Things to Know When Purchasing a Pre-Construction Home

Buying a home is a sizable decision that will impact nearly every section of your life. While there are many options, from detached homes to condominiums, more and more Canadians are choosing to go forward with pre-construction homes. 

Why purchase pre-construction? 

The choice to purchase a pre-construction home comes down to a few factors. Some purchase because they would like to have a never-lived-in home that is modern and comes with some level of warranty. Others do so with the hope that the value would appreciate by the time the building is actually built. 

There are also aspects within the financial process of purchasing pre-construction which can be particularly attractive. For example, when it comes to paying for pre-construction condos, the market in Ontario only requires a 20% down payment compared to other markets in Canada, where you have to pay from 50-100% of the cost of the property upfront. Furthermore, you don't even have to pay the entire down payment right away with pre-construction. Instead, buyers have the freedom to pay their down payment over the first year of ownership. Canada’s First-Time Home Buyer Incentive program may also provide buyers with a 10% down payment for new builds, versus 5% for used homes.  

Problems & Surprises  With Pre-Construction Homes

With many choosing to purchase pre-construction for the above reasons, it's important to point out some of the potential surprises and problems that could occur. 

The first is the builder's Agreement of Purchase and Sale (“APS”). The APS sets the ground rules and is both long and complicated with multiple key dates. The document is typically also one-sided in many ways, favoring the builder over the purchaser. When moving forward with the purchase, a buyer will have ten days to cancel if they are not satisfied with the terms provided by the builder.

It is highly advisable that a buyer actively works with a legal representative at this stage. For example, your APS will typically include many charges through adjustments. These charges include development charges, lot levies, and more. The costs from these factors could very well raise the final purchase price by tens of thousands. Your legal representative at this stage could work to negotiate these fees. If the builder does not allow a cap or removal, you will still be able to cancel the contract within ten days.

While your legal representative will attempt to tilt the agreement in your favor, there are also areas in which they will provide important advice, especially for first-time buyers. 

For example, while many buyers assume the advertising they see will represent what they receive, it is not in many cases. Most APS agreements allow the builder the right to alter the plans, dimensions, and substitute materials without the requirement to provide any compensation to an aggrieved buyer. Furthermore, the builder determines when the property is complete and fit for occupancy and sets the closing or interim closing date. This could very well mean having to find [bridge] financing (or refinance) at the last minute since you would not be able to yet register a mortgage on the title. The builder will have to complete the items, but this is done after closing and is subject to the builder’s schedule and availability of trades.

The builder can also extend closing dates with limited prescribed delayed occupancy compensation. The builder can even cancel the contract altogether for several reasons, including a lack of unit sales, municipal problems, or the worst case, bankruptcy. In the case of bankruptcy, your deposit could be at risk because Tarion, which administers the province’s new home warranty program has limits on the amount of protection provided. 

In contrast, a buyer has no such right. Moreover, if financing is not available, there is no guarantee for a solution - at best, the builder could choose to grant an extension, which typically comes with associated fees. 

Investor Vs. Homebuyer 

While many choose to purchase a pre-construction home as their primary place of residence, others do so purely as an investment. If the buyer's family is not living at the residence, the HST rebate will not be provided. Legislation is in the works to update the Real Estate tax regime, so it is important to follow developments in the area for current advice.

With so many potential surprises, it's essential that you have active legal representation for the purchase of your pre-construction home. Our team has experience working through the complexities of purchasing a pre-construction home, and we are happy to assist. 

Interested in learning more? Reach out today.