The Ultimate Pre-Construction House Buying Guide in Toronto

The Ultimate Pre-Construction House Buying Guide in Toronto

Close to one in three homes purchased in Canada are bought directly from a builder. While you may not have considered purchasing a house in the pre-construction stages, there are many benefits you can enjoy purchasing a home during the pre-construction stage. These benefits range from saving money and ideally reaping a large return on your investment when the time comes to sell your house, the possibilities for customization, the convenience of having a new home, and more. However, buying a home during the pre-construction process might not be the right choice for everyone for their needs, lifestyle, etc. It is important to consider the pros and cons before you consider purchasing a home during the pre-construction phase.

Pros for Buying A Pre-Construction House

If you purchase your home early on during the pre-construction process you might be able to purchase your home with a minimal down payment, while your home’s value will ideally appreciate over time. You can also buy at today’s prices, theoretically enjoying the benefits of your house’s future value. Moreover, if your financial situation is not amazing today, you can still purchase a new house and buy yourself time to improve your financial situation while your home is being built before the time comes to finance your home. Many brand new homes tend to be built in underdeveloped suburbs, this can allow you to avoid high costs and/or the bidding wars you might experience in expensive urban areas such as Toronto, Vancouver, and Montreal. Finally, newly built homes might offer more living space and be located on larger properties than older, existing homes.

Other advantages to purchasing a house during the pre-construction phase are the possibilities for customization since your house will be built exactly to your specifications. These customizations can potentially improve your home’s value while differentiating it from your neighbours’ homes before it’s finished, helping you avoid future costly renovations. This means your house will be painted with your colour palette, with your desired finishes, and appliances, saving you time and money, since all of the work will be done for you. New houses are typically built in the style that is popular today, such as open floor plans, larger eat-in-kitchen, walk-in closets, and more.

Additionally, new houses and condos are usually equipped with the latest technology built right in, such as alarm systems, speaker systems, internet, and cable wiring, saving you time, money, and holes in your walls. Another financial benefit for new properties is that you probably will not need to do as much maintenance since your home will be equipped with brand new appliances, plumbing, heating, air, and electrical systems. This will hopefully help you to avoid needing to do repairs for a few years. While utilizing new construction materials can help ensure that newly built houses are more energy efficient, potentially lowering your utility bills. While there are many pros to buying pre-construction or new construction homes, there are some potential cons you need to be aware of before buying a home in the pre-construction stage.

Cons for Buying A Pre-Construction or New Construction House

First, brand new homes can cost more than older, existing homes. Sometimes buying a brand new house can cost up to 20% more than buying an existing house. The fabulous amenities you saw in the model home at the project site can add up. It is important to remember that upgraded features in brand new homes are significantly marked up to ensure the builder is turning a profit and they can end up costing you far more than you ever expected. For example, it may cost your builder $6,000 to install granite countertops in the kitchen in a model home, but these counters might cost you $12,000 to have the builder install in your newly built home. Many new housing developments are frequently far away from important destinations such as schools, shopping centers, and more. If you are going to be one of the first people to move into a new development, you might be living in a construction zone for a long time.

If you are looking for a newly built house in a lovely, charming, tree-lined street in an older neighbourhood with a well-established community of neighbours, you are not likely to get this for a long time, probably years, moving to a new housing development. Newly built homes do not have the architectural detail and charm you might find in many older homes. When the time comes to sell your home, newer houses might not be as appealing to buyers who enjoy buying fixer-uppers and/or customizing and upgrading their homes to their exact specifications. People who enjoy fixing up homes will probably figure out that buying a brand new house is not ideal for them. Another consideration is that newer homes, especially newly built homes tend to be built on smaller lots than many older homes. So if you are looking for a house with a large backyard, in a neighbourhood where there is a lot of space between your home and your next door neighbour’s home, you might not find this with a brand new house.

While buying a house during the pre-construction phase for a project might be an ideal choice, there are some lifestyle factors you should consider before making any decisions. It is important to remember that you are not only buying a house, you are also buying a home and into a neighbourhood.

Related article: The Ultimate Buyer’s Guide for Buying a House in Toronto

There are several steps involved in the process of purchasing a pre-construction house. The steps in this process will vary from agent to agent, broker to broker, and developer to developer. However, the steps listed here represent the basic parts of this process.

