Written by 11:57 AM Mortgage Strategies • One Comment Views: 3,982

Pre-construction purchases: Beware of closing day surprises

Recently, we helped a couple navigate the process of buying a pre-construction condo townhome. Their journey left them frustrated and vowing never to buy pre-construction again.

Pre-construction purchase closing costs

But is this a fair judgment, or is it fuelled by media criticism of pre-construction properties, particularly high-rise condos?

It’s true—buying pre-construction, once a “sure thing” for capital appreciation, has lost its luster. The strategy of paying higher upfront costs compared to resale homes no longer guarantees big returns. While this couple managed to close their deal on time, the unexpected final costs were a bitter pill to swallow.

Here’s a snapshot of their experience:

  • Purchase price: $729,900
  • Purchase date: October 2021
  • Additional cost of upgrades: $5,150
  • Interim occupancy date: August 2024
  • Purchase completion date: December 2024
  • Appraised value at closing: $630,000

The pre-construction buyer’s journey

The challenge of buying resale properties in 2021

In 2021, the Canadian real estate market was on fire. Mortgage rates hit historic lows, prices surged at double-digit rates, and buyers faced fierce competition due to a housing shortage fuelled by high immigration and elevated household savings.

Initially, our buyers focused on resale properties in the Greater Toronto Area but repeatedly lost out in intense bidding wars. Each failed offer meant starting over, with prices climbing higher by the week.

Buyers faced enormous pressure to make clean, firm offers with no conditions and large deposits. Frustrated, they began to feel like they were chasing an impossible dream.

Shifting focus to pre-construction properties

To escape relentless bidding wars, they turned to pre-construction properties. While these typically cost more than resale homes, the rapid price appreciation during the pandemic made this seem like a minor drawback. Many buyers had achieved significant profits from closing pre-construction deals in the past, fuelling their optimism.

However, challenges persisted. Several attempts to buy in desirable locations failed because builders’ sales agents prioritized their own clients over buyers represented by external realtors. After expanding their search across the GTA, they realized they’d need to approach builders directly, sacrificing their trusted agent’s guidance.

Eventually, they found an affordable townhome development from a reputable builder in Pickering, close to Highway 401 and numerous amenities. They settled on a basic two-bedroom, two-bathroom layout priced at $729,900. However, there were no model homes to walk through, and the promised completion date was two years away.

The waiting game and market shifts

After signing the agreement in October 2021, they monitored rising property values, which had exceeded $800,000 by February 2022. It felt like a win—until the Bank of Canada began raising interest rates in March 2022.

By mid-2023, the policy rate had jumped from 0.25% to 5%, cooling the real estate market and slashing the value of pre-construction properties. Buyers now faced significant financial strain.

By mid-2024, construction on their subdivision was nearly complete, and they received notice of interim occupancy for August 2024.

Interim occupancy: a confusing phase for condo buyers

Interim occupancy lets buyers move into their units before the entire building or subdivision is complete. However, ownership doesn’t transfer until the condominium is officially registered.

During this phase, buyers must pay the builder monthly “rent” to cover carrying costs. For Amanda and Bryn, this amounted to $4,738 per month—far exceeding the unit’s projected rental income of $2,700–$2,900.

Closing costs for a home purchase

Closing the deal: surprises and financial strain

As their December 2024 closing date approached, they faced two major hurdles:

  1. Appraisal issues: An appraiser valued the property at $630,000—$100,000 below the purchase price. This left them scrambling to cover the shortfall.

Initially, they were concerned they wouldn’t be able to close the purchase, but we reassured them we could find an alternative lender if need be. While a conventional “A lender” would require a significant down payment at the lower appraised value, we found a solution through the builder’s bank.

Happily, they agreed to lend at 65% loan-to-value (LTV) based on the original purchase price, offering a lifeline at favourable terms.

  1. Unexpected adjustments: The statement of adjustments from their lawyer revealed several additional out-of-pocket costs, including, but not limited to:
    • Utility meter installations: $5,528
    • Parkland levies: $20,978
    • HST on bonus items: $2,626
    • Estimated property taxes for 2025: $10,241

These adjustments, combined with upgrades, added $45,000 to the completion costs. This brought their total cash requirement to $301,187—far exceeding the $255,465 expected for a comparable resale property with a 35% down payment.

Combining these additional purchase completion costs with an apparent $100,000 loss in value, alongside the significantly higher mortgage interest rate, were all factors that left these homebuyers disheartened.

The bottom line

Buying pre-construction properties can offer certain advantages, like avoiding bidding wars and tailoring a home to your preferences. But as this story illustrates, the journey is rarely straightforward. From unexpected costs to shifting market conditions, pre-construction buyers must navigate significant risks and uncertainties.

If you’re considering pre-construction, keep these tips in mind:

  • Budget for extra costs: Save, save, save!
  • Work closely with your real estate lawyer: Understand the fine print.
  • Prepare for market fluctuations: These can impact appraisals and financing.
  • Secure mortgage financing early: Reassess at each stage of the process.
  • Ask about the builder’s lender: They may guarantee the purchase price for mortgage purposes, which could be a lifesaver.

There are even more dramatic pre-construction stories out there, not all with happy endings. The issue of shrinking values is particularly acute in new Toronto high-rise condos.

Many units purchased years ago at $1,200–$1,300 per square foot are closing in a market where comparable resale condos are selling in the low $900s per square foot.

Be cautious and plan ahead!

 

 

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Last modified: January 6, 2025

Ross Taylor is dedicated to empowering Canadians with financial literacy and expertise in housing, credit, and real estate. With over 20 years of experience as a mortgage broker, Ross has helped thousands of Canadians navigate the complexities of home financing and credit management. His passion for education drives him to demystify the mortgage process, ensuring clients make informed decisions. Discover more valuable insights and resources by visiting www.askross.ca/articles

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