Are Pre Construction Homes Cheaper?
There is a consistent belief that pre construction condos are a cheaper way to buy a home. But, this is just not the case – nor is the reason as straightforward as some people would like to believe!
First – it’s not comparing like for like. Age is a factor in the price of a home, especially a condo unit. New is consistently seen as having a premium associated with it and this is reflected in the price.
Second – as many new construction investors will tell you, you are getting the chance to own 100% of an asset for 20% or less of the purchase price, spread out over the course of construction.
That means, you get to own a brand new unit, in a brand new building with new amenities and everything else that comes with a new building – and you do so by paying a downpayment in instalments over 3 or 4 years (depending on the construction period).
That’s an amazing deal!
We’re going to dive into a few of these points in this article – so you can understand exactly what you’re paying for, and why the price is what it is.
The Purchase Price
First and foremost, pre construction prices will tend to be at current market value or even slightly higher.
The Toronto pre construction market at the time of writing this averages out to $1300 per square foot. The resale market: closer to $1200 per square foot.
Does this mean you would be better off buying a resale property?
Well, that depends on a few things:
- Can you (and do you want to) carry the cost of a downpayment and mortgage costs now? Or, are you better off to offset these costs with an increase in the property value over the course of construction? The answer will depend on your investment strategy, and your financial situation.
- Pre construction will typically see higher returns on investment (from purchase to when you move in) compared to a resale property in the same period. If you’re looking to make more money – pre construction is a good option.
- Do you want to live in a brand new building? Is that important to you?
- Location: what are the options where you are looking? If pre construction is offering something more attractive, then that’s an obvious choice!
- Timeline: when are you looking to move into your unit? Pre construction has a longer timeline obviously than resale. But, as a buyer, that may be an attractive option for you as you can budget and work towards your mortgage.
The Downpayment Offset
Investors know about this one: the fact that the downpayment is spread out reduces your upfront carrying costs and can be a big boost to your bottom line depending if you are holding or assigning.
Investors who are holding can see large gains in equity – but they have to consider closing costs and other factors.
The deposit structure can be very attractive to end users as well, especially first time home buyers, as they budget their deposit payments over the construction timeline and arrange for financing prior to closing.
Any incentives that the developer is offering – through real estate services like ours or otherwise – can really help offset the cost of purchasing.
Incentives like a discount or free parking or storage, capped development fees, low cost or free assignment, cash back, free upgrades – all of these greatly help to offset the purchase price.
When you know what to look for, you can save upwards of $60,000 through incentives alone!
Both resale and pre construction have closing costs that you need to budget for.
The final closing costs for both are going to be very similar – from 1.5% – 4% of the purchase price depending.
New construction will have a few closing costs that resale doesn’t have; things like HST (for which there is a rebate up to a certain amount), development charges and other fees – which are fees charged by the municipality for things like utility hookups, area improvements, sidewalks, etc. – and Tarion fees, which cover your warranty for the new property.
The “New” Factor
New things typically cost more.
A good comparison is cars – you are always going to pay more for a brand new car than you are for a used car.
The same is true for new construction.
There is a premium associated with new – and that’s reflected in the price.
But, the trade-off is that you are getting something that is brand new – new appliances, new amenities, no wear and tear. With that comes less maintenance than further down the road.
And there is just something nice about living in a clean, well constructed new building, which is why pre construction is so popular!
Lower Maintenance Fees… For Now
Maintenance fees will typically start low and stay low for a couple of years until an audit is performed by the condo board. At which time the fees will then go up, usually by 20% – 30%. This is fairly typical – when things are new, they will not require a lot of attention and maintenance. As things get used, they will need more resources (i.e. money) to be allocated towards them.
Is Pre Construction The Better Choice?
Well, that’s a personal preference. A lot of the things we’ve covered here are subjective, and you’ll have to decide what you’re looking for exactly.
As an investment or for you as an end user, there are a lot of advantages. But, there are some considerations – mainly, the timeline, and new premium.
Incentives, and knowing how to find deals, will help you hone in on project that can offer fantastic returns and be incredible places to live. But, ultimately, it is up to you to decide if pre construction is the right way to go or not!
If you want to talk about pre construction as an opportunity, or hear about more projects, we would be happy to talk. You can book a time to chat with a specialist right here for free: preconstructionpros.ca/book
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