Steps for Buying a Pre-Construction House in Toronto and The Greater Toronto Area (GTA)

1. Find A Great Agent/Broker To Represent You, The Buyer

Before you begin looking at pre-construction houses, you should find a great agent or broker that you like and feel like you will work together with, who has experience working in pre-construction and in new construction. While the model homes in developments are where you can see what the final product might look like, they are usually staffed by real estate agents who have a relationship with the builder or developer. These agents are usually representing the builder or developer, as the seller’s agent. As the seller’s agent, they are duty bound to act in the builder’s best interest, not necessarily your (the buyer’s) best interest. The builder’s real agent’s primary job is to ensure that the builder is getting the highest price possible for the homes they are selling. Therefore, it’s important that you have your own agent or broker who can best represent your interests, as the buyer.

A real estate agent or broker representing you as the buyer is duty bound to act in your best interest. As your real estate agent, they can advise you on how to best structure your offer so it is most appealing to the builder, can recommend other professionals who can help you throughout the purchase process such as lenders, movers, real estate attorneys, home inspectors, etc. and they can help you resolve any problems during the building process. Your real estate agent can also advise you on making choices such as choosing upgrades that will impact your home’s resale value. Your agent can also help you decide which areas, developments, and new projects might be an ideal fit for you, your needs, budget, and more. This is why it is essential that you find a real estate agent or broker who has experience working in new construction and that you also like, trust, and believe that you will enjoy working with.

You will be spending a lot of time with your agent or broker and they are an important person during this process. Your real estate agent/broker is your advocate and ally in this process, they are guiding you through this process. Chances are you will be looking at houses and probably moving in at least a year later so you will be working with this person for a long time. You do not have to be best friends with your agent or broker but you want someone who understands you, your needs, what you are trying to do and can help make this process as smooth as possible, saving you time, headaches, and money.

However, before you begin looking at home sites and developments, it is important to remember that some developments have site registration policies that require your agent to accompany on your first few visits. Before visiting any possible developments and home sites, you should ask your agent or broker to check the site’s registration policy before you visit. Your agent might be able to register you online or over the phone so you will be able to visit the model home at the site at your convenience. Or you can arrange a time with your agent to look at the community together.

Related article: Justo brokerage model includes lawyer, inspection fees

2. Investigate the builder’s/developer’s reputation and completion record

Assuming you have a found a project in the pre-construction phase that interests you, you will need to investigate the builder’s reputation and completion rate before deciding to buy one of their homes. You can investigate your builder’s reputation by visiting one of their other developments and speaking with homeowners, and searching online for reviews, testimonials, and news related to the builder/developer and their past projects. It is important to keep in mind that many builders have both happy and unhappy past clients. When researching builders and developers you should be looking for trends in reviews and news about their past jobs and make sure that you cover any concerns you may have in the purchase agreement documents. You can also see if your agent has worked with the builder in the past and/or is aware of their reputation. You can also check out local home builders’ websites, such as the Greater Toronto Area’s Building Industry and Land Development Association (BILD) website.

3. Visit the home site and learn about your potential new neighbourhood

If you are interested in some projects in the pre-construction phase, you should arrange a time to visit the homesites and project sites. Visiting project sites is an important step in this process since it will help you get an idea of what living your potential new neighbourhood might be like, and you can get an idea of how far away your potential new home would be located from schools, shopping centers, etc. During these visits, you should inquire about any future plans for commercial expansion in this area, e.g. are there plans in the works to build or expand upon any commercial areas, any plans for additional residential development, etc.

4. Visit a model home

On this visit, you will probably see a top of the line model home in a given development. However, it is important to remember that model homes are always going to look beautiful since you might not realize that all of the features and amenities you fell in love with in the model home, might be upgrades that you will be paying extra for. Moreover, the fit and finish of a model home might not necessarily represent what comes standard with a home. You can always ask to see basic model homes if they are available.

Model homes usually are a mix of features that come standard with the homes that are being built and additional upgrades. When you are touring model homes, be sure to find out which features and amenities come standard with the home and which features or amenities are upgrades that will cost you extra. It is important to know exactly what’s available, what you will be getting, and how much it will cost. It is important to remember that costs can change. In other words, the quoted price you received at the start, might not be the same as the price when you decide to move forward. You can ask your agent to get you a list of standard features and if available, a list of common upgrades and the costs associated with them.

