PRE-CONSTRUCTION CLOSING

PRE-CONSTRUCTION CLOSING PROBLEMS AND HOW TO AVOID THEM 

A pre-construction home or a condominium has always been an attractive piece of real estate. It comes with the benefits of delayed payment and a future-dated closing; it is an investment of choice for investors and end-users. 

Despite the benefits of pre-construction homes, there are still some challenges that need to be mitigated to ensure maximum benefit. A detailed due-diligence is required before the deal is finalized.

PREPARING FOR CLOSING 

First of all, it may seem you are clear of roadblocks once you have paid all your initial deposits. The actual issues may arise closer to the closing date. 

Some of these issues may include refusal of a mortgage by the bank, loss of job, change in your personal circumstances and financial situation.

You need to ensure that you fully understand your agreement, as well as get ahead of any closing tasks such as financing. 

HARMONIZED SALES TAX 

You may have to pay the HST on the purchase price if it is not your primary residence. When purchasing a new condo or home as a rental property, the buyer will have to pay this amount, but can then claim it as a rebate post-closing.

This creates a financial burden on buyers of new rental properties, as they must pay the full HST amount upfront and may suffer the interest costs until a rebate is granted. It is recommended that the buyer consults with his/her accountant at the time of booking in order to avoid these last-minute financial scrambles

MORTGAGE RULE CHANGES, INTEREST HIKES, AND CAREER CHANGES

You cannot be certain whether the interest rates will rise significantly, if your job may change, or if the government will impose a new tax or mortgage rule that will affect your purchasing power. Buying a presale condo is risky because you cannot lock your mortgage in at the time of purchasing, and you’ll have to be confident that you can get financing when the project is ready for closing. 

If your job security is not the greatest, want to change careers, or might want to switch to entrepreneurship, then a pre-construction condo may not be a good option at this time.

DEVELOPMENT CHARGES AND LEVIES 

All new condo/home project development companies have to pay the development charges and levies to authorities as part of the new construction. The developer passes these costs on to the buyers. These charges could be in thousand and can upset your budget at the time of the closing. So at the time of the booking, it is recommended to ensure that your real estate agent and/or lawyer work to get these charges capped to a maximum to avoid any surprises down the road.

ASSIGNMENT CLAUSE 

In simple terms, this is a sales transaction where the original buyer of a property allows another buyer to take over the buyer's rights and obligations of the Agreement of Purchase and Sale before the original buyer closes on the property. These days most of the builders offer this clause in the contract (may be associated with a fee). This is an important clause as it allows you to walk away from a property before the closing and get out of the purchase contract.

In the absence of this clause, you will have to complete the purchase in your name. If you fail to close, this may result in legal implications and you could lose your deposit.  

Lastly, The assignment clause may also pose a benefit to the initial investor,  as it allows you to sell the property before closing if prices have risen and you would like to flip.

OCCUPANCY AND FINAL TRANSFER 

The closing of a pre-construction condominium happens in two parts: interim occupancy and final transfer. If you have booked the property for your own use then it is not a big deal as you can move into the unit at the interim occupancy. But if you are looking to rent out the new property, then you should also ensure that you have the ability to rent out your property during the time of interim occupancy. This can generally be added as part of the purchase contract, or you may need to ask for permission from the builder just before interim occupancy. 

If you fail to do so, this may result in months of missed rental income. 

In brief, we can say that proper due-diligence at the time of the booking is an essential part of any pre-construction purchasing process. Ensure to get the contract read by a lawyer and consult your accountant in order to have a hassle-free closing. Lastly, ensure you work with an experienced realtor who can advise on the best path forward and answer any of your questions and avoid any problems down the road.