Buying A Brand New Condo Unit:
Pre-construction & Assignment
Let's start with differences between buying a pre-construction
♦ Pre-construction usually takes 3 - 5 years to finally take ownership
♦ Pre-construction Listings Are Not found on the MLS system
♦ It is usually purchased through an agent who has access to get units for their clients, not every agent has access to pre-construction projects
♦ Pre-con projects usually offer buyers different floor plans to choose from based on sizes, layouts, number of bedrooms, washrooms, exposure, and etc.
♦ Buyer can choose to have a higher floor and pay something called floor premiums. Example: $1,000 per floor starting from the 3rd floor
♦ Builders have a standard finish applied to all units, upgrades are available but not mandatory. Example: standard laminate flooring, buyers can choose to upgrade to engineered hardwood flooring.
Down Payment / Deposit
♦ A buyer is often required to have at least 20% down payment when purchasing a pre-construction unit; once in a while, there will be projects require less down payments (Example: 10% before occupancy), but most projects require 20%
♦ Down payment is usually broken down into smaller installments (usually 5% per installment), builders call this the Deposit Structure
♦ An example of a typical deposit structure
▸ $5,000 when signing the agreement (this will be considered as the first day)
▸ 5% in 30 days (including the initial $5,000)
▸ 5% in 180 days
▸ 5% in 360 days
▸ 5% at occupancy
Cooling Off Period: a buyer will be given usually a 10 days period after signing, to reconsider their buying decision. Buyers can have the agreement reviewed with the lawyer within the cooling off period. Builders will also want the buyers to get their mortgages approved during this time. Most builders nowadays require buyers to have mortgages approved, failing to arrange a mortgage may result in a return of deposit and loss of the right to purchase that unit.
Occupancy Period & Occupancy Fees
An occupancy period starts when the builder lets you move into your unit before the rest of the building is done. During this time, some elevators will be working but most of the building's amenities will not be open for use. Units on higher floors usually have a shorter occupancy period. Occupancy period can take 6 months to 12 months or even more, it really just depends on which floor your unit is on and how long the builder takes to finish the building. Remember builders want to get things done as you do, that's when they get paid! They won't delay if they don't have to.
You won't be able to start paying mortgage payments yet since the building isn't complete and the title is not transferred. Thus, you will need to pay the builder an occupancy fee for each month that you live there until the title is transferred to you.
Occupancy fee is calculated in three parts:
1. Interest on the unpaid balance of the purchase price of your condo
♦ interest on the 80% unpaid balance if you paid 20% deposit
2. An estimate on the municipal property taxes for your unit
3. A projected common expense/maintenance fee
Closing Cost (Cash)
Cost of closing a new condo is higher than closing a resale at the same purchase price. It is just like when you buy a new car, there will be a bunch of fees to be paid.
1. Land Transfer Tax (same as a resale)
2. Development charges and levies (usually $1,000 - $4,000 for a one-bedroom, $4,000 to $8,000 for a one-plus-one or a two-bedroom condo), make sure it is capped by the builders - check the agreement carefully
3. Legal fees
4. New Home Warranty Plan enrolment fee (around $1,000)
5. Utility hook-up fees ($200 - $500)
Is buying a pre-construction a good option for you?
♦ You want a brand new property and willing to wait for at least 3 years
♦ You want to select your own floor plans
♦ You are looking for an investment opportunity
What is an assignment?
♦ Buying a pre-construction unit from an original purchaser
♦ The new purchaser is called the Assignee, and the original purchaser, now the seller is called the Assignor
♦ The assignee is buying the right to purchase this unit from the assignor since the building is not done
♦ Assignment listings Are Not listed on the MLS system anymore
Why do people sell their units before the final closing?
♦ Plans change, they no longer need the unit for the purpose they planned
♦ Investors, who want to make a profit
What is the cost to assign?
♦ Some builders charge assignors an assignment fee (I've seen builders charge $5,000, it is written in the original agreement)
♦ Some builders offer free assignment at no cost (I've seen a lot of these as well)
What is the cost to buy an assignment (exclu. closing cost)?
♦ Assignors/original purchasers usually want their 20% deposit paid to the builder from you when signing the assignment agreement
♦ Assignors/original purchasers also want a part of or all profits they are making from selling this unit to you when signing the agreement (with condo prices going up each year, there should be profits)
♦ This is really all negotiable (assignors know that not every buyer has 20% or more cash available)
♦ Not all assignors are profit-seeking, some of them just want to get rid of the property
A very important thing to note: HST Rebate
♦ New Housing HST Rebate is a government rebate given to pre-construction purchasers, with conditions
♦ Usually, the final price already has the HST and HST Rebate included
▸ example: when you are buying a pre-construction unit from a builder for $350,000, they are showing you the final price. The base price for the property could be around $330,000, plus 13% HST then minus the HST rebate (builders claim this rebate on behalf of their buyers), so the final price ended up being $350,000
♦ However, this will be something to worry about when a new purchaser is buying an assignment unit from an assignor/original purchaser who is seen as an investor by the CRA
▸ If that is the case, the builder will not claim the HST Rebate on behalf of the purchaser
▸ The new purchaser will be liable for paying the HST Rebate to the builder (to make up the missing part the builder is not claiming) and then claim the rebate from the CRA through their own accountants (this will be the new purchaser's primary residence)
▸ It can be a huge cash flow issue, it is an extra cash around $20k
Is buying an assignment a good option for you?
♦ You want to live in a brand new building and would like to move in sooner than waiting 3 years
♦ In general, a pure investor would consider buying a pre-construction over an assignment
Click here to know more about closing costs calculation and down payment
Click here to know more about buying a resale condo