This is not to say that upgrades are not worth the cost, it is to remind you that they will cost extra and you will be paying for them. You should also ask to see samples of the builder’s finishing touches, such as lighting and plumbing features, so you can see what they look like and make decisions about whether or not you will need to pick alternate plumbing and lighting fixtures. It is important to remember that upgrades in your future home are an investment because they can help add to home’s resale value when you are ready to sell. However, whatever upgrades you are adding need to be worth it for you and ideally should add to your home’s resale value. Finally, it is important to remember that builders and developers’ turn a large profit with upgrades. While there might be a little room for bargaining with the base sale price for a new house, you should try to negotiate the price for any upgrades you wish to add. The more upgrades you add to your home, the more leverage you will have when haggling over the price for your home.

Related article: Types of Houses in Canada and How to Get the Best Price for Them

5. Get Creative During the Negotiation Process

Assuming you have found a home that you love, now it is time to have some fun with negotiating if that is your thing of course. If you do not want to get bogged down in negotiating, your real estate agent/broker can help you with this. It is important to remember that builders and developers do not enjoy lowering their prices because in lowering their prices they are reluctant to set a precedent for negotiating prices with buyers because future buyers might expect the same discounts. While it may be possible to negotiate a bit with the base price for your home, you can also be creative with your negotiations and ask for discounts for other things.

If you want to get really creative and strategic during the negotiating process with your builder/developer, you could consider asking the builder or developer to pay your closing costs and/or perform upgrades at no additional cost. Asking for this can be great for you since builders are frequently more likely to negotiate on the “back end” since paying closing costs or giving you deal on upgrades are a more subtle way to sweeten the deal.  If you are considering a potential offer, you can ask your agent to research a builder or developer’s negotiating style for prior sales in the community and for other developments they have built to determine if there is any particularly effective way to approach their offer and negotiations with them.

6. Get Everything In Writing

Before you do anything, DO NOT sign anything until everything has been negotiated, agreed upon, and written into the contract. If you are purchasing a home during the pre-construction or construction phase and it has not been completed, it is essential to spell out in the contract, how the home will be finished, what will happen if there are construction delays, what will happen if the project is cancelled and the deadlines for any important decisions you will need to make during this process, and the payments that you will be making throughout this process. You should also have the builder or developer include in the purchase agreement, how much your Homeowner’s Association fees and other fees will be.

It is important to remember that verbal conversations are not legally binding, so everything important, every little detail should be put in writing and signed by all involved parties. While this may seem excessive, this is for your own benefit. Builders frequently use customized purchase agreement documents instead of standard purchase agreement forms commonly used in your area. You should ask your agent to get a copy of the builder’s purchase agreement documents for you to review in advance of signing any contracts and take them to your attorney to review before you sign anything.

If there is no legally mandated cooling off period in your province for new construction when purchasing directly from the builder or developer, ask for a cooling off period with a right of rescission. A right of rescission allows you to withdraw from a deal before the cooling off period has ended for any reason and receive a full refund for any money you may have paid.

During this legally mandated cooling off period you can also add amendments and other favourable clauses to your contract that can help protect you as a buyer in case there any construction delays or in the event that your project is cancelled by the builder or developer.

7. Get a guarantee and find out what is covered by the warranty

Since you are purchasing a house that has not been completed yet, you will need to figure out what guarantees will you have that your home will be ready on time? Your purchase agreement documents should specify a completion date. DO NOT sign purchase agreements that do not have agreed upon completion date. However, it is important for you to remember that many builders add provisions that make the completion date contingent upon receiving permit approvals from a municipality or building materials from suppliers. Furthermore, you may be responsible for paying additional fees if you are unable to close on time because your lender is not ready. You should ask your agent to point out what happens in the event of a delay on the builder’s side or the buyer’s side. This is especially important since there are frequently delays with residential and commercial construction projects. Your agent should also negotiate a guarantee in case of the rare occurrence that the project gets cancelled.

