Sophia follows my blog posts and wrote me a quick email that went like this:
“Hey Stevie, thanks for the emails and blog posts lately, they’ve been extremely helpful! Ok, so we saw a pre-construction project you sent out. Gilberto and I are interested and wanna take the plunge!! Looks like it’ll be pretty hot though so how does this work exactly, what comes next??”
Hey Sophia, how’s it going? Glad I could be of help! For starters, most hot pre-construction projects tend to sell out REALLY fast, often before there’s even a public launch! So when it comes to landing a unit, those who act first, usually win.
What makes a project hot?
The location of the project might be in an extremely exciting, high-demand area or the developer might be offering some pretty awesome purchase incentives.
There’s lots I wanna cover Sophia, but first let me give you some quick insider-tips on how things work…
When a builder launches a new condo project, there’s typically a 3-tiered release.
The first group to be notified are the top brokers who’ve worked with the builder on past projects – usually helping their clients secure multiple units. On occasion, yours truly might be ranked among them.
Next, is the general real estate broker community who typically focus on the condo market exclusively, within a certain geographic area.
The third group are usually previous purchasers of projects built by the developer.
It’s worth noting Sophia, each group is usually given a different release date and all this happens prior to the public launch of the project.
Keep the following point in mind…
When you purchase a pre-construction condo in Ontario, you are legally allowed a 10 day cooling off period.
This means, if for whatever reason you change your mind within that time frame, you can return the signed agreement to the builder and get your deposit back.
During the 10-day cooling off period, it’s expected that you’ll have your lawyer review the documents and suggest any amendments to the contract.
Some builders may also require a mortgage pre-approval during this time as well.
After the 10 days (also called the rescission period) elapses, it is assumed that you will be moving forward and your deposit held in trust, will be cashed by the builder.
Pay keen attention to what comes next…
I’ve itemized the closing costs associated with most pre-construction purchases. It’s really important that you have a keen grasp on this.
1. What do Pre-construction Closing Costs Include?
Each Pre-Construction Project Offers a different set of closings costs. The costs are not consistent across the board as different projects will often have a different closing cost structure.
In my experience, buying in Toronto for 2016, you should prepare for a closing cost figure in the range $7-$14,000 for a 1 bedroom or studio condo, and approximately $12-$18,000 for a 2-bedroom suite or larger.
The costs typically include:
Fees paid to your lawyer
This will depend on the lawyer or law firm chosen but an all-inclusive package may range from $1500-$2500.
Land Transfer Taxes
Toronto is the only municipality in Canada (that I’m aware of) imposing a burdensome land transfer tax on its citizenry. It’s typically considered a provincial tax.
But, if you’re purchasing in Toronto, the range for units under $450K is around 1% on the provincial level and a subsequent 1% on the municipal level.
This is a big thing to watch out for. The range varies greatly from project to project. Your lawyer should always have them capped – no exceptions. Typical numbers I’ve seen in the city core range from $5-7,000 for 1 bedrooms and $8-10k for 2 bedrooms and larger.
Utility Hook ups
Builders transfer the cost of connecting your utilities for the first time.
The warranty with your new home is not free and is required by law in Ontario. The cost might range anywhere between $600 and $1200 for the typical investment unit. Check out my blog post here to learn more.
This usually sits at $1000 or under for a typical purchase. Elements may include law society fees, deposit cheques, admin-fees, mortgage discharge fees, status certificate fees etc.
In some cases, the builder may require that property taxes be paid up front for a period of 2 years at final closing.
This detail would be included in your Agreement of Purchase and Sale Agreement so having your lawyer review the document is key.
2. Always, Always, ALWAYS Ensure Development Charges (levies) are Capped.
Levies are charged to the builders of new condos or houses by the local municipality to cover expenses such as sidewalks, lamp posts, streets, parks, schools, hospitals etc. Nice.
The issue is these charges are transferred to purchasers and appear only on the closing date of your purchase.
In theory, we really have no clue what the municipality will charge 2-4 years down the road when your condo is built – hence the importance of setting limits on these charges via a cap.
I cannot stress this point enough: If you come across a developer not willing to accept a cap on development charges/levies, turn around and run for the hills.
If the development charges are not capped, it simply means the levies are downloaded to you on closing and there is no control of the future cost leaving you on the hook.
Your lawyer should still do his/her due diligence in reviewing the Agreement of Purchase & Sale thoroughly to ensure you’re protected.
3. Does the Purchase Price Include HST? – Well kinda… Yes & No
The price tag for most pre-construction purchases will often say “HST is included.” The reality is if you or an immediate family member will be occupying the unit as end users then HST is included in the purchase price.
However, if you’re an investor, you’ll need to declare that to your lawyer (upon closing) and hence you will no longer qualify for the upfront HST rebate.
Prepare to pay approximately 8% of the purchase price on final closing as HST (it’s never the full 13%), as an investor.
The developer will remit the funds to the Canada Revenue Agency and from there, it’s up to you to apply for the HST rebate to get the funds back.
There is a silver lining though. Let’s say your condo investment is under $350,000.
By supplying proof that you’re renting out your condo for a minimum of one year (under a tenant lease agreement) then you can expect to receive 100% of the HST rebate back–within around 30 days from applying to the CRA.
If your investment is in the $350k-$450,000 range, most of your HST will be returned, but definitely not all. For investments above the $450,000 mark I advise you consult a tax expert for them to expound on your specific situation.
The moral of the story is, if you’re an investor you need to budget for HST on final closing. I hesitate to describe this as an actual cost though, given you do get some or all of it back.
That said, it is an out of pocket expense due on final closing, so as an investor it helps being prepared! Hope this helps!