People are increasingly enticed these days with the idea of buying a pre-construction house or condo from a builder.
Perhaps they like the idea of buying a property that is new, modern and never been lived in?
Or a property with a warranty?
And for some who are thinking investment, they might have heard they can buy a property that will most likely appreciate in value before they actually have to close the deal to purchase, or by the time it’s ready for occupancy.
Of course there are pros and cons to everything.
Which is why getting all the facts before you take action is always important.
What might be a great idea for someone else might be a bad idea for you.
Buying a pre-construction property is very different than buying a resale property.
There are additional risks and surprises that can come along with buying a pre-construction property from a builder.
#1. A typical builder’s APS is a very long, complicated Agreement which is prepared by the builder’s Lawyer.
Unlike a typical Agreement of Purchase & Sale Realtors use for a Resale property the Builder’s APS is much longer, more detailed & comprehensive (which is a good thing if it protects YOU the Buyer).
But, given it’s prepared by the builder’s Lawyer, it is usually looking out for the Builder.
It is often so detailed and onerous you’d definitely need a Lawyer of your own to review it.
The builder’s APS often contains many provisions which are one-sided in favour of the builder.
When buying a pre-construction condominium, a buyer will have a ten (10) day rescission or cooling off period to cancel the transaction if not satisfied with the terms of the contract.
During this period, I always recommend Buyers contact an experienced real estate lawyer to review the contract and provide legal advice.
#2. Different from a typical APS used by Realtors for resale properties, a builder’s APS has a section on adjustments.
These are the costs the buyer will have to pay for items like development charges, lot levies, Tarion enrolment fees, utility connection fees, and other fees you wouldn’t have tacked on if you were buying resale.
The costs of these adjustments can also increase the purchase price by thousands of dollars.
In some cases, the builder will provide caps for the adjustment costs. And sometimes they won’t.
Either way, you need your Lawyer to review the Adjustments with you so you’ll be aware of how much extra money you will need on closing to pay for these items.
#3. Many buyers are dazzled by glossy brochures and plans at the sales office.
Unfortunately, what you see is not always what you get.
This is because a typical builder’s APS gives the builder the right to alter the plans and dimensions and substitute materials without the requirement to provide any compensation to a Buyer.
#4. Many buyers don’t realize the builder determines when the property is complete and fit for living or moving in.
The builder sets the closing date and the buyer has no say in this matter.
In some cases, very little notice is provided leaving the buyer to scramble to arrange your financing.
A buyer will be forced to close, pay for and move into a property that may be unfinished.
While the buyer will have an opportunity to do a pre-delivery inspection prior to closing, unfinished items are completed by the builder after closing subject to the builder’s schedule and availability of trades.
#5. The builder has very liberal rights to extend the closing date for a number of reasons.
The occupancy date on the APS is tentative and should not be relied upon as the final date.
The date can and will likely change and while delayed occupancy compensation may be available, there is a limit to the amount they are required to pay you.
#6. Alternatively, the Buyer has no rights to extend the closing date.
If a buyer is unable to arrange its financing in time for closing, the buyer cannot insist on extending the closing date.
Remember, you put down a deposit sometimes 2 or 3 years before completion.
Lenders won’t pre-qualify or pre-approve for a real estate purchase years in advance.
Your employment or financial position might change in that time.
When you know your closing date is firm you have to apply for a mortgage, go through the approval process, and arrange for all that a few months before the closing date.
The builder does not have to grant an extension of the closing date.
If they do, they can charge extension fees which can amount to thousands of dollars in some cases, depending on the builder.
#7. Some people think they will just put down a deposit, hope the property goes up in value during the 2-3 years of construction and they’ll sell it (on paper) to another Buyer before the deal actually closes.
That way they make a profit without actually having to get a mortgage or close on the deal.
That’s called an “Assignment”. Some builders don’t allow assignments (if you read the fine print).
Other builders will allow Assignments, but you first need their consent which may be arbitrarily withheld.
In other words, there’s no guarantee the builder will grant you permission to assign.
And if they do, there are often conditions and assignment fees that must be paid.
#8. Sometimes a buyer needs to add a third party to the APS because they will not qualify for financing alone.
A Buyer cannot unilaterally add a third party to the APS.
The consent of the builder must be obtained and again, the builder might charge a fee for this.
#9. Many buyers who buy a property for purely investment purposes do not understand how the HST applies to the purchase of a new property.
If the buyer or its immediate family member will not be occupying the property as their primary place of residence, then the buyer will not qualify for the HST rebate.
This means that the builder will charge the buyer the HST rebate on closing.
This could add an additional $25,000 to the purchase price.
Also, builders are now getting very stringent on this point and have the ability to charge Buyers the HST rebate if they suspect that the Buyer is being untruthful about moving into the property.
#10. Many buyers don’t realize that a builder’s APS may allow the builder to cancel the contract altogether for a number of reasons.
For example, the builder can cancel the contract if it fails to sell a certain number of units, if it fails to obtain bank financing or if it fails to obtain the necessary approvals from the municipality.
Finally, although it is a rare occurrence, the builder may go bankrupt leaving a buyer’s deposit at risk.
Even if some of the your deposit is protected by Tarion, remember that Tarion only provides a limit on the amount of deposit protection that is available.
If you want to know more about buying resale or pre-construction real estate & how to do it safely & smoothly, I’m always happy to chat.