07/06/2017 10:26 EDT | Updated 07/06/2017 10:43 EDT

Buying A Pre-Construction Condo Is All About Risk And Reward

Why do people purchase pre-construction? That's a lot of money to put down on a plan and a promise that it will be built in a few years.

By Lydia McNutt

The pre-construction phase is a popular time to buy a new home or condo, for a number of reasons. Usually at this stage in the game, the home builder offers more competitive pricing to raise the funds needed to get shovels in the ground faster.

This is also the time for buyers to get their choice of lot, floor and exposure, as well as customize their home to their personal preferences.

Bloomberg via Getty Images
A model condominium stands inside a showroom in Toronto, Ont. on May 27, 2017.

But every reward carries some element of risk -- the really good ones do, anyway.

With a pre-construction purchase, one of those risks is that the development could fail.

How often does this actually happen? The risk is relatively small, according to Debbie Cosic, founder and CEO of Mississauga-based In2ition Realty, but it does happen. "In 2016, there were five cancelled projects totaling 400 units," she says. Cosic is quick to add that in the same year there were a total of 90 projects completed, with just over 18,500 units.

For those 400, the repercussions can be devastating.

That's a lot of money to put down on a plan and a promise that it will be built in a few years.

Recently, a new Mimico condo, once touted as a transit-friendly hot spot, is making headlines after being placed in court-ordered receivership.

All the gritty details were originally reported by the CBC back in April. Now, condo buyers who found and purchased their not-yet-built dream homes as far back as 2011, could well find themselves priced out of the 2017 Toronto housing market altogether.

We compared condominium apartment prices from 2017 and 2012. The average condo in the City of Toronto sold for $318,600 in January 2012. As of June 5, 2017, that price was $477,600 – a difference of $159,000 (source: Toronto Real Estate Board). That's gotta hurt.

This begs the question, why do people purchase pre-construction? That's a lot of money to put down on a plan and a promise that it will be built in a few years.

Richard Lautens via Getty Images

The rewards

"Timing is everything when it comes to purchasing," says Barbara Lawlor, president of Baker Real Estate Inc. "Particularly, when in the marketing cycle you choose to sign on the bottom line can affect everything from your lifestyle to future resale value. For example, if you purchase from plans early in the cycle, you will get the best price and selection of floors and suites."

The lower price and greater choice afforded by the pre-construction phase is certainly a big selling point, especially in Toronto's hot housing market. But not everyone's buying into the idea.

"For some buyers, seeing the finished product eliminates any doubts they may have," Lawlor points out. "We notice a rise in sales once construction begins. People often experience peace of mind, knowing the developer has secured enough sales to obtain financing and begin the construction process."

"I have seen many instances where the unit as finished is not what the purchaser envisioned."Jonathan Fine, Fine & Deo

The risks

"Be aware that you are buying from plans and there is usually a provision in all agreements that permits a declarant to change the plans for various reasons," warns Jonathan Fine, condominium specialist lawyer with Fine & Deo. "I have seen many instances where the unit as finished is not what the purchaser envisioned. There may or may not be recourse, depending upon many factors. Make sure that anything important that a sales person has told you is in writing. Otherwise, it is not necessarily part of deal."

Fine also cautions that "it has happened in the past, usually where there is a hot market like we see presently, when, for example, inexperienced 'would-be' developers enter the market."

How do you avoid this scenario? Cosic's advice to prospective homebuyers is simple: research your builder.

Fine adds, "Read and understand the disclosure statement, the proposed condominium documents and the proposed budget statement. Finally, remember that you have a 10-day cooling off period during which you should consult your lawyer."

Peter Power via Getty Images
Waterfront condos in Toronto.

6 questions to ask your builder

  1. Where are you building? Determine your area of choice, and which builders are active in the community. Ask people you trust for recommendations. Nothing beats first-hand experience.
  2. What's your experience? If this is starting to sound like a job interview, then you're on the right track. How long has the builder been in business? How many homes or condos do they build each year? What kind of background and experience do they have? Get references.
  3. Are you licensed with the proper registrations? If they don't take care of their own house, how can you trust them to take care of yours?
  4. Is there a model? Take a tour, noting what you like and what you don't. Take your time, and if you feel you don't know enough about construction to make a decision, bring someone with you who does.
  5. Can I get a site tour? This isn't always possible, but it's definitely worth asking. You can tell a lot about a builder by seeing them in action.
  6. Can I see the master plan? Request this from the builder as well as the municipality. A brand-new community will look very different in 10 years than it does today. Know the future plan for retail, schools and services, public spaces and infrastructure. These all affect the value of your home.

For more essential real estate reading, visit NextHome.

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