Home prices & sales took a hit after the Ontario Fair Housing Plan was implemented – as a result of the government attempting to curb the year over year double digit price growth, and ‘cool’ down the heated Toronto Real Estate market. Shortly after the plan was implemented, listings shot up, and homes were taking longer to sell – the uncertainty & regulations led to a sudden shift towards a buyers market.

Fast forward to today, prices have been showing signs of stabilizing. In June 2018, the year over year sales increased 2.4%, and average prices increased 2% to $807,871. The average home got sold in 21 days – a 40% year over year increase (Toronto Real Estate Board). This is a huge shift from the intense bidding wars, where homes would get snatched up in less than a week.

Buying a Pre-Construction Home

Buying a home on concept provides many benefits that are not common within the resale market. These include, but are not limited to:

• • Design studio options/customizing: customize your home in and out, from the choices of the baseboards, to the colour of the kitchen cabinets. You can expect to spend a couple of hours in the design studio choosing the finishes. When possible, opt in for upgrades that increase the value of your home. If you’re on a tight budget, it’s best to focus on structural upgrades (i.e. hardwood floor stairs, extra bedrooms), rather than cosmetic upgrades. Structural upgrades are more costly to do after closing.
  • Lot/floor plan selection: Purchasing from pre-construction builders can give you the option of choosing the floor plan that best suits your lifestyle. Depending on the availability, you can opt in for the lot with great reselling features, such as pie shaped lots, corner lots, and ravine views.
  • Tarion warranty: All eligible new-built homes built in Ontario are enrolled under the Tarion Warranty program. This includes a one year warranty for all defects in workmanship, and a seven year warranty for structural defects. The Tarion Warranty also applies to new-built resale homes (the warranty is transferable, until it’s no longer valid).

Down Payment vs. Deposit

There’s a difference between deposits and down payments – this is where many homebuyers get confused. The deposit is the amount required by the builder, to make the agreement binding. For low-rise homes, it typically ranges between $40,000 – $60,000. In some instances, a deposit over $100,000 may be required – depending on the builder, and the price of the home. During the heated 2016 market, some builders were asking for deposits of $150,000 for townhomes within the Toronto area.

For condos, the deposit required is usually 20%, which ends up being the total down payment amount for many homebuyers. There are some promotions where the builder will ask for a 10% deposit, in order to speed up the sales.

The down payment is the total amount of funds used towards the property, including the deposit. Let’s say, a buyer bought a resale home for $500,000, with the objective of a 20% downpayment. With the offer, the buyer provides a deposit of $10,000, to be accepted by the seller. Upon closing, the buyer would contribute an additional $90,000 in funds to achieve the 20% downpayment of $100,000 ($500,000 x 20% = $100,000), and the $400,000 balance of the purchase price would be financed.

From this perspective, the main difference between resale homes and pre construction homes is the deposit amounts. Resale homes can be more flexible on the required deposit. However, pre-construction homes provide the advantage of saving up additional money over the duration of the construction.

In my case, when I bought my first home, I had 20 months to save up for a downpayment of 20%+ (I purchased the home in January 2016, and closed in August 2017).

Closing Costs

The total closing costs depends on the location of the property, and if the buyer is eligible for the first time homebuyer tax rebates. Homes in Toronto are subject to pay two land transfer taxes, to the city, and the province of Ontario. Closing costs for resale & pre-construction homes are relatively the same, except for the fact that pre-construction homes are subject to Tarion Warranty enrolment fees and development levies.

It’s a general rule of thumb to save around 2% – 4% of the purchase price on closing costs. I highly suggest you to speak with your lawyer to seek legal advice. When buying a pre-construction condo – ensure that there is a cap on the development levies. This would give you a peace of mind, knowing you’d be paying up to a maximum amount.

Occupancy

Resale homes are more reliable when it comes to occupancy, assuming that the seller doesn’t default on the Agreement of Purchase & Sale. The occupancy for resale homes is negotiable, typically between 60 – 90 days. For pre-construction homes, you can expect to occupy the property within 1 – 3 years. In some instances, the builder may cancel the project (which is another risk you’d have to consider). To avoid this risk, do extensive research on the builder before purchasing a lot.

Bottom Line

Depending on your objectives, pre-construction & resale offer great benefits. For buyers seeking to occupy within a year, a resale home may be the best option. However, buyers who are flexible with the occupancy dates should look into pre-construction homes. In my opinion, it’s the best way to get into the real estate market – purchasing a pre-construction home, and taking advantage of the construction period to save up additional money towards the down payment. In other words – you’re buying at today’s prices, and closing on the property in a future date, where the value of the property has appreciated, assuming that it’s a bullish market.

Before deciding to go into pre-construction or resale – weigh in on the pros & cons of both options, and determine what’s the best fit for your lifestyle & financial circumstances.

You May Also Be Interested In: How I Bought My First Home at the Age of 22

Writer: Jelani Smith 

Disclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.