You may have seen a floor plan or even a life-sized layout of a pre-construction condo, which is a condo that has not yet been built or is in the process of being built. A pre-construction condo can be an excellent choice for real estate investors, especially as a second property or one to be rented out.
Pre-construction condos allow you some extra time to save up for the deposit, which isn’t typically due all at one time, and they tend to be cheaper than resale condos. Plus, even though you are choosing to buy based on a floor plan, you will be the first owner and will get to customize certain features and finishing options of the condo, such as cabinetry or flooring.
Here are a few pointers for buying a pre-construction condo:
Invest in the Best Builder, Not the Best Building
Buying a pre-construction condo can be risky. There is always a danger that the project could be delayed or called off altogether, though that tends to happen less often nowadays. The best thing you can do to minimize risk when buying a pre-construction condo is to invest in a reputable builder.
Some delays are inevitable in building a condo, but when they go on for too long, say for a year or more, that is an indication that the builder is not very reputable and is having issues like poor financing. Also, take a look at their past projects. If they are still in good standing with stable maintenance fees, this indicates that their builder is reputable and will likely do a good job with the pre-construction condo.
The 10-Day Cooling-Off Period
Most pre-construction sales contracts give a 10-day cooling-off period after the date you receive your signed copy of the offer, and in some places like Ontario, the cooling-off period is mandated by law. This gives you an advantage in buying a pre-construction condo because it gives you some time to decide if you really want the condo or not. It also prevents the builder from selling your pre-construction condo to anyone else or increasing the price.
During the ten days, it is advised to get the sales contract reviewed by a lawyer, to review the closing costs and any fine print that may be on the document. You should also ensure that your financing is good to go because, after 30 to 60 days, your mortgage pre-approval letter will be requested. One last thing to do during this period is to explore other options. Look at similar pre-construction condos and compare prices and incentives, to make sure that your transaction is right for you.
The Deposit Structure
Like most real estate transactions, a 20-per-cent deposit is required to purchase a pre-construction condo. However, the deposit schedule is set up differently. Deposits are usually staggered over a year, but remember that every project will be a little bit different.
A deposit schedule generally looks as follows:
- 5% due at signing, which is cashed as soon as the 10-day cooling-off period ends
- 5% within 30 days
- 5% within 60 or 90 days
- 5% within 120/240/365 days, or upon occupancy
While this schedule is most popular, some projects have incentives where they offer five per cent a year or $1,000 monthly for five years.
Investors often like pre-construction condos because they put down 20 per cent of the purchase price but earn appreciation on 100 per cent of the condo’s value for the next three to five years, while it’s being built. They also don’t have to worry about taxes, maintenance, mortgage payments, insurance or tenants. So, it ends up putting more money in their pocket.
Is Buying a Pre-Construction Condo Right for You?
Buying a pre-construction condo is not for everyone. It is essential to educate yourself not only on the advantages but also the risks. Do your research to make sure that the builder is reputable and that you will be getting a good return on your investment, and take the time to learn how the pre-construction buying process works.
There are often great incentives to buying a pre-construction condo. They can include capped closing costs, free rental management, guaranteed rates, free parking, free unit upgrades, and more. However, if you do not know that you will be in a position to afford your condo in the coming years, then it is probably not a good idea because you could lose your deposits.
Depending on your budget and the amount of risk you are comfortable with, a pre-construction condo could be a worthwhile investment. Consult a real estate agent and a financial planner to discuss your options before you jump into anything.