Condo Market: Pre Construction Condo Myths
Sometimes buyers are unsure if they should buy re sale versus a pre-construction.
I would like to take this opportunity to touch on a few key points regarding some of the questions I run into on this topic.
Myth: Renting is cheaper than buying a condo.
The reason this topic comes up is when most people think of buying, they may only be thinking of the 5 per cent down payment. Therefore, their calculations of monthly mortgage payments plus additional expenses such as property tax, maintenance, home insurance and utilities can add up quickly. Pre-construction can be a great choice for someone who is worried about his or her monthly costs. Let me explain:
One of the benefits of buying pre-construction is that by the time you take possession, in most cases, you would have already paid down 20 per cent, which makes the mortgage a lot more affordable and lower payments. The delay in taking possession also gives you time to save. People tend to rush into homeownership and buy with only a 5 per cent down payment. I am not saying that there is anything wrong with buying with a 5 per cent down payment as it is a benefit to a first-time buyer. However, if you are worried about your monthly expenses or your income is on the lower side, you might want to consider pre-construction.
Myth: I can get a better deal on a resale condo.
I hear this quite often. A lot of investors that buy pre-construction, in the very early stages of the project release, tend to get the best choice of available suites, floors and the best prices. Additionally, most of the time builders throw in incentives at the launch event. Another benefit is to let your deposit work for you. There is a good chance that you would gain equity by the time the project closes a few years down the road. One last noteable item that I think is worth mentioning is that when a pre-construction condo is complete a few years down the road, you get a brand-new property for the price of a few years back. The unit’s price per square foot will most likely be much higher at the time of closing in comparison to other condo buildings around in the immediate area. Let’s not forget, since it is a brand new condo, there is a good chance you will pay a lower condo maintenance fee.
Myth: I will need a huge down payment.
Typically, you will only need 5 per cent when signing at the sales centre. Depending on the structure of the down payment, one can expect to pay 5, 10, or 20 per cent in total. Most payment schedules range anywhere from 120 days to 540 days, depending on the project and how early it is when purchasing. Also, the closing costs such as land transfer tax, which is a big one, and other legal fees do not have to be paid until closing date. Therefore, you can focus on the deposit instead of having to come up with everything all at the same time if you were buying resale.
Myth: Too many investors buy pre-construction condos.
I have had a lot of experience with end users buying preconstruction condos. In fact, seasoned investors typically have deep pockets and most of the time do not need to save up a down payment. They can afford 20 per cent easily. Investors also want to start receiving rental income as quickly as possible. I am not saying that investors do not buy pre-construction. However, it is not geared only towards investors. The breakdown of the deposit structure is typically intended to attract a buyer who wants to put more money down to have a smaller mortgage and avoid paying CMHC.
Myth: What if my situation changes by the time it closes?
A very good point. You may have heard the saying, nothing in life is certain. I have seen more resale deals fall apart because the circumstances have changed just before closing. Sometimes even one week before closing a buyer would lose their job and the bank refuses to finance the deal. This can happen at any given time.
Myth: I do not know what I am getting.
The scary part is that this is not 100 per cent myth. I have heard stories of buyers who get the keys and are not impressed with the unit they bought. One way to potentially avoid issues such as this is buying from a reputable builder. Research reviews and look to see if there are any negative reviews against that builder by looking at their past projects. A good reputation goes a long way in any business. A good realtor would be able to guide you when you are looking for a reputable builder. In addition, when you sign the purchase agreement at a sales centre, you will most likely come across a few builder clauses that indicate that the floor plan or drawings might vary. Remember, you have a ten-day cooling period. Therefore, you should use this time wisely and review your contract with your lawyer before the ten days expire.
ARIE BUZILO is a broker and an investor specializing in buying and selling properties all over the GTA. He works out of Century 21 Leading Edge Realty Inc. Brokerage. For further information ArieBuzilo.com.