The Basics of Buying a Home in the Preconstruction Phase
Have a Meeting with Me
With any buyer, I find that it’s useful for us to meet (either in person or with a video call) so that we can discuss your wants and needs with respect to your potential purchase. I want to hear about what you are looking for, and discuss how I can best help you find it.
Get a Mortgage Pre-Approval
It is a good idea to get a mortgage pre-approval completed before you start working too hard on finding a property, so that you will know where you stand with respect to how much a lender will be willing to lend to you, and you won’t waste time looking at properties that are outside of your price range. Also, a mortgage agent could give you advice about how to improve your profile (increase your mortgage approval), if that is important to you. For mortgage agents, you can deal with someone at your favourite bank, or if you would like to speak to a non-lender-specific mortgage broker then I can recommend someone to you.
Just note that for preconstruction home purchases, the developer will have a list of “approved” lenders from whom they will accept a mortgage preapproval when you submit your offer to purchase one of their homes. Usually any Schedule I bank in Canada will be approved. You may need to have a mortgage commitment completed and submitted to the builder if they accept your offer to purchase one of their units.
Decide on the Location
What area/neighbourhood do you have in mind? Consider the following:
- Are you buying the home to live in yourself, or will you be renting it out to tenants, or using it for some other purpose? Consider the needs of the people who will be living there, and, determine which areas/neighbourhoods meets those needs. For example, do you want it to be close to your job, or a certain school, or a certain shopping area? Do you want it to be walkable to a subway station, or in a slightly more tucked away from the main streets?
- How important in market appreciation to you? If this priority is high on your list, then you might want to look in an area that has started to show market appreciation in the last few years. You can also consider “up and coming” areas, areas that are being developed with infrastructure and shopping areas.
Learn About Preconstruction Projects
Using preliminary information from me and any other projects that you might find on your own, eliminate the ones that aren’t suitable for you. Compare the projects to each other to identify which one you like the most.
Consider the reputation of any builder from which you consider buying. If you have any questions about certain builders, just ask me.
All builders in Ontario should be registered with Tarion. Tarion is the company which provides new home warranties in Ontario. You can learn more at tarion.com.
Choose a Suite
Out of the available suites, choose one that meets your wants and needs.
Sign the Agreement of Purchase and Sale
The Agreement of Purchase and Sale will be a fairly standard, approx. 35-page document which includes Tarion Warranty information and a basic floorplan. We can discuss the clauses and any questions and concerns that you might have before signing. Usually, there is a 10-day “cooling period” which starts the day after the Agreement of Purchase and Sale is signed by both you and the builder.
It’s important to know that the down payment rules for buying preconstruction homes is different that that for re-sale homes. When buying a preconstruction home, you will usually be required to submit 20% of the purchase price (in some cases possibly more) in installments.
The deposit structure is usually as follows:
- $5,000 submitted with the signed Agreement of Purchase and Sale;
- the balance to 5% of the purchase price in 30 days of signing;
- another 5% in 120 days;
- another 5% in 180 days; and
- another 5% in 365 days, totalling 20% of the purchase price.
For non-Canadian residents, the required deposit is usually at least 35% of the purchase price.
During the 10-day cooling period (if applicable), your real estate lawyer will review the Agreement of Purchase and Sale as well as any documents provided by the builder at the time of signing, such as the proposed condominium documentation (if it’s a condominium). It is important to get these documents to your lawyer as soon as possible after you have signed so that your lawyer will have the time to review them and then report to you on any legal issues of concern (such as the builder’s rights to change materials and layouts, to extend occupancy/closing dates and to charge development fees on closing), before your 10-day cooling period expires. That way, you will have a chance to ask for any amendments that you require, or to back out of the deal and get your deposit back. Your lawyer will likely charge a small fee for this preliminary review, and will charge fees at closing as well.
Expiry of the 10-Day Cooling Period
If, within the 10-day cooling period, you decide to cancel your purchase for any reason, you will sign a Letter of Rescission to notify the builder, and deliver it to the builder before the expiry. Your first deposit will then be returned to you without any deduction.
Once the Agreement of Purchase and Sale is fully signed and after the 10-day cooling period has expired, then you wait… and wait… and wait. Some projects can take several years to be completed. It is rare for construction projects in the Greater Toronto Area to be completed within the time first mentioned in the Agreement of Purchase and Sale. The typical Agreement of Purchase and Sale allows the builder to extend their completion dates with notice to you. Construction involves many variables and it is impossible for a builder to predict an exact completion date, so this is to be expected.
At any point before the Closing Date, you may (subject to any restrictions in the Agreement of Purchase and Sale) have the option to assign your Agreement of Purchase and Sale to another buyer. Since you don’t yet own the home, you are selling your contract to purchase the home. If you sell your contract prior to the closing date, then you can avoid the closing costs associated with closing on the purchase of real estate. There may be a fee associated with assigning the contract, and the new buyer would need to qualify for the mortgage just like you did upon signing. These assignment requirements will be set out in the Agreement of Purchase and Sale.
Pre-Delivery Inspection (or, “PDI)
The builder is required to give you the opportunity to inspect your property before the Occupancy Date. This inspection is called the Pre-Delivery Inspection (or, “PDI” for short). During the PDI, a representative from the builder will walk you through the property and may explain anything that you need to know about the home’s systems, such as heating and plumbing. Any deficiencies in the home should be noted on the builder’s PDI form.
With newly built condominium homes, the builder is allowed to provide a buyer with occupancy once the unit is substantially complete, even if the unit or the building is not fully completed, as long as it is safe for occupancy, with 120 days written notice. This allows the builder to pass along some of the costs of ownership to you, the buyer, without waiting for the entire building to be completed and the condominium documents to be registered on title. The interim occupancy period may last around three to eight months before the Closing Date.
From the Occupancy Date (the date that the keys are released to you) to the Closing Date (the date that title is transferred into your name), you will be responsible for a “phantom mortgage” or “rent” which is a payment that reflects the interest on what a mortgage would be for the unit (at the builder’s lender’s interest rate), as well as condo maintenance fees, property taxes, and your utilities.
Note that any deficiencies that were not corrected by the Occupancy Date need to be reported to Tarion. Tarion is the company which provides new home warranties in Ontario. You can ask me for more information about this and you can learn more at tarion.com.
Prior to the Closing Date, you will need to coordinate with your lender and your lawyer for your financing to be lined up with the Closing Date of your purchase.
The Closing Date is the date on which title to the unit will be registered in your name, and your mortgage will be registered on title.
Closing Costs and HST
Closing costs on this date will include land transfer tax, your lawyer’s fees and the builder’s final fees (such as any development fee, the Tarion fee and your portion of the discharge fee for the builder’s mortgage).
In the typical Agreement of Purchase and Sale, HST is included in the purchase price, as long as the first occupant of the home is the buyer (or certain family members) and the intention is to use the home as a primary residence on a permanent basis. The HST Rebate can be claimed as soon as title has been transferred, and there is a two-year time limit to file the claim. Some builders pay or credit the buyer the amount of the HST Rebate on closing, and then the builder seeks the rebate from the government.
Note that all claims are subject to be audited by the Canada Revenue Agency, and if you are found to be ineligible after receiving rebate funds, then you may be required to repay all or a portion of the HST Rebate plus interest, so act in good faith when making any claims.
Every type of home that is purchased has its own unique processes and advantages and disadvantages. Work with a Realtor like me to help you get through!