2020 was not a kind year for condo sellers. In Toronto and Vancouver, there is some indication that condos are coming back - Toronto had a 27% increase in condo sales in February compared to January - but will that momentum continue to grow? We’re not sure but if you’re thinking about investing in a condo, consider all of your options, including purchasing a pre-construction condo. Below, we highlight the pros and cons of doing so.
When you enter into an agreement to buy a pre-construction condo, you’re buying a condo that isn’t built yet. You’re contractually committing to buy it before or during its construction.
You can get a brand new condo at a good price
Since you are taking on risk buying a condo you’ve never seen before, condo developers have very reasonable prices for early buyers. For example, a pre-construction condo unit may cost you $425,000 today. When the building is finally ready for occupancy in 5 years time, the market for condos will likely have increased, so it’s like getting a condo in 5 years for today’s price. Additionally, developers need to hit milestones early on to show progress to their lenders, and as a result, often have more flexibility on price for earliest buyers.
Your deposit can be spread out
The deposit structure of pre-construction condos differs from that of resale condos. Normally, a buyer has to put down a 20% deposit but spread out over a longer period of time, unlike regular real estate purchases which require the full deposit on a specific date. For example, developers can ask for 5% at signing, 5% within 30 days, 5% within 60 or 90 days, and 5% on occupancy. Deposit structures vary, but generally a buyer has a longer period of time to fund the deposit, allowing some people to break into the market at a slower pace.
You can customize your condo
Pre-construction condos are often customizable to a certain extent. You can often choose your floor plan and any upgrades. If you want a condo that you can design, this is an advantage without having to do any renovations.
You’ll be the first to live there
This is an emotional advantage, not an economic one, but some buyers prefer to live in places that have been exclusively theirs.
What exactly are you buying?
Buying pre-construction means you’re essentially buying sight unseen - except you can’t see the unit until you actually move in. Developers often show you everything that they know about a building’s features, but these can change as the construction progresses. Buyers are often protected from material changes, but what constitutes “material” can be confusing.
You can’t plan your move-in date
If you’re planning on living in a pre-construction condo, it’s mighty difficult to plan your move date! Developers will provide an expected completion date, but rarely are they completed on time. Further, builders have the right to delay for different reasons. It’s not uncommon to have delays of anywhere between 6 months to 2 years, which makes it challenging to plan.
Expect condo fees to increase substantially in the first 2 years
When you buy pre-construction, developers estimate condo fees in advance. They don’t know what the actual costs of running the building will amount to. Very often, operational costs are higher than anticipated and condo fees surge after the building is up and running.
It can be difficult to get out of your contractual commitment
If your personal or financial circumstances change since signing a pre-construction condo contract and you still cannot move in, you have to embark upon an “assignment”. This is when you, as the original buyer, assign your rights and obligations to another buyer. The new buyer will take your place under the original agreement. You can’t just “sell” the unit because you don’t officially own the unit until it is built and have closed on the purchase. Given this, you may have difficulty finding a new buyer because there may be restrictions on how to market the unit or fees associated with getting permission to do so. Also, the new buyer must accept the original agreement. No changes can be made.
Pre-construction condos aren't for everyone! Make sure you do your research and assess the risks and rewards of taking this path for a condo purchase.
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