New Construction Buying/ Financing


The pre construction buying process can be daunting for the first time buyer. It sometimes involves quick decisions and large sums off your hard-earned money. Should you buy a lower floor or higher one, parking and locker or no, one bedroom or two, etc? Do not let it be.

Your visit to sales center should be informed. Have knowledge before going into buying/ meeting is essential. Having done this process twice, in two different projects, and serving numerous pre construction clients, I have some experience in these types of purchases. Knowing where you stand financially is critical. Having an agent that keeps up to date and is informed will help with your preparedness. Knowing the type of suites and costs that are available will allow for thought through un emotional decisions. Bring your check book, especially when sales centres first open as suites go fast. If you are serious in purchasing offer contract/ purchase agreement package will be signed. A deposit of $1-5,000 is usually required with the reminder of 5% due in 7 days. You have a time period in the first few days to opt out of the contract and get your deposit back. Once that time expires you are bound to the contract.

To find out more information, I got in contact with the sales centres for AURA Condos developed by Canderel Stoneridge and Market Wharf by Context. Both had very similar requirements. In the purchase agreement/ contract there will be a payment schedule stating when payments are due. It normally goes as follows: 5% due in first week, 5% in 30 days, 5% in 6 months, 5% in  12 months from signing. This makes up 20% of the downpayment. Another 5% is usually due once the building is ready for move in before owning. Getting 25% down is a big task for many first time buyers, hence the pre construction market is driven by investors a lot of times. Foreign buyers or group purchases where one party is a foreign national, the downpayment requirement goes up to 35%. This is because with 35% down, mortgages no longer require CMHC insurance and it is easier to obtain financing based solely on equity and downpayment.

Home construction outside the Greater Toronto Area sometimes follows different schedules and rules. For example, I have seen Deerfield Homes use a $1,000 at signing and two instalments equaling only 5% downpayment. This obviously depends on the area, size of project, and developer. I had one client who required a letter, it was drafted based on current market conditions and was obviously not a pre approval.

When you move in to the building, you pay rent at market prices to the developer. A very small portion of this goes towards your property taxes, the rest is pocketed by the developer. I usually recommend buying on higher floors, hence time from move in to registration is usually shorter. In large projects, units on the first few floors can end up renting up to a year or more until official registration with the city. This ends up costing you up to another 5% of the purchase price. Registration usually takes time, as deficiencies are fixed and closings lined up. While this sounds extreme, the appreciation of your condo from time of purchase to time of move in should more than cover any of those costs.

Since most projects are completed within two years, developers usually get a major bank to prepare a special mortgage offer for their buyers. This will usually include a 24 month rate hold, with options to renegotiate and lower rates in the future should they drop. To find out more, I looked into the program offered for Market Wharf phase 2, through the Bank of Montreal. Their current Builder Special Includes: Rates Capped for *24 months while the project is under construction! 1.00% off the posted rates. Option to convert to 1.25% off the posted rate in effect during the last 12 months. Option to convert to our lowest competitive rate during the last 90 days. The rates are 3.55% for a 3 year fixed, 4.69% for a 5 year and 7 years at 5.49%. Considering the BMO standard 5 year rate is now 5.69%, these seem quite reasonable. Different projects will have different offers and incentives, get informed before you purchase. Some developers will ask for financing qualification

Assignments have become very popular in Toronto over the past few years. In fact a market has emerged especially for assignments. Buyers and investors, purchase multiple properties with hopes of selling them or assigning them before they are actually built or ready for move in. Why is this popular? A few reasons actually, condos have been appreciating fast and when buyers purchase at pre construction prices they can get a return of up to $100 per square foot with in a year or two. So on an 800 square foot condo, that is $80,000. Another reason is some brokers are invited to review suites and plans with developers before all suites are released for sale. In return these brokers can buy up to 10 units each for as little as 5% down in some cases. They can then re sell them when prices go up or if many of the units sold out quickly. Not all developers allow assignments, for examples Daniels FirstHome does not allow assignment on its affordable housing projects. Since prices are kept low for first time buyers, this prevents investors from buying units. Also, assignments are allowed once all of similar units have been sold by the developer and at some point in the middle of the construction process. Developers allow this because the sooner they reach their 65-75% sold mark they can start getting construction started and the project going. AURA condos will be going up available for assignment sometime in May or June, while some units at Trump Tower can be seen in monthly circulars.

