When deciding to purchase a condo, you will ask yourself if investing in a pre-construction condo or buying a resale condo is the right choice. Many fancy buying a new condominium, but the high price can scare off budget-conscious buyers.
Want to invest in a pre-construction condo? Our housing experts will explain what it takes to own one and its benefits.
What Is a Pre-Construction Condo?
A pre-construction condo is a condo that’s yet to be completed. It’s a structure that’s still in the early stages of building. Homebuyers who prefer to live in an affordable condominium invest in a pre-construction condo because they can customize it to their style.
Pre-construction condo developers use this selling strategy to help finance the rest of the project. This means that the money they get from selling the property is used to complete the project.
Sometimes, the developer may have a broad vision for the development or a plan to start constructing but may not have the financial power to complete the project. As a result, they decide to sell the building to interested buyers.
Pros and Cons of Investing In a Pre-Construction Condo
The pros of buying a pre-construction condo are as numerous as the cons. The choice depends on the buyer entirely if the investment is worth the risk.
Below are the pros and cons of buying a pre-construction condo.
Pros
- It costs less to buy than an existing or fully completed condo. Additionally, developers may offer exceptional deals for the pre-construction condos.
- Pre-construction condos are often located in areas of high demand. Buying a unit will offer you the opportunity to live in those areas for less.
- Investing in a pre-construction condo early will allow you to choose your preferred unit’s location, flooring countertops, etc. You get to choose the condo that fits your needs.
- Deposit requirements are low, and you have the power to cancel without penalties, provided the condo is still in its early stages. After the initial deposit, you have the opportunity to spread the full payment.
Cons
- You will still have to pay the usual condo fees even if it's not completed. That is, you will have to pay the maintenance fees, homeowners association fees, and upkeep fees. The costs may also rise over time.
- Although the deposit is low, you'll need to pay a 20% down payment, which is a little high. Developers typically ask for this because they want to see that you are committed to the project. The good thing is you can pay the deposit in installments.
- There might be a risk of construction delays. If you love sticking to schedules and can't handle delays, pre-construction condos may not be a good choice for you.
Factors to Consider
You would want to make sure everything checks out when buying a pre-construction condo. Therefore, you must consider the following factors before making a decision about purchasing a pre-construction condo.
Builder
Research the builder and projects they handled in the past to see how each of those projects turned out. Compare them to the current one and note your observations. If there are issues with the current project, including the location, avoid purchasing it.
You should purchase your condo from a reputable developer. There are low risks associated with buying from a trusted developer.
Location
You should also research the location of the condo to see if there is any problem. The area is a crucial factor that you must have at the back of your mind before committing to buying a pre-construction condo.
Cooling-Off
In places like Ontario, every purchaser of a pre-construction condo is given ten days to reconsider their purchase [1]. During this period, the buyer can arrange with his/her lawyers to review the terms of the agreement. The buyer should also arrange to get a pre-approval regarding the financing and make sure it’s in order.
If the buyer changes their mind, they can back out of the agreement and have their deposit returned without penalty.
Business Plan
Before buying a pre-construction condo, you need to have a look at the business plan. Sometimes, this changes during construction, as a shady developer might take advantage of construction variances to rip purchases off.
Construction variances cover things like square footage, ceiling height, etc. The developer might alter the layouts too. You need to be wary of all these things.
Carrying Costs
When purchasing a pre-construction condo, you will be entitled to pay an increased maintenance fee between 10% – 20% after the first two years of ownership. Also, once you have closed on the purchase, you will be responsible for closing costs, such as development costs, utility connection fees, legal fees, sales tax, etc. Our housing experts suggest that you set aside about 3% of the purchase price for closing costs.
Interim Occupancy Rates
Interim occupancy rate is the stipend paid to the builder equal to the unit’s total cost. The stipend is calculated based on property taxes, maintenance, and 80% mortgage.
You can move into the newly completed unit for the time being during the interim occupancy, but it doesn’t belong to you yet. You are also not allowed to renovate or rent the property unless you ask for written consent from the builder. Interim occupancy usually lasts a minimum of a few months and a maximum of two to three years.
Assignment Sale
Assignment sale is the sale of a contract to purchase a pre-construction condo. This is usually given if the building in the construction phase has not been registered yet. Once you buy a pre-construction condo, the seller will give the assignment contract to you, and after completion, you will be the one to complete the final sale with the builder or developer.
It would be best if you looked at the terms of this assignment contract before signing. It’s vital that you understand the words to know the type of transaction you can perform legally while the building is still under construction.
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FAQ
Is it better to buy pre-construction condos?
It’s better to buy pre-construction condos if you are low on budget and can wait until the building is completed. The waiting period may not be long, but you should be ready to accept delays.
Why investing in pre-construction condos could cost you money?
Investing in pre-construction condos could cost you money because it would subject you to pay several fees, such as deposit, closing costs, maintenance fees, and interim occupancy rates, among others. Although these fees may look big, you are allowed to pay some of them in installments.
Conclusion
As our housing experts stated, purchasing a pre-construction condo isn’t for everyone. But, if you are willing to wait while the construction process continues, you should consider investing in pre-construction condos. Nevertheless, it’s an excellent way to buy a condo at a lesser price.
Buying a pre-construction condo isn’t as straightforward as purchasing a conventional resale condo. Whether you are an investor or a first-time buyer, purchasing a pre-construction condo comes with risks. If you have made up your mind to invest, you should consider all the factors explained by our real estate team.
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