If you live in the GTA, you know many Canadian's are opting for the condominium lifestyle due to its easy maintenance and added convenience. It's also proven to be a lucrative source of income for investors looking for additional cash flow. The pre-construction condo market remains active and the coming projects for 2020 appear to be an investor's dream!
If you've been thinking of investing in Pre-Construction there are some important things to consider before taking the first step.
1. Invest in The Builder - Not the Building
Investing in Pre-Construction becomesmuch less risky when you invest only into reputable builders who have a proven track record of executing on their development plans in a timely fashion or without too many delays. You also want to note what happened with developments after they've closed and if the builder completed successfully in the past.
Keep in mind, this isn’t exactly pre-construction specific, it’s important when investing in resale to consider the builder as well – as that can give you more insight into why the building may or may not be the best investment for you.
There’s a couple of important factors to take note of when looking into a builder:
a. Did They Complete Their Buildings? Any Delays?
Delays are inevitable with Pre-Construction but theycan be a postive thing.The longer a project delays, the longer you have before you need to close on the condo, all the while you’re leveraging the appreciation of the property market 5 to 1 (assuming you have 20% down, as is the case with most pre-construction developments).
If delay notices are handled improperly, which unfortunately they typically are, you could be eligible for up to $7500 as a delayed occupancy rebate, thanks to Tarion.
3 to 8 months of delays from the initially marketed occupancy date is common – but if a developer's past projects continually get delayed a year or more, that may potentially indicate poor financing or improper planning.
b. How Have Buildings Lasted? How Are The Maintenance Fees?
If you take a look at projects that the developer completed 5+ years ago. These are the projects in a good financial standing today. As for the maintenance fees, look for red flags like special assessments or huge increases.
While it may not be entirely the developer's fault and could be the result of poor management; you’re looking for trends here, not outliers. Good quality buildings, with good resale value, and stable maintenance fees are all good signs.
2. The 10 Day “Cooling” Period.
The 10 Day cooling period is mandated by Ontario law on all new condominium purchases in the province, and it gives you an advantage in the Pre-Construction market that you just don’t have in Resale.
When you purchase a condo from a developer, you have 10 calendar days from the date of signing to decide if you want the unit or not. The 10 day grace period has no obligations, no penalties, no tricks.
You should use the 10 Day cooling period to your advantage. In Toronto’s rapidly growing market, buildings sell out on average within 3-6 months from the date of sales. Typically, builders increase their prices regularly and change incentives as they open up sales to the public.
The 10 day cooling period allows you to reserve the price, the incentives and ensures the builder cannot sell the suite to anyone else or change the price on you.
Two things to consider during the 10 day cooling period are, have a lawyer review your Agreement of Purchase and Sale with the builder to give you the scoop on closing costs & what the fine-print legal-jargon says.
Also, take a look at other options. Go look at another comparable pre-construction project, and compare the prices and incentives to be sure you’re getting a good deal.
3. Interim Occupancy vs. Closing: What’s the difference?
Interim Occupancy is when you get the keys and can move into your unit – but technically, you don’t own it just yet. With condominiums, you have two ‘closing’ dates:
a. What is Interim Occupancy for Condos?
The first is Interim Occupancy, when you get the keys to your unit. Occupancy for owners is staggered, usually a couple of floors per week, that way everyone isn’t moving in on the same day.
At this point – the building isn’t registered yet. If you bought with a good builder, typically registration and final closing will happen within 6 months after interim occupancy.
b. What are Interim Occupancy Fees?
Interim Occupancy Fees are what you pay the builder to occupy the unit. You don’t have the title to your unit until registration, so your mortgage doesn’t start just yet. Some people call this “rent to the builder” or “phantom rent” – but simply put, it’s just:
c. Your monthly condo maintenance fees
The interest payment on the 80% borrowed for the purchase (assuming 20% down). The builder uses the Bank of Canada key rate to determine your interest payment, and the payment is made to the builder directly.
During the time of interim occupancy, your monthly carry costs will be lower than after registration because you haven’t started the principal payment on your mortgage yet.
d. What is Final Closing?
The final closing is when the Builder registers the Condo Corporation with the City. This is when your bank pays the builder the 80% balance, when your mortgage starts, and when you receive the title for your unit.
This is also when final adjustments and closing costs will be calculated and paid, such as legal fees, land transfer tax, and any other closing costs as outlined by your Agreement of Purchase and Sale.
Once you’ve completed the final closing process, you will receive the official title and your mortgage will be registered.
4. Closing Costs: What? Why? When?
If you’ve ever heard “Pre-Construction Horror Stories,” they were likely referencing some outrageously inflated closing costs that were levied against the buyer on final closing.
These are rare, but they do happen – however, they only happen to people who didn’t do their due diligence, bought with an untrustworthy builder, or worked with Realtors or Lawyers who don’t specialize in Pre-Construction condos.
