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Buying a home that doesn't yet exist may sound risky. But if you take the time to understand the process, as well as how to protect yourself, a pre-construction home or condo can be a great investment of your time and money.
My wife and I bid on, and lost, nine houses before we got our 10th. I remember the day in March 2016 when the listing popped up on Realtor.ca, the online directory of homes for sale, which had become one of the “frequently visited” websites on our computer. The house ticked off all the boxes, and more, for a starter home—with the small caveat.
It didn’t exist yet.
After seeing more than 50 houses and losing nine bidding wars, the house hunt was not only becoming tiresome for us, but it was also becoming more difficult to get any house at all, let alone the one we wanted. When we saw the listing for this pre-construction home in Toronto’s west end, it shifted our thinking. Buying a new build could improve the return on our monetary investment, and give us an ROI of our time too—no more pounding the pavement, figuratively and literally, in futile search of a home.
With that found time, however, came a requirement for patience. We bought the house in early 2016, but we didn’t move in until late 2019—three years and eight months later.
The payment schedule may be prohibitive for some Canadians, as well. A pre-construction property typically requires a 20% deposit (there is no regulation around this, and the deposit is set at the discretion of the builder). So, if the purchase price of your home is $750,000, a 20% deposit amounts to $150,000, which buyers usually have to pay on an installment schedule, such as 5% due within 30 days of purchase, the second 5% after 90 days, the third 5% due within a year, and the final 5% due 30 days before you move in. That’s a significant amount of money you need to come up with before you can even move in and stop paying the mortgage or rent at your current abode. But for those who have the means, here’s what else you need to consider when buying a pre-construction property:
We lost the first house we bid on by more than $150,000, although we had gone in with an offer of $30,000 over asking ourselves. The market in Toronto in 2015 when we started looking seemed illogical, and it was stressful to put in offers that we thought were high, yet still were not even good enough to “win.” Current-day house hunters will find it hasn’t gotten easier since then. Lauren Haw, CEO of Toronto-based brokerage Zoocasa, shares, “COVID has made this [phenomenon] expand to suburban areas now too. So-called 18-hour cities—places like Barrie, London, Hamilton—were not experiencing bidding wars in 2015/2016 as they are now.” With a pre-construction, purchase happens on a first-come, first-served basis, so sellers cannot position multiple buyers to compete against each other, raising the price. The price that’s listed is the price you pay.
My wife and I were lucky in that our pre-construction home rose in value by the time we moved in, but it doesn’t always work out that way. When you consider how long you have to wait before you actually get possession of your home, the housing market will likely look very different, so it is hard to anticipate what the future value might be. “Nowadays, builders factor in an increased value by the time the construction is complete, and, in some cases, like condos that are just being finished in big cities, the value can actually go down,” Haw cautions. “It really depends on the project and where it is being built. Even though no one predicted this pandemic and no one can predict what will happen in the future, keeping on eye on current trends can help you make a more informed decision.” One helpful tool is MoneySense’s Where to Buy Real Estate guide, which is updated annually.
Several of the houses we saw in Toronto were “character” or “heritage” homes, which is to say they needed upgrading. With a pre-construction home, you get to choose your finishes and not have to live through a renovation after you take possession. It’s nice to know your house will be move-in ready. However, be prepared for the very strong possibility that the included options for your finishes will be limited, and the cost for upgrades can be significant. Offering upgraded finishes is another way for builders to increase profits from buyers, so make sure you do your research on the quality and value of the upgrades being offered. In our case, several “upgrades” were priced way too high and we knew we could do them for much cheaper once we moved in. We also learned from a neighbour of ours that you do not necessarily need to stick to the options they offer you at the beginning—they managed to negotiate some customizations that weren’t originally included in the list price.
Even though your house may be brand new, things can and will go wrong, but a pre-construction home in Ontario comes with Tarion insurance, which helps enforce a quality standard guarantee that you do not get with a resale home. “While it is comforting to know that you have a certain amount of protection,” Haw cautions, “Tarion does not cover aesthetics, and this is where many issues will pop up.” For example, the Tarion website notes that among the items not covered are “[n]ormal shrinkage of materials that dry out after construction such as nail pops or minor concrete cracking.”