Before signing any Agreement and Purchase of Sale (APS) agreements, you will need to find out what the warranty for your new home covers. Many newly built homes are delivered to their owners and to buyers with a warranty or guarantee from the builder. But, not all warranties are the same or are created equally. Canadian provinces such as Quebec, British Columbia, and Ontario, all have legally mandated warranty coverage for newly built houses, condos, and townhouses. While in other Canadian provinces, builders may try to convince buyers to opt out of warranty coverage by saying they are saving buyers from registration fees, do not fall for this. You will need to find out what is and is not covered under the warranty or the builder’s guarantee and how long the warranty lasts.

It is important to keep in mind that many builders use a third-party warranty company. In some cases, the manufacturers of certain products, such as windows, may have a separate guarantee or warranty for their products. For example, if you have a problem with your windows and they are covered by a warranty from the manufacturer of your windows, the builder might refer all issues with your windows since they come with their own separate warranty from the manufacturer instead of handling these issues themselves. Your builder should be able to provide details on which part of the home is covered by which policy. You should ask your agent to obtain warranty information early in the process so your offer documents will be prepared to address your concerns that you may have up-front before signing any purchase documents.

8. Sign the Agreement of Purchase and Sale (APS)

At this point, you will be signing the papers to purchase your future home. When the day to sign the APS arrives, you will need to arrive prepared with your valid government-issued photo ID (i.e. passport or driver’s license) and your chequebook, since you will need these items to purchase your home. Your real estate agent will take you through the signing process and answer any other questions you might have at this time.

It is important to remember that a new home’s purchase agreement is a legally binding document, spelling out the conditions of the sale and each side’s obligations in the sale. APS documents tend to be full of legalese and fine print. Therefore if you are signing the APS documents without understanding all of the terms and conditions you are agreeing to, you might be agreeing to substitutions, inclusions or exclusions you did not know you were agreeing to and/or did not realize you were agreeing to. Before signing the APS or when you are signing the APS, you will need to figure out any milestone payments you might be responsible for paying. You should ask whether or not will you be expected to pay at certain stages of construction or will be paying the full price for your home the day you receive the keys for final occupancy?

9. Keeping It Cool: The Cooling Off Period

Ideally, your APS will have a legally mandated cooling off period, which will allow you to back out of a deal before this period ends and receive a refund for any money you have paid. During this period, if you have not already done this, you should have a lawyer with experience in pre-construction review this agreement. If you have not already done so now is the time when you should also work on securing pre-approval for a mortgage from a lender or a commitment letter from your financial institution and be completing any other important tasks related to the purchase process. During this period, your home is on hold under your name for however many calendar days this cooling off period lasts and you will be 100% protected during this period in case of an emergency. A typical cooling off period might last 10 days for new home sales in Ontario.

10. If You Have Not Already Done So, Find a Lender and Get Pre-Approved For A Loan

If you have not already done so, if you will need a mortgage to purchase your home, you will need to secure pre-approval from a financial institution or a commitment letter in order to proceed with the purchase of your home. It is important to remember that since your home is not completed, it has not been officially registered yet, you will not be officially registered for a mortgage. It is recommended that you shop around for lenders and find the lender/financial institution who can give you the best rates, they do not need to be the builder’s lender.

11. Your Builder/Developer Cashes Your First Check

If you are satisfied with the purchase agreement after the cooling off period, the contract can be finalized and your first deposit check will be cashed one day after the cooling off following the date you signed the contract has passed. Congratulations, you are one step closer to being a homeowner! Your deposit checks should be processed accordingly. You should definitely be making sure that you will have sufficient funds in your account on the specified dates that were provided to you in the sales agreement to avoid paying costly Non-Sufficient Funds (NSF) fees and delays in your purchase process. You will be receiving a receipt each time one of your checks to your builder/developer has been cashed.

12. Begin working with the builder/developer to customize your home

While your new house is being built, you will be in contact with someone in your builder/developer’s office about customizing and designing your house. You will be working with them to pick the colours, finishes, and upgrades you want in your home and create your dream home.

13. Home Inspection

Before closing on your home and having the ownership of your home transferred to you, you will need to have your home inspected. The first inspection is mandatory for all new homes under warranty and takes place with your builder shortly before the house is delivered to you. This is where you make sure that the builder lives up to the promises set out in the purchase agreement. If there are any deficiencies, you will need to write them down on a list and have the builder sign off on this list this way you will have a written acknowledgement from your builder/developer that they are aware of these problems and will fix them. It is important that your builder signs off on this list since if these problems are not written down and signed off by the builder, the builder is not obligated to fix the problem(s).

