Removing Your Risk In Pre Construction


Removing Your Risk In Pre Construction

How can you protect yourself on your purchase, ensure you save money, and guarantee you get the best deal on a great condo?

Insider condo investors know another secret: if you want to guarantee you’re getting the best deal, you have to protect your downside.

Meaning, if you make sure that not only are you putting your money into a great project, but also that you protect yourself from any unknown expenses, then you’re bound to have a great investment.

With your pre construction condo, there are a couple of ways that you can ensure you are removing your risk.

The Assignment Clause

Assigning means that you essentially sell your condo, or your contract to that condo, before it is completely built.

Many investors already do this as a way to quickly turn an investment around – you buy at a Platinum price, hold it for 2 years, and sell it for a profit before completion.

Assigning removes any risk of you not being able to secure a mortgage. In the worst case, you sell (or assign) your condo and pocket the profit. Absolutely no risk to you having to walk away having lost your money.

The key is to make sure that there is an assignment clause in the contract with the developer. Having this clause in place is important to removing your risk.

The Hidden Costs And Fees You Probably Didn’t Know About

Development fees are what the developer pays the municipality for the needed infrastructure, such as roads, sidewalks, water lines, gas lines, etc.

Developers pass these fees onto you, the buyer. These fees are anywhere from 1% to 5% of your unit cost.

The risk is:

  • You don’t know what these costs are (and neither does the developer) until the end of the project when everything is built
  • These costs can jump up over the course of the project – construction costs may increase substantially over 3 or 4 years – meaning that your development fees could be very high in the end.

That’s why you need to make sure that your development fees are capped.

What this means is that you have a set ceiling – an amount that you don’t pay any more than, even if the fees end up being higher.

You may end up paying less than the cap, but anything more means you only pay that amount. The developer has to eat the rest to absorb the difference in the cost.

Capped Development Fees

Almost every pre construction project in the GTA has development fees of some kind. 

If this isn’t capped in your Agreement, it is important to have this amended during your 10 day cooling off period.

Fee caps depend on the size of the unit (as the amount of the fee is proportional to the unit size), but typical caps are around $8,000 for one bedroom units and up to $15,000 for three bedroom units or larger.

These caps will differ depending on the municipality as well.

In addition to development charges, Toronto has other levies and fees, including education development charges and parkland levies, all of which are designed to be reinvested in the project neighbourhood to help build up the community.

Understanding these fees, and requesting caps, is important to protecting yourself from risk upfront. 

Just to reiterate, it is important to have a legal team review and push back on these fees during your 10 day cooling off period.

What About The Risk Of A Project Not Being Completed?

There have been periods during economic downturns especially, when developers have either gone bankrupt or walked away from projects. Still, it was rare then, and it’s even rarer now.

The absolute vast majority of projects in the GTA will be built by reputable builders who have solid financing, lots of project experience, work with trusted general contractors, architects, and other design teams. They build quality projects on time (or very close to on time).

You can always check a developers history and past projects online to get a good idea of their experience, and what unit owners have thought of the building after living in the finished product.

Moving Completion Date 

A pre construction project has lot of moving parts, deliverables, and other factors that make pinning down an exact completion date next to impossible.

Developers do their best to estimate the completion date by forecasting a construction schedule, and through past experience. However, even the best run projects will run into issues along the way, including those outside the control of developers, like a materials shortage, for instance.

Most Agreements outline what happens in the case the developer does not meet the set date, and outlines future dates that would be reasonable to expect the project to be completed by.

Better Agreements have more well defined dates, as opposed to a vague range. This gives you a lot more peace of mind going forward.

Interim Occupancy

When a building nears completion, the municipality will deem when owners can start moving into the building, starting with the lower units typically.

During this period, the building hasn’t been turned over to an elected condo board. Occupants are moving in as the units are finished, typically one floor at a time. Only once everyone is in the building can a condo board be formed and the building officially be turned over from the developer.

In this interim period, you are living in your unit prior to officially taking possession, which is why it is called interim occupancy.

During this period, you would pay the same monthly costs you would after possession – maintenance fees, and property tax. However, where this interim period is different is in regards to your outstanding balance owed on the unit.

You can’t get a mortgage on a unit prior to taking possession, so in the interim period, the developer essentially acts as a lender for the outstanding balance.

The price of your unit, minus the deposit you’ve paid, is your outstanding balance. The developer will charge an interest rate and that’s the amount you will pay for the interim period.

One big difference between this setup and a typical mortgage is that during this period, you aren’t paying down the principal (the amount owed). You are only paying for the interest on that outstanding amount.

The downside of this is that you are essentially paying “rent” on your unit for the interim occupancy period.

Contrary to popular belief, developers are not allowed to make money on these fees (interest, maintenance fees, etc) during the interim occupancy period. 

Your total interim period really depends on what floor your unit is on. Lower floors typically move in sooner than the upper floors. Interim periods can typically be up to 6 months for those who move into the building first.

Unfortunately, this is one risk that there isn’t really anything you can prevent. However, the upside is you get to move into your unit sooner while typically paying a reasonable interest rate.

Deficiencies

When you move in, if there is anything wrong with the unit, such as something wrong with the paint, floors, any damage or material defects, you are well protected under the Tarion warranty that all new construction comes with.

This includes your new appliances and heating and air conditioning system as well.

The Tarion warranty – which you can find out more information about here – clearly outlines what is covered, and the time period that this coverage lasts.

Tax Rebates

If you are the end user, you do not pay the HST on your unit. This is paid for by the developer, who then applies for the rebate program through the Candian GST/HST New Housing Rebate program.

If you are an investor, you will pay for the HST upfront, and then are eligible for a rebate of up  to $24,000 through the rebate program. 

You can find all of the specifics about the program here.

Conclusion

As with any major home purchase, there are certain risks to consider. However, if you approach things the right way, you can significantly protect your downside while maintaining a massive upside on your new unit.

Pre construction can seem a little overwhelming when you first look at it, but with the right guidance and help, you can easily navigate this interesting real estate world and be excited about your opportunity!

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