Not everything is black and white, but you can get a better understanding of Tarion’s warranty coverage to help you understand what to expect. And buyers still need to do their due diligence, as we discovered: Although our builder advertised a “finished lower level” on their listing and sales material, there was no mention of this in the contract—so we, and other new owners who wanted their basement finished had to pay for it as an upgrade.
During a lockdown like we are experiencing right now, the process for buying a pre-construction doesn’t change—you buy off a plan. Unless you really want to go see the presentation centre, all that really matters is what is in the agreement of purchase and sale you ultimately sign. That is to say, this can all be done remotely, without setting foot in a stranger’s house.
Pre-construction purchase and sale agreements are lengthy and detailed, and you have 10 days to renege on your offer, so that you have time to go through the contract and understand everything you are agreeing to. It is important to get an experienced lawyer who knows what to look out for and can help you negotiate on terms in your favour. In our case, we used a lawyer who specialized in resale homes in Mississauga, outside of the market where our home was being built—and so she (and we) did not even realize the lower level wasn’t mentioned at all.
Buying a pre-construction home has a lot of benefits, but it can be very frustrating too. Had we known it would take almost four years before we moved in, we may have made a different decision, but at the time we bought the house we were told that construction was about to start and they are expecting people to move in within a year to a year and a half later. They hadn’t even dug into the ground until a year after we signed the agreement, and the move in date was pushed back four times. It wasn’t only the move in date that changed, but when we had bought the house we weren’t even engaged and by the time we moved in we had gotten married and had a baby. It was a long time. This was just our experience, there is also the risk that the house or condo doesn’t even get built because the developer runs out of money or doesn’t sell enough units to fund the project.
If the hefty deposit required on pre-construction home purchases isn’t hard enough to manage, you cannot really qualify for a mortgage until the house is ready to move in—so, when you commit to buy, you are also gambling on what the mortgage rates will be in the future, as opposed to what you would qualify for if you moved in within the typical 30 or 60 days. In our case, we were lucky: Mortgage rates went down. But a lot can happen in a year, let alone almost four.
Most people transfer their whole deposit to their down payment when it comes time to register ownership and get a mortgage. However, buyers do have the option of asking for a portion of the deposit back and determining how much down payment they want to apply at the time of registration (could be more or less than 20%). James Laird, the president and broker of record at CanWise Financial, and co-CEO of Ratehub Inc, warns: “If you do use a 20% down payment you will not qualify for most of the rates you see in advertisements, because those are usually for high-ratio mortgages, and what you need is a low-ratio mortgage. Low-ratio mortgages have higher rates than high-ratio mortgages because they do not come with automatic default insurance to protect the lender.” A low-ratio mortgage is typically 20 to 30 basis points higher than a high-ratio mortgage, and you can see the current differences in rates using MoneySense’s mortgage payment calculator tool.
Buying a pre-construction could be prohibitive for many Canadians, but as long as you do your due diligence, you have the money available for deposit payments, and the willingness to wait (and wait, and wait), then, much like any good investment strategy, thinking long-term can help you come out ahead.
MoneySense is fully owned by Ratehub Inc, whose co-founder and CEO, Alyssa Furtado, is also a director at Zoocasa.com. MoneySense remains editorially independent. For more information, please read our policies:
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One could also avoid bidding wars by deciding not to live in Toronto, or Vancouver !! Simple !!
A few other problems with buying a new home:
While it is possible to negotiate a small reduction in price of the home or upgrades with new home builders, it’s basically a take it or leave it price. You have to pay whatever the homebuilder thinks the house is worth.
The problem with that is nobody really knows what your house is worth until at least a year or two after it’s been built, and people are buying and selling houses in your neighbourhood.
Dust and noise from construction around you for at least a couple of years.
Landscaping and fence building costs.
No character of an older neighbourhood. Small trees, no birds.
The school they say will be built, may take a few years longer than their guess.
Long commute time for a new subdivision on the edge of the city. Or just to get around the city for errands or visits with friends.
Great read, preconstruction is a leap of faith which most of times are worth their risk. You can assign some before closure and make good margin.
Happy new year.
When the preconstruction is finished and you’ve put 20% down for it, do you have to put down additional money to get the mortgage too or that 20% you put down prior counts as the down payment?
Good article and very informative. A follow up question on this topic, are there any provisions \ penalties if an installment for the payment schedule is delayed for some unforeseen reason. Would the builder just cancel the keep the amount which is already paid in previous installments or they refund some amount or allow extension for payment of next installment.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.