The Pros And Cons Of Pre Construction
As an investment opportunity, both as an end user and as a pure investment, pre construction offers a lot of advantages over a traditional resale property. However, there are always risks and factors to consider before making a decision between the two.
Today, we’re going over the pros and cons of pre construction, so you can hopefully have a much better understanding of this opportunity before you decide if it’s the right fit for you!
Let’s start with the pros of pre construction:
Own 100% Of An Asset For 20% Or Less
This is the key strategy to many real estate investors. You own an asset, and all of its appreciation, by putting only a small portion of the total value down.
So, your carrying costs are incredibly low versus your potential for a significant gain.
Many investors use this strategy to buy in early to a project, hold it for a few years, and then assign their purchase (which means to sell it before it’s fully built) and pocket the increase in price.
This works extremely well in a market that is on the rise, which most of the GTA and Southern Ontario certainly are.
Even as an end user, or an investor who is holding on to the unit, you can experience significant gains in your unit value before even moving in.
You Have Time To Save For The Downpayment
In pre construction, you’re paying the downpayment over the course of construction, rather than one lump sum upfront.
This means you have a longer time to make that downpayment and can budget accordingly.
For most projects, 20% is the total downpayment amount. But, the deposit structure is spread out over the course of 3 – 4 years, typically in 5% installments, which can be very attractive to buyers who don’t have the full downpayment upfront.
The Brand New Shine
You’re getting a brand new unit and everything that comes with that.
New appliances, new finishes, new amenities, and so on.
Meaning, you get to enjoy your unit and the building in the best shape it’s ever going to be in! And while many buildings are very well taken care of, there is just something nice about something that is brand new.
Because it is such a new building and everything should be in tip-top shape, when you first move in, your maintenance fees are going to low in comparison to older buildings.
The same goes for just general wear and tear and maintenance within your unit – there shouldn’t be anything to fix since everything is brand new.
And if there is anything to fix, it will be covered under your warranty.
Pre construction is covered under a Tarion warranty, or a similar warranty program. Which means that if anything goes wrong under the warranty period, it becomes rectified at no additional cost to you.
This provides a lot of peace of mind to new construction owners should there be any issues as they settle in to their new unit.
No Bidding Wars – A Calmer Buying Experience
With pre construction, there is either a unit there for you, or there is not. And the price you pay is the price that is advertised.
There is no chance for a bidding war and escalation of that price.
And in this market, where there is still too many buyers compared to sellers, it is hard to find a highly desired home that doesn’t sell for more than what it’s listed at.
While the buying process always involves a lot of patience, paperwork, and important decisions that involve a lot of money, the pro of pre construction is in the ease of how the sale takes place – meaning you get a much calmer buying experience.
Potential For Large Value Increases
Going back to the investment opportunity side of things, pre construction offers an incredible chance to see large gains in your property value.
This is especially true in undervalued areas or areas that are going through large growth and seeing solid infrastructure investment.
Right now, there are many areas in the GTA and beyond that are seeing incredible growth. And pre construction is an excellent chance to get into these markets at a relatively low premium.
We’ve run some investment seminars for clients and looked at their potential investments – and the return on investment potential is incredible for pre construction assets if you know what to look for!
And now onto the cons:
Longer Wait Or Delays
In comparison to resale where you’re getting your home in a manner of weeks or months, with pre construction, you obviously have to wait for it to be completely built.
Depending on when you buy in the construction stage, this could be upwards of 4 years. The later you buy, the sooner you move in.
It’s something to factor in w
hen you’re making your decision or deciding on what project criteria fits what you’re looking for. If you want something within 2 years, then you’ll have to narrow down some options based on that.
And, with most pre construction projects, there are delays to consider.
With so many moving parts, materials, and labour to organize, there will inevitably be delays. Developers have not quite yet figured out how to be more exact in their estimated timing of when a project will be completed (despite their best efforts).
The best organized and experienced developers will tend to complete projects within 3 – 8 months after the first interim occupancy (that is, when the first floors start moving in).
The project type will have an impact on construction delays. Townhomes typically come in on time. Boutique buildings – smaller to mid-rise buildings – typically have minimal delays. It’s the larger, high-rise buildings that present some complications and typically are a little over-schedule.
