What is Pre-Construction?
Pre-Construction Condos are residential development projects that are yet to be completed. They may include high-rise and low-rise condos, townhomes, semi-detached and detached homes. When you invest in a pre-construction project, you are essentially purchasing a commitment from the developer to build your dream home on a pre-established timeline and locking into a price rather than being subjected to the future whims and fluctuations of the real estate market.
What are the benefits of Pre-Construction?
Cost

For many buyers, the purchase of a home is the largest and most important capital investment in their lifetime. The staggering pace of real estate appreciation in the GTA can be daunting for buyers who may feel that homeownership is always just out of reach, no matter how much they save, due to rapidly escalating prices, fierce bidding wars, and stringent financing approval requirements. With a 24% year-over-year gains in the GTA real estate market in 2021, no wonder many prospective buyers are intimidated.

The solution—investing in a pre-construction project.

Pre-construction properties can be tens if not hundreds of thousands cheaper than equivalent re-sale options. When you invest in a pre-construction property, you are paying the current market price and insulating yourself from market risks of future price fluctuations.


Reduced initial investment

The other benefit is the flexible payment structure for pre-construction projects. When purchasing a resale property, you generally have to come up with the entire capital investment within a short period of time between the acceptance of the initial offer and the close date. This means, a buyer needs to have saved their down payment in its entirety before they begin house hunting. Furthermore, once the offer is accepted by the seller, they have very little time to secure a mortgage or other financial arrangements to complete the purchase. As a result, buyers are often left to the mercy of banks or private lenders, and are subject to the financing rates available at the time of purchase.

However, a pre-construction project will only require you to pay an initial deposit which generally ranges between 5%-10% of the property value, with additional installments due according to the predetermined schedule. A typical deposit schedule requires the deposit to be paid in 5% increments with the first installment due upon signing the purchase agreement, second installment due within 30 days, the third within 60-90 days, and the final deposit 120-270 days after the initial purchase. In this way, a buyer does not need to have their entire down payment saved up when securing their property and is able to space out the investment over the period of time it requires to build the property, making them more likely to obtain a competitive mortgage rate and select the best possible financing arrangements.


Value

Buying a real estate property is always an investment into a fixed asset, regardless of whether the owner plans to use it as their primary residence. When you invest in a resale property, you are taking a financial risk and betting that the real estate market will continue to rise. This risk is significantly reduced with a pre-construction project which is pretty much guaranteed to increase in value by the time the project is completed. Preconstruction properties tend to hold their value even in a recessionary market when resale prices fall. For this reason, investing in pre-construction is not only more affordable but also more secure than the resale alternative.


Avoiding Bidding Wars

The GTA real estate market is notorious for its fierce bidding wars that can significantly hike up the purchase price. We have all heard stories of homes in the GTA selling hundreds of thousands above asking. According to Zoocasa, 2021 saw homes in the city going for as much 27.88% above their list prices. In most cases, the buyers of these homes are overpaying for their homes—a capital expenditure they may never recover if the market takes a downturn.

Bidding wars mostly occur in seller’s markets when inventories fall far below existing demand, leaving desperate buyers in a frenzy and willing to pay any price to outbid the multitude of competing offers. With pre-construction, the property will cost you exactly what it says on listing, and not a penny more. You do not have to haggle, bargain, compromise, or offer concessions to make your offer more attractive to the sellers. The set price of the property generally reflects its fair value based on market fundamentals and, as such, represents a more conservative and prudent investment for your single largest asset.


Lower Maintenance Costs

Condo properties, whether high-rises or townhomes, require owners to pay a monthly maintenance fee to the condominium corporation to cover ongoing costs. Maintenance fees are set at the discretion of the condominium board and tend to increase over time, so that owners of older properties pay significantly higher fees than those living in newer buildings. Condo fees for pre-construction condos are always significantly lower than for resale properties because the building is brand new and the management is yet to determine the true monthly costs of maintaining the property. This does not mean they cannot rise over time, but the increase is slow and gradual which means it will take many years before pre-construction condo fees catch up to the level of their resale counterparts.


Customization

Not only are pre-construction homes generally more affordable than resale properties, but they are also customizable to suit the preferences of the buyer in terms of floor layouts, design features, appliances and amenities. Virtually all builders offer buyers a range of upgrades from home extensions, patios, and decks to flooring, lighting, and smart home elements. Builders subsidize the costs of upgrades which means that you are paying wholesale prices significantly below what you can expect to spend on equivalent renovations for a resale property.


Warranty

Since pre-construction homes are brand new and never been lived in, they come with comprehensive warranties that encompass deposit protection, project delays, structural issues, repairs, roofing, flooring, heating/cooling systems, appliances and more. In this way, unlike with a resale property that tends to crumble as soon as you move in and drain your finances, with a pre-construction home you are guaranteed not to incur any unexpected costs in the first several years of occupancy.


10-Days Cooling Off Period

When you invest in a pre-construction project, you are given 10 days to reconsider your purchase, penalty free. This gives you time to shop around for financing arrangements, get a lawyer to review the purchase agreement, or simply mull over the investment with the option of changing your mind at no risk. If you decide not to go through with the deal for whatever reason, the developer will refund your initial deposit in full, no questions asked.

What are the downsides of Pre-Construction?
Even with these numerous benefits, pre-construction homes are not for everyone. The biggest drawback is the fact that a buyer has to wait for the building to be completed before they are able to take occupancy. Delays beyond the initial projected closing date are more common with high rise condos than with other types of real estate. Although this is very rare, there have been times where pre-construction projects were canceled altogether, leaving the buyers scrambling to make alternative arrangements and get their deposit back.

Fortunately, developers offer insurance on the deposit and generally compensate buyers for any delays. This means, however, that before investing in a pre-construction project, it is warranted to research the builder and ensure they are a trusted company with a proven track record and solid reputation. Buyers should also be aware of closing fees such as registration, taxes, utility meter installation, and land registration which tend to range between 1%-3% of the purchase price.

Before taking the leap and investing in a property, make sure that you retain an experienced real estate agent that will not only ensure you get the possible deal, but also provide you with a more realistic estimate of the costs and protection against all eventualities.
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