It didn’t exist yet.
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After seeing more than 50 houses and losing nine bidding wars, the house hunt was not only becoming tiresome for us, but it was also becoming more difficult to get any house at all, let alone the one we wanted. When we saw the listing for this pre-construction home in Toronto’s west end, it shifted our thinking. Buying a new build could improve the return on our monetary investment, and give us an ROI of our time too—no more pounding the pavement, figuratively and literally, in futile search of a home.
With that found time, however, came a requirement for patience. We bought the house in early 2016, but we didn’t move in until late 2019—three years and eight months later.
Understand the payment schedule
The payment schedule may be prohibitive for some Canadians, as well. A pre-construction property typically requires a 20% deposit (there is no regulation around this, and the deposit is set at the discretion of the builder). So, if the purchase price of your home is $750,000, a 20% deposit amounts to $150,000, which buyers usually have to pay on an installment schedule, such as 5% due within 30 days of purchase, the second 5% after 90 days, the third 5% due within a year, and the final 5% due 30 days before you move in. That’s a significant amount of money you need to come up with before you can even move in and stop paying the mortgage or rent at your current abode. But for those who have the means, here’s what else you need to consider when buying a pre-construction property:
You do not need to enter a bidding war for a pre-construction home
We lost the first house we bid on by more than $150,000, although we had gone in with an offer of $30,000 over asking ourselves. The market in Toronto in 2015 when we started looking seemed illogical, and it was stressful to put in offers that we thought were high, yet still were not even good enough to “win.” Current-day house hunters will find it hasn’t gotten easier since then. Lauren Haw, CEO of Toronto-based brokerage Zoocasa, shares, “COVID has made this [phenomenon] expand to suburban areas now too. So-called 18-hour cities—places like Barrie, London, Hamilton—were not experiencing bidding wars in 2015/2016 as they are now.” With a pre-construction, purchase happens on a first-come, first-served basis, so sellers cannot position multiple buyers to compete against each other, raising the price. The price that’s listed is the price you pay.
The value of your new build could go up (or not) by the time you take possession
My wife and I were lucky in that our pre-construction home rose in value by the time we moved in, but it doesn’t always work out that way. When you consider how long you have to wait before you actually get possession of your home, the housing market will likely look very different, so it is hard to anticipate what the future value might be. “Nowadays, builders factor in an increased value by the time the construction is complete, and, in some cases, like condos that are just being finished in big cities, the value can actually go down,” Haw cautions. “It really depends on the project and where it is being built. Even though no one predicted this pandemic and no one can predict what will happen in the future, keeping on eye on current trends can help you make a more informed decision.” One helpful tool is MoneySense’s Where to Buy Real Estate guide, which is updated annually.
Be smart about spending on upgrades
Several of the houses we saw in Toronto were “character” or “heritage” homes, which is to say they needed upgrading. With a pre-construction home, you get to choose your finishes and not have to live through a renovation after you take possession. It’s nice to know your house will be move-in ready. However, be prepared for the very strong possibility that the included options for your finishes will be limited, and the cost for upgrades can be significant. Offering upgraded finishes is another way for builders to increase profits from buyers, so make sure you do your research on the quality and value of the upgrades being offered. In our case, several “upgrades” were priced way too high and we knew we could do them for much cheaper once we moved in. We also learned from a neighbour of ours that you do not necessarily need to stick to the options they offer you at the beginning—they managed to negotiate some customizations that weren’t originally included in the list price.
Even though your house may be brand new, things can and will go wrong, but a pre-construction home in Ontario comes with Tarion insurance, which helps enforce a quality standard guarantee that you do not get with a resale home. “While it is comforting to know that you have a certain amount of protection,” Haw cautions, “Tarion does not cover aesthetics, and this is where many issues will pop up.” For example, the Tarion website notes that among the items not covered are “[n]ormal shrinkage of materials that dry out after construction such as nail pops or minor concrete cracking.”
One could also avoid bidding wars by deciding not to live in Toronto, or Vancouver !! Simple !!
A few other problems with buying a new home:
While it is possible to negotiate a small reduction in price of the home or upgrades with new home builders, it’s basically a take it or leave it price. You have to pay whatever the homebuilder thinks the house is worth.
The problem with that is nobody really knows what your house is worth until at least a year or two after it’s been built, and people are buying and selling houses in your neighbourhood.
Dust and noise from construction around you for at least a couple of years.
Landscaping and fence building costs.
No character of an older neighbourhood. Small trees, no birds.
The school they say will be built, may take a few years longer than their guess.
Long commute time for a new subdivision on the edge of the city. Or just to get around the city for errands or visits with friends.
Great read, preconstruction is a leap of faith which most of times are worth their risk. You can assign some before closure and make good margin.
Happy new year.
When the preconstruction is finished and you’ve put 20% down for it, do you have to put down additional money to get the mortgage too or that 20% you put down prior counts as the down payment?
Good article and very informative. A follow up question on this topic, are there any provisions \ penalties if an installment for the payment schedule is delayed for some unforeseen reason. Would the builder just cancel the keep the amount which is already paid in previous installments or they refund some amount or allow extension for payment of next installment.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.