Your home should be inspected a second time about a month before your home warranty is due to expire. Your house should have gone through all four seasons to have enough time for any major defects from settling or cracks to appear.

It is important to remember that there are different deadlines for warranty claims, mark your calendar with the dates for these warranty deadlines and submit any warranty claims at least five days before the warranty deadline is due to expire. As a new homeowner, it is your responsibility to ensure that the warranty remains valid. For example, if you have to change your furnace filter or clean your gutters if you are claiming that you are having heating deficiencies in your home or water penetration into your basement, these repairs will need to be documented for your warranty. Your builder should be leaving you with copies for the manufacturer’s warranties for the components and products used to build your house.

14. Moving in: Interim and Final Occupancy

There are two important dates and stages during the closing process. These stages are the Interim Occupancy stage and the Final Closing stage, you will be meeting with your lawyer and real estate agent/broker during these final closing phases.

You will first meet with your lawyer when your developer/builder first contacts you to inform you that your home is ready for Interim Occupancy. At this time you should be prepared to make any outstanding deposits and occupancy fee payments. It is important to note that during the Interim Occupancy period you still do not own your house. Your mortgage or final payments will not occur until the Final Registration date. It is recommended that you contact your lender approximately one year prior to your anticipated occupancy date to have your mortgage letter updated so you can avoid paying increased interest rates.

You will be meeting with your lawyer a second time during this process shortly after the final closing date so you can sign all of the documents to officially transfer ownership of your house from your builder/developer to you. Your mortgage will be beginning and your lawyer will be explaining all of the outstanding costs you will be responsible for paying to finalize this purchase. Once you have signed all of these documents and paid all of the outstanding fees and/or deposits, you can pat yourself on the back since you are now officially a homeowner!

Things You Need To Keep In Mind

Whenever making an important decision such as buying a home, especially a new home during the pre-construction phase, there are some things you should keep in mind, such as taxes, length for completion, your objectives for buying a home, and more.

First, Tax Considerations For New Homes in Canada

It is important to remember that for new homes in Canada, the GST/HST, the Goods and Services Tax (GST)/the Harmonized Sales Tax (HST) is applied to the price of a new home, this is not the case for existing homes in Canada. The GST/HST has the potential to significantly increase the overall cost you will be paying when purchasing a new home since it is approximately 5% of the purchase price. Although you might be able to receive a 2-3% rebate from for the money you paid for the GST/HST.

Second, you need to ask yourself whether or not you are prepared for the possibility that your home might be completed one or more years after purchasing it during the pre-construction phase? Are you prepared for the possibility that the anticipated date of completion vs. the actual date when you will be able to move into your home might be months or years after the promised delivery date? There are almost always delays with construction so you need to be patient and flexible given that it is more than likely that the construction of your home will be delayed.

Other things you should consider are you prepared for the likelihood that your money might be tied up for a while? Are you ok with the possibility that might be tied up for years? Another important question you will need to ask yourself is will you be able to qualify for a mortgage upon your house’s completion? You will need to consider what might interest rates be doing years from now? Do you need to ask yourself what your objective is in purchasing a house in pre-construction? Do you believe that you will be living in this house or will this be a house that you are renting? If you plan on renting out this home once it has been finished, you will need to consider factors like how many other investors there might be in your development? Are you prepared to wait for your builder to fix any deficiencies for you or your tenant? Are you prepared to wait a long time before your builder fixes any deficiencies in your home?

Related article: 5 Common Mistakes to Avoid for a First Time Home Buyer in Toronto

Conclusion

Buying pre-construction houses is not for those who lack courage or gumption, since buying a house during pre-construction has its risks and investing in real estate is inherently risky. However, if you do your research, negotiate well, are prepared for the trials and tribulations buying a house during pre-construction can present and are lucky, your investment might turn out well for you. In order for you to enjoy the rewards of your investment, you will need to do your due diligence and consider whether or not buying a house during a pre-construction phase is the right choice for you.

Photo by Randy Fath on Unsplash

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