4 Risks of Buying Pre-Construction Condos
2019-01-17

The Toronto real estate market loves condos. That should come as no surprise. Land is scarce, detached homes are expensive, and new condo developments increase in value before they’re even completed. But is buying a pre-construction always a good idea? There are potential risks that are being brought to light by several high-profile condo cancellations in Vaughan.

The Cosmos condo that was supposed to be built on Highway 7 in Vaughan is the most recognizable cancellation, but there have been others that haven’t shared the limelight. Some never even make it to the construction phase, the buyers left in limbo, hoping to get their deposits back. If you don’t want to end up like these people who missed their chance to get into the market years ago, keep these things in mind when looking at pre-construction condos.

 

1.     There is no guarantee the building will be completed

Sadly, just because you signed a contract doesn’t mean the developer will follow through on their promises. That’s not to say that all condo cancellations have been scams, but rather that the market isn’t always able to deliver.

One of the most-cited reasons for a condo cancellation is “inability to secure financing,” which happens to individuals and businesses alike. Construction financing is actually notoriously difficult to get, with applications taking months to process at a minimum. An individual can get pre-qualified for a mortgage in 60 seconds, pre-approved in 48 hours and have the funding released in as little as two weeks, while two weeks isn’t even long enough for lenders to look at an application, let alone decide to fund it.

 

2.     You get your deposit back but not your time

Despite buyers getting their deposits back after a cancellation, they may have actually lost money. The Toronto real estate market moves fast, especially for condos. We’ve seen huge price increases over the last couple of years – a comparable condo to what buyers purchased in 2016 for $280,000 could be worth up to $350,000 if it were in the best appreciating area in Vaughan.

That’s $70,000 to make up in just two years, well out of reach for the average Canadian household who earns that in a year. Where is the rest of the money supposed to come from?

The sad answer is that these people probably won’t be able to afford a similar condo, if they can afford one at all. They tried to enter the market at a time when they had the means, but the prices shot up and left them behind. They could try looking in the best cities for first-time homebuyers, but depending on their job they may not be able to.

That’s why the 451 potential residents of the Cosmos building want to file a class-action lawsuit for damages against the developer, Liberty Development.

 

3.     There can still be problems with the unit

Being new doesn’t mean that the building will be good. You’re buying the unit based on the reputation of the developer and the hope they’ll make a pristine unit. But what happens if the developer doesn’t do a good job?

There are limited warranties available for certain things going wrong. Before you move in you may be able to get compensation for delays in occupancy (receiving money back for paying for extended living arrangements) which is great. You’ll also be covered up to 1 year for defects in the work or unauthorized substitution of materials (cheap linoleum instead of tile flooring, for example). There’s a 2-year warranty for health code violations, water penetration, electrical or plumbing defects, and building exterior defects. Finally, there’s a 7-year warranty for severe structural defects.

If something happens in the third year, such as a wiring defect causing your unit to lose power, then you’re on the hook for what could be a potentially costly repair (which would be largely covered by your home insurance policy). That may be more likely to happen in an older condo than a newer one, but you should check the developer’s track record and reviews of previous condos they’ve built. Do they seem reliable? Are people complaining about shoddy construction?

 

4.     Condo fees could be hiked

Something that’s often overlooked when budgeting for your condo is the monthly condo fee. Unlike mortgage payments, where a portion of your money goes towards building equity in your unit, 100% of your condo fee is gone. In some buildings, your utilities may be covered by the condo fees, but not always.

New buildings may entice people to come in with low condo fees for the first few years before raising the prices. This is good for your budget but it may be bad for the condo’s. Part of your fee goes towards funding the condo’s amenities, and part goes to building the condo’s reserve fund which allows them to pay for unforeseen or expensive repairs and maintenance. A large reserve fund is ideal because it allows the condo to stay in tip-top condition even if disaster strikes.

If the condo needs money to fund a repair that they don’t have, they have the right to demand a special assessment, or a one-time payment. This payment could be thousands of dollars, required upfront or added to your condo fees for a limited time. You cannot opt out of a special assessment – if you don’t have the money the condo corp will place a lien on your property.

Low condo fees entice buyers – news of a special assessment sends them scattering. When buying a pre-construction condo, be sure that there’s a plan in place for building a reserve fund.

 

Benefits of buying pre-construction

Buying a new condo isn’t all doom-and-gloom. There are plenty of upsides to buying a new construction unit – that’s why it remains so popular.

 

You can choose and upgrade your unit

When you go to the sales centre you’ll be shown a smorgasbord of unit options, each with detailed floor plans that show you exactly how the unit will be laid out. They’ll often have several variations for one-, two-, and three-bedroom units with optional upgrades for the materials used. You may even be able to choose which floor you want to live on. Selecting all of this beforehand beats waiting for a condo to pop up that meets all your exact requirements.

 

They’re often built in desirable areas

Let’s ignore the fact that the Cosmos building was cancelled for a moment. The reality is that that area is a very highly sought-after location for condos, as evidenced by the other condo that Liberty is developing right next door to the cancelled project.

Developers know that location matters when choosing a home. They’ll often reserve spots that are close to public transit or highways for easier commutes, or proximity to green spaces or the waterfront.

 

You get to be the first owners

Being the first to own something isn’t usually the best financial decision, but it is