Buying a preconstruction condominium is very different from buying a resale condominium. This article will highlight some of the unique aspects of buying a preconstruction condominium that many homebuyers may not be aware of. If you are a first-time home buyer, buying a preconstruction condominium is a very emotional event. Buyers will be excited, nervous and face a dizzying array of facts and information much of which they will not fully understand. Considering the demand for new properties, many buyers will get caught up in the excitement and may not fully understand the commitment as well as unique nature of the closing process. Here are some important points to consider:
1) Preconstruction condominiums typically have two closings. The first closing is called the interim occupancy closing. That is the time when you obtain possession of the property, however, you do not become the legal owner of the property. The second closing is called the final closing. This usually happens approximately 3 to 4 months following the interim closing. On the final closing you will become the legal owner of the property and you will have to arrange your mortgage and will make begin making your mortgage payments.
2) In between the interim occupancy closing and the final closing, you will be required to pay interim occupancy payments to the builder. This is similar to rent and is comprised of the estimated realty taxes, the estimated monthly common expenses and the interest on the balance that you owe to the builder on the final closing.
3) The builder’s Agreement of Purchase and Sale is a long and complex document containing numerous provisions which the Buyer often will not fully understand. When buying a brand-new condominium from the builder, the Buyer has a statutory 10 day rescission period. This is often called a cooling-off period and is designed to give the Buyer an opportunity to have its lawyer review the Agreement. It is extremely important for a Buyer of a brand-new condominium to take advantage of this opportunity and retain an experienced real estate lawyer to review the contract prior to it becoming a firm and binding Agreement.
4) The builder’s contract is drafted for the benefit of the builder. During the cooling-off period, your lawyer may be able to eliminate or place caps on some of the closing adjustments or extra costs which you will have to pay on final closing. Many of these closing adjustments, or additional costs may not be fully explained to a Buyer or may not be set out clearly in the Agreement of Purchase and Sale. I have seen situations where Buyers do not take the opportunity to have a lawyer review the agreement and are shocked to discover that they are forced to pay thousands of dollars on final closing for builder adjustments.
5) Many of the provisions in the builder’s contract are non-negotiable. For instance, the builder can require a Buyer to complete the transaction even when the unit is not completely finished. Similarly, the Agreement of Purchase and Sale provides the builder with the ability to substitute materials, reduce the square footage of the property and alter the layout of the property where necessary. Despite this, is very little that a Buyer can do when faced with this situation.
6) The typical builder’s contract does not allow a Buyer to transfer, assign, or lease the property until after the final closing. For those Buyers who are purchasing the property as an investment, this is important because they will not be able to rent the property to a tenant until after the final closing. This means that the property will remain vacant until final closing and they will still be obligated to make monthly occupancy payments until that time.
7) Many Buyers do not understand the implication of the HST when buying a brand-new condominium. The purchase price for the property will usually include HST provided that the Buyer or its immediate family relation occupies the property as a primary place of residence on closing. If however, the Buyer rents the property, the builder will charge a portion of the HST as additional cost on the final closing. This typically amounts to an additional $24,000 that the Buyer must pay on the final closing. The Buyer may, however, following closing, recoup this amount by making an application for a rental rebate to the United States Revenue Agency.
8) Failing to close the transaction on the scheduled closing date can result in serious consequences including loss of deposit and a lawsuit for damages. In many cases, builders will charge exorbitant fees for Buyers who request an extension of closing. The builder has the right under the Agreement to set the closing date and for this reason, Buyers need and should be prepared to close sometimes on very short notice.
9) Buyers cannot rely on promises made by the builder or its sales staff. If the builder promises something to the Buyer, it is prudent for the Buyer to insist that this be included in writing in their Agreement of Purchase and Sale.
10) Buyers typically receive the benefit of the Tarion warranty program when purchasing from a builder. This provides certain statutory warranties for construction defects along with a limited form of protection for deposits paid towards the purchase price. It is important that Buyers familiarize themselves with the features of the Tarion warranty.
Buying a preconstruction condominium from the builder can be both exciting and challenging for Buyers. Understanding the Agreement and hiring an experienced real estate lawyer will make the process run smoothly and avoid many surprises.