inventory units offer all of the benefits of a pre-sale unit, with far, far less stress and chance of disappointment. We recommend standing inventory 9 times out of 10 to our clients – your chance of getting the unit you want are just so much higher.
Signing The Agreement Of Purchase And Sale
If the unit you want (and we always recommend having backup choices in case your first choice is sold out) is available, the developer will come back with an Agreement of Purchase and Sale (APS).
As mandated by law, you have a 10 day cooling off period where you can walk away from a purchase after signing the APS – so even if you’re still thinking things through, we recommend signing right away. You still have that 10 days of breathing room and can walk away for any reason and reclaim your initial deposit.
The Agreement will outline everything you need to understand in so far as the relationship between you and the developer, what to expect from the project, key dates, and so on.
Prior to signing the Agreement, you should have your initial deposit ready to go. But, just to reiterate, this deposit completely recoverable if you decide not to go forward with the purchase.
After signing, there are a number of things to cover during your 10 day cooling off period.
The 10 Day Cooling Off
This is an important time to make sure everything is in order in your Agreement.
And yes, weekends and holidays count towards the 10 days.
During this period, you’re going to want to make sure you have a full legal review of your Agreement. A pre construction lawyer will be able to go into detail about the contract so you can have a solid idea of what you can expect. They will also break out the closing costs and fees.
This is the time to push back and negotiate on the fees and closing costs in your Agreement. Your lawyer will do this on your behalf and will work with the developer’s lawyers to arrive at a decision that everyone can agree on.
Other things to pay attention to in your Agreement:
- Is your purchase assignable – meaning it can be sold prior to being finished
- Can you rent your unit during the occupancy period – prior to final closing, but after you first take occupancy (these two dates typically don’t line up)
- Is there a cap on any charges – things like development charges or other levies that the municipality places on the project at the completion – having a cap makes sure that you pay no more than that amount no matter what
Your signing date sets the start of your deposit structure, which makes up your downpayment.
Your downpayment is made up of multiple deposits.
A typical downpayment in pre construction is 20%, but you can find projects as low as 5%. The total required at any given time is typically a reflection of how far along in the construction period the project is. Projects that are closer to completion will typically have lower downpayments.
A typical deposit structure looks something like this:
- $5,000 on signing
- Balance to 5% in 30 days
- 2.5% in 90 days
- 2.5% in 180 days
- 5% in 370 days
- 5% on Occupancy
The days is measured from the signing of your Agreement.
Every pre construction project will have some variation of a deposit structure like this.
You’ll make out your post-dated cheques to whom the developer specifies after your 10 day cooling off period.
Occupancy Vs. Final Closing
When you take occupancy of your unit (i.e. move in, or are able to rent it out depending on your Agreement) will likely not line up with your final closing date – which is when the title is transferred to you and you officially own the unit (and start making mortgage payments).
During the period between these two dates – when you take occupancy and the final close – a few things are going on.
First, the building isn’t yet fully complete, so there is still construction happening. Typically, the lower down floors will take occupancy first and the upper floors will still be under construction. That, and the amenities and other areas in the building will likely still have finishes being installed and other work ongoing before the project finishes officially.
Second, during your interim occupancy period – before the project is finished and title transfers to all unit owners – you will have to cover the costs associated with your unit – same as you would if you owned the unit.
These costs are:
- Estimated maintenance fees (calculated prior to occupancy)
- Taxes on your unit (paid monthly)
- Interest on your remaining sum (your purchase price minus your downpayment) as calculated by the Bank of Canada rate
Contrary to what some believe, the developer cannot make a profit on these fees. These fees are to cover costs only, and it is in the developers best interest to finish a project on time so they can get paid in full.
When your unit closes, you owe the balance remaining on your unit purchase. This means a mortgage is required.
Leading up to your final closing date, you will need to get your mortgage arranged. Typically, it’s a good idea to leave yourself 1 – 2 months to give yourself some time gather your paperwork and have some time to shop around and find a great rate and mortgage product.
We have an article about pre construction mortgages: check it out here.
On all new construction properties you will be required to pay HST on final closing. The good news is, developers include that in the price that you’re seeing for the unit. Additionally, to make things more interesting, there is an HST rebate that can be claimed through a couple of government programs. This is also included in the price you see for your unit.
For example, if you see $800,000 as your purchase price, that is the price of the unit plus the HST plus the HST rebate.
Where things get slightly more complicated is in how the HST gets applied whether you are an end user, or an investor.
The key thing to note is, if you are an end-user, you don’t have to worry about HST – this is already built into the price alongside the HST rebate which the developer will go through the paperwork to claim. If you are an investor, however, you will have to pay the HST and claim the rebate separately.
By now, you should have a good understanding of what a pre construction purchase entails. We have articles on each of these steps that go into a lot more detail, so if you’re interested in learning more, read on!
We also encourage you to reach out and talk to one of our specialists directly if that would make it easier. You can book an appointment anytime here: https://preconstructionpros.ca/book
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