It is always in the developer’s best interest to complete a project as soon as possible, as that reduces the period they have to carry their costs, and ultimately can claim their profit when they turn the project over upon completion.
Higher Down Payment
In resale, for those who can’t cover the entire downpayment in one go, you can pay as low as 5% down (so long as the purchase price is under $1M) and take out mortgage insurance.
In pre construction, however, the down payment amount is set by the developer, typically at 20%, and you are required to make that full payment according to the deposit structure set out in your Agreement.
There are projects that have as low as 5% downpayment – those are typically at a later stage of construction. But, 20% is the most common.
Even though this full downpayment is spread out over the course of the construction period, for some, paying this increased amount is out of their budget.
So, while this deposit structure can be a pro to some (think investors) it can be a hindrance to others, especially first time home buyers.
As opposed to resale, pre construction has HST on the purchase price.
If you are an end user (i.e. you plan to live in the unit for a minimum of 12 months), the HST as well as the HST rebate is built into the price you’re seeing, so there isn’t really anything to worry about.
As an investor, however, you must factor in the HST, as well as the work of filing for a rebate, into your decision.
We have an article that goes into a lot more detail about HST and new construction.
Factor In Higher Maintenance Fees (Down The Road)
This is something that everyone will need to consider. Your maintenance fees will go up from where they start.
As your building gets older, things will need to be repaired and taken care of. The more amenities a building has will also influence how much your amenities go up by.
For most condo tower projects, you can expect maintenance fees to go up by 10% – 30% from
where they start off at in a period of about 2 – 3 years.
Additional Closing Costs
There are always closing costs to consider, whether pre construction or resale. However, there are additional costs for pre construction projects that will need to be budgeted for.
A good estimate is always between 1% – 4% of the purchase price. Resale, on the other hand, typically falls between the 1% – 2% range.
Where pre construction can have additional costs is in the levies and development charges that get put on the project. In a municipality like Toronto, the City passes on charges for hooking up utilities, as well as charges levies like parkland levies that go towards investing in the local community.
When you’re in your 10 day cooling off period and negotiating on fees/charges, it’s important to have your lawyer push back on these fees and attempt to have some lowered, deleted, or in the very least capped at a certain amount.
Capping your fees will ensure you will never pay more at the final closing, even if the municipality raises certain fees – the developer will not be be able to raise fees above this cap amount.
New Is At A Premium
Contrary to popular belief, pre construction is not cheaper than resale. There is a premium associated with something that is brand new, and that is reflected in the price.
At best, you are paying resale market price for your pre construction unit. But, whereas you may be paying more, there is a greater appreciation of your unit that takes place in comparison to older buildings. Should you sell after you take possession, you will be able to sell at a higher premium than a unit that is in an older building.
Where you save money in pre construction is in the incentives. Most developers will offer incentives to attract buyers. Things like discounted or free parking and/or storage, cash-back incentives, upgrade incentives, and so on, are where you can save money on your purchase – if you know how to access these incentives (hint: use a pre construction specialist).
Imbalance In Risk
There is risk in any investment. In pre construction there is an imbalance in the risk between you and the developer.
Should you not be able to make a payment or cover the mortgage at close, you risk forfeiting your deposit as well as possibly open yourself up to further legal action from the developer for damages (in the legal sense).
The developer, on the other hand, does not have this risk. If they fail to complete the project for whatever reason, they simply return your deposit and you all walk away.
The good news is, with GTA developers, the vast majority of whom are backed and financed by major banks and lenders, and who have a lot of experience bringing projects to completion, there is very little risk of a project not coming to completion.
But, of course, this is something to keep in mind when making your decision.
With risk comes great potential. And those who know what to look for in a project and a developer can drastically reduce any risk.
Knowing the Pros and Cons to pre construction can be incredibly valuable while making your decision on whether it is the right investment choice for you.
Pre construction is an incredible opportunity that many investors have used to make fortunes, and people have used to get a high-quality home they are proud of living in. But, there are also trade-offs in comparison to resale that must be considered.
If you do decide to go with pre construction, spend some time finding the project that is right for you. We have a list of up to date projects that are all vetted to ensure they are built by developers with great track-records. And we focus our energy and efforts on projects that offer great returns, as well as top-quality places to live.
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