During the recent recession some people may have had issues making the scheduled payments. With layoffs and scale downs, not everyone had access to extra cash. So what should you do when this happens? Be pro active and open with the sales centre. Let them know that a certain payment will not go thru and arrange for the instalment to be replaced. If a longer time period is required speak with the developers representative at head office. They usually have a little more authority and can allow for extensions. Remember it is better to deal with the issue before your payment bounces. This will give you more time to find an alternate solution. If you can not get the funds for the payment as for permission for early assignment or transfer to relative. It is always best to try all options then lose thousands in downpayment. This can be especially stressful when it occurs around the 3rd or 4th payments. If you do not get this done, then you forfeit your downpayment and your unit goes back into the sales pool, usually at a higher price. This is a risk taken by pre construction buyers.

Now lets take a look at closing. After either living in your unit or renting it, you will finally be required to get a mortgage or pay the balance of the purchase price. Depending on the lender you go with may or may not require an appraisal. The developer will notify you a month or two in advance to allow you to get all your mortgage documents in order, lawyer appointment booked, and downpayment funds ready. While normally 25% is enough to by-pass CMHC insurance, some lenders and banks will as for insurance up to 35% downpayment. If there are any delays in obtaining financing, again it is essential that you communicate with the developer and their representing attorney. An extension can be arranged with a small fee. Again this is better than losing possession. Buyers having difficulty getting funding are advised to consult a mortgage professional who has access to more products and equity lending. At this stage assignments are normally allowed, however if property values have gone down, assigning a unit may be more difficult. This can be seen in Las Vegas, where projects have stalled and no one is living in pre purchased units.

Another situation that is happening now with new mortgage rules is investor buyers who bought into projects with only 5% down years ago, now need to come up with another 15% to qualify for a rental mortgage. Since the new rules affect mortgage contracts and not purchase contracts the fact you bought the unit 2 years ago does not matter. The option for these buyers is to seek help from a mortgage professional who can still secure you a non insured B loan for 35 years amortization or 5% down.

No matter how experienced of an investor you are, always make sure you are aware of your decision to purchase a new construction project. Not only are you purchasing based on plans and blue prints, but you are also tying up a great deal of money for a hopeful future return. As with any investment, make sure you get professional advice. Being comfortable and educated will be the difference between making an informed decision or a rushed emotional one. For more information on mortgage information and real estate information in the Greater Toronto Area please email me at wpianka@mortgagealliance.com.

Website: AURA CondosCanderel StoneridgeMarket WharfBMOContext

 

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About wojciechpianka

After a few years of studying English and History at the University of Toronto, I decided to transfer to Ryerson University and pursue a Bachelor of Commerce degree. While studying, I worked various jobs where I acquired many skills. Starting as a teller at Scotiabank, I moved on to being a manager of a restaurant, admin staff at a medical clinic, a sales agent for INGDirect and a manager at One King West Hotel. While all these jobs challenged me, I never felt my potential being utilized. Finally in 2008, I completed the Ontario Mortgage Agent Course and signed up with The Mortgage Alliance Company of Canada. This was a great decision, as it allowed me to use the skills I learned working to help people achieve their real estate and financial goals. My passion for real estate and numbers has lead me to becoming a mortgage agent. Growing up in New York City, I always had a fascination of historic buildings and skyscrapers. At 21, I bought my 1st property and have been investing in real estate ever since. I firmly believe thru steady, safe and conservative investing a one can obtain long term financial wealth. One day, I hope to develop the same buildings I help clients purchase.
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