Should You Buy Pre-Construction in Real Estate Canada?
Posted On October 27, 2023
Many investors and first-time home buyers in real estate Canada increasingly prefer an alternative approach to purchasing property. Instead of browsing through multiple resale properties, they buy new homes before they are built, AKA pre-construction homes.
This is a popular choice for potential homebuyers who want a brand-new home, even if they must wait for its completion before moving in. Buying a pre-construction home means purchasing a property before it is built, which comes with benefits and challenges.
It’s essential to note that while pre-construction properties are primarily condominiums, they also contain a broader spectrum of real estate types. This category includes freehold detached houses, semi-detached residences, townhomes, and even commercial properties, all of which are reserved for a future closing date.
This article will explore the pros and cons of buying pre-construction properties in Canada while sharing tips for potential buyers.
The lower initial costs are one of the most compelling reasons to buy a pre-construction home. While the down payment may still be required, it is generally lower than traditional down payments for existing homes. This gives buyers a more extended period to build the capital needed to purchase.
2. Potential for Profit
Buying a pre-construction property provides buyers with greater profit potential. Buyers can enjoy a substantial financial gain if the property’s market value increases between purchase and completion. This can be especially beneficial in a market where property prices rise.
3. Customization Options
Another benefit of purchasing pre-construction homes is the opportunity for customization. Buyers who buy early, particularly during VIP sales events, often have the chance to customize or even combine units according to their preferences. This creates a highly personalized living space that meets specific needs and preferences.
4. Warranty and New Appliances
Buyers can enjoy a Tarion warranty when buying a pre-construction home. The home and common areas come with a standard warranty, providing peace of mind for potential issues that may arise. Additionally, everything, including appliances, is brand new, reducing the likelihood of maintenance and repair costs in the early years of homeownership.
5. Rental and Pet-Friendly
Many new buildings have fewer restrictions on rentals compared to older homes, making pre-construction properties attractive for investors looking to generate rental income. New building bylaws often have no restrictions on pets, allowing for a pet-friendly living environment.
6. Mortgage Vacation at Occupancy
In some cases, developers may allow buyers to move into their pre-construction units before the rest of the building is complete. During this occupancy period, buyers are not required to make mortgage payments. Instead, they pay an occupancy fee to the developer, which is often cheaper than renting an apartment. This allows buyers to settle in their new homes without the immediate financial burden of mortgage payments.
Cons of Buying Pre-Construction Homes
Now that you have a fair idea of why you should invest in a pre-construction home let us also discuss the risks.
1. Market Value Uncertainty
One of the primary risks of buying pre-construction homes is the uncertainty of market value. While property prices usually increase over time, there is always the possibility of market fluctuations. Buyers assume the risk of potential losses if the property’s market value goes down before completion.
2. Interest Rate Fluctuations
Interest rates play a crucial role in homeownership affordability. With pre-construction purchases, buyers face the risk of interest rate fluctuations between the time of purchase and completion. If rates rise significantly, mortgage payments can become more burdensome, impacting the financial feasibility of the investment.
3. Financing Challenges
Buyers who opt for pre-construction homes may face financing challenges. Changes in mortgage qualification rules or personal circumstances, such as job loss or reduced income, can result in changes to mortgage eligibility. Additionally, if the property’s market value drops below the pre-agreed purchase price, buyers may need to provide a larger down payment to make up the difference.
4. Completion Date Uncertainty
Pre-construction contracts often provide estimated completion dates, but developers can extend these dates significantly. Buyers may find themselves waiting for an extended period before taking ownership of their properties. On the other hand, when the developer is ready to complete, buyers must be prepared to close within a short period, adding pressure to finalize the purchase.
5. Variation from Marketing Materials
Marketing materials for pre-construction homes often depict the properties in their best light. However, the final product may not always match the initial expectations. Developers may make changes without consulting buyers, and there may be slight deviations from the original floor plans. Buyers must have a vision and understanding of potential variations when purchasing based on floor plans.
Tips for Buying Pre-Construction Homes in Canada
If you still wish to buy pre-construction houses for sale in Toronto or other Canadian cities, here are some essential tips to keep in mind:
Know your risk tolerance: Understand the potential risks and uncertainties associated with pre-construction purchases. Consider the possibility of project cancellations and market fluctuations and assess your ability to handle these risks.
Understand the timing: Clearly understand the timing involved in the purchase. Know when the closing date is expected and how much time you have to prepare for it.
Research the area: Conduct thorough research on where the pre-construction property is being developed. Consider factors such as infrastructure, developments, and the potential for growth in the area.
Research the developer: Look into the developer’s track record. Review past projects to assess if they were completed on time and in line with the initial promises. Consider speaking with individuals who have invested in the developer’s previous projects.
Research additional costs: Consider potential hidden costs while purchasing a pre-construction property. Consider expenses such as HST costs, levies, infrastructure development fees, and potential increases in condo fees.
Find a good Realtor: Work with a knowledgeable Realtor with pre-construction property experience. They can guide you through the process, provide valuable insights, and ensure that your interests are represented.
Work with a lawyer: Engage a trusted lawyer to review all legal documents associated with the purchase. They can help you navigate the fine print and protect your rights and interests.
In conclusion, buying pre-construction homes in Canada can be a viable option for home buyers and investors. It offers potential benefits such as lower initial costs, customization options, and the opportunity for profit. However, it comes with risks and challenges, including market value uncertainty and financing considerations.
We encourage you to visit our blogs that comprehensively explain the hows of investing in pre-construction condos in Canada.
The real estate market in Canada offers a wide range of options for home buyers, including the opportunity to purchase pre-construction properties. Investors and first-time home buyers can effectively make informed decisions and navigate the pre-construction real estate market by understanding these factors and following the tips provided.