Here’s the reality: You need to work with specialists who know what they are doing. In this specific case – you need to ensure that you have someone making sure your developmental and municipal fees and levies are capped.
What are Development Fees & Municipal Levies?
Development fees and municipal levies are determined when buildings are developed. When a building goes up, the population density for the neighborhood increases.
The city is going to determine the impact on the neighborhood, and charge the builder a per-unit price to fund the local infrastructure needed to support the residents that the building is bringing in.
This might mean new streets, parks, schools, future transit solutions, etc.
If your Agreement with the builder wasn’t reviewed by a good lawyer in the ten days, and you had an uneducated Realtor guiding you, it’s possible that your closing costs aren’t capped.
In that case, if the City charges the builder $25,000-50,000 per unit (which is not uncommon for most areas), the builder will pass that cost along to you on the final closing.
However, if your Agreement of Purchase and sale has Pre-Capped closing costs, or if your lawyer amends the contract and has them capped for you, the builder can only charge you that capped cost.
For many developments, you can expect to get your closing costs capped at $7,500-10,000 for a 1 bedroom unit, and $10,000-15,000 for 2-bedroom or larger.
The takeaway here? It’s critical to have a pre-construction Realtor and Lawyer on your side when you walk into the sales center. The sales reps that work for the builder represent the builder, you need to have representation on your side.
It doesn’t cost you a penny (and no, you won’t get a discount for not using a Realtor).
5. HST Rebates for Investors on Condos
HST is included in the price when you purchase a condo. If you’re moving into the unit yourself, or one of your family members is, that’s all you need to know.
However, as an Investor, you need to be aware that on final closing, you’ll be charged HST again. Without going into too much detail here, you can get 100% of your HST rebated if you file for it within 1 year and provide the government with a one-year rental lease agreement proving that you rented the unit out.
6. Assignments: Selling Pre-Construction Condos
Assignments are your way out, or your way to cash out, of Pre-Construction units before the unit or building is complete.
They’re called assignments because you’re simply assigning the Contract between you and the builder to a buyer – since no real property exists yet.
Assignment flipping is somewhat prominent but has slowed since the CRA decided that it may start applying income tax to the capital gains on an assignment sale if they determine that you intended to flip the unit before closing.
Regardless, your right to Assign is your way out of a Pre-Construction contract should life change or if you simply want to pull your profits and not close on the unit.
Generally speaking, most builders prohibit the listing of assignments on MLS. For that reason, Assignment sales can typically be more difficult than resale condo listings. Many people try to assign their unit themselves through Kijiji or word of mouth, but it's recommended to avoid this route for a couple of reasons.
a. You’re unlikely to get Fair Market Value and may have to sell well below it to get any interest from low-traffic media like Kijiji and Facebook,
b. Assignment sales involve a lot more paperwork and legal headache than regular condo sales.
You’re better off having a Pre-Construction Realtor or Team who specializes in assignment sales sell your unit for you (hint: we’re one of them). You have a far better chance of getting fair market value for your unit, and the commission paid will generally be minimal compared to the price difference you’ll get versus selling it yourself.
Profit aside, assignments can be a bit messy contractually. If you wouldn’t want to risk selling your home or condo yourself, you don’t want anything to do with an assignment sale – many Realtors won’t even take them on for that reason.
7. Fair Market Value
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Many people are under the impression "Pre-Con Condos are sold at a discount.” This is one of those rumors that gets tossed around as often as, “if I don’t use a Realtor, the builder will give me a discount”. The fact of the matter is it's not true.
The truth is – it depends on the unit, and it depends on the development. Some projects are priced at 5% under market value, some are priced at 10% above market value. Sometimes, a project priced 10% under market value has a specific unit or two that’s priced 10% over resale market value.
The point is – you’ll only know if you’re getting a good deal if you look around, keep updated on the market, and work with a Realtor who knows the market.
Buying a Pre-Construction condo with 20% down, or less, allows you to leverage 100% of the asset’s appreciation at a 5-to-1 ratio.
Keep in mind, your downside is leveraged at the same rate – but if you’re not over-leveraged with bad debt, and if you buy at fair market value or below – you’re going to realize capital gains at a rate that no stock or asset will match provided our market keeps heading in the direction that it has for the past years.
Mourad Hanna Team has spent years cultivating relationships with some of the best builders in North America and as a result, receives VIP ACCESS to some of the most exciting new condominium developments in the GTA.. With VIP access Mourad Hanna Team can help you get first choice on an amazing property/investment unit with the best possible pricing structure and incentives. Buying alone or direct can be much more complcatied and often cost you thousands$ more in throughout the transaction... So call Mourad Hanna Team today to learn more or get started 416-822-7112 or mhanna@mhanna.ca