Seven things to pay attention to in the pre-construction agreement of purchase and sale:
Although you may have little negotiating leverage in Purchase and Sale’s pre-construction Agreement, it’s still important to understand your legal and financial obligations. From our experience, when reviewing your Agreement with a lawyer, here are seven critical things to focus on:
- What are the assignment rights/limitations of the purchase and all associated costs with assigning?
- Do you have permission to rent during the occupancy period?
- Is there a cap on builder closing costs (based on unit size)?
- What is the cap on utility hookups?
- Is the heat pump owned or rented?
- What are the administration fees (i.e. administering the deposit)?
- What are the projected first-year maintenance fees?
Of course, there are many considerations to factor in when it comes to buying pre-construction. That’s why, after signing the Agreement, you still have ten days to re-think your decision.
The 10-day cooling-off period
Now, if you’re thinking, “did I make the right decision” after signing and feeling buyer’s remorse, don’t fret. You have the 10-day cooling-off period to make up your mind.
In Ontario, you have what’s known as the 10-day cooling-off period. Under Section 73 of the Condominium Act, pre-construction purchasers are allowed a cooling-off period during which you can rescind the pre-construction Agreement of Purchase and Sale for any reason. This means you have ten calendar days, starting from the day you received an executed copy of the Agreement, to review all the documentation and your financial circumstances. During this time, you want to ensure that you are confident and ready to move forward with the purchase. Because after the 10-days, you no longer have the right to walk away from the sale without legal and financial pains.
Do you need a mortgage when buying pre-construction?
You do not need a mortgage, given that what you are buying doesn’t exist and most likely won’t for several years. You will, however, require a mortgage pre-approval that will satisfy a developer’s requirements. Most resale mortgage pre-approvals are only good for 90 days. When purchasing pre-construction, the actual Agreement will be written that the purchaser must provide a pre-approval as per the developer’s terms within a stated period. The developer requires this approval to satisfy its lenders to show that all of the purchaser’s covenants on all its sales are solid, thus reducing the risk for defaults at the close. It is essential to know that you will qualify to get mortgage pre-approval ignorer to buy a pre-construction property. It is imperative that you have this done in advance of purchase or during the ten-day rescission period.
The top three mistakes a pre-construction when buying new construction?
On average, there are between 16,000 -25,000 pre-construction purchases made every year. For the most part, most of these properties close without issue; however, not all projects and developers and investment opportunities are equal. Even more worrisome is that once in a while, there are situations where a purchaser can run into trouble. With several decades of experience in working in pre-construction, below are a few of our biggest watch-outs:
First and foremost, everything starts and ends with the developer. Questions to ponder; Do they have a sterling reputation? What is their track record, and what have they built before? Have you visited any of their buildings or know anyone who resides in one of their buildings? How deep are their pockets, and can they get the job done if they run into snags or an unforeseen financial downturn? The horror stories you hear about condo development projects gone wrong mostly happen with first-time developers or developers with nefarious reputations in the media. Make sure to do your due diligence, or as the saying goes, Caveat emptor; buyer beware.
Know your costs! It is imperative to understand all of the costs involved in your purchase will be due on closing over and above the purchase price. On average, you could be looking at an additional 9-10% of closing costs that can not roll into your mortgage, and if you are not prepared, you could be in for a rude awakening in 3-4 years. There are known costs to be factored in, like legal and land transfer taxes, but less often considered or advertised by the developer is the relevance of HST on an investor’s purchase. In addition to those mentioned above, there are development charges, some capped and others unknown, coupled with all kinds of additional costs built into the Agreement; a competent lawyer will outline that at the time of review. In short, this is a significant investment that has a lot of additional costs that you need to understand clearly.
Buying a bad floor plan: It is estimated that only a tiny fraction of the general population can visualize a space in 3d. On top of that, it takes a considerable amount of experience to understand how space will feel and function once built and how livable it will be? Given that the average condo in downtown Toronto ranges from 500 – 700, it’s surprising how much can go wrong in such a small amount of space. Here are some considerations that go into a floorplan, how much natural light is there, what are the ceiling heights, what is the exposure and views, is there outdoor space and how does the living space flow into it, is there an island, walk-in closet, are the ceilings flat or stipple to both? Knowing what to look for and choosing the right floor plan can often make or break your return on investment or enjoyment of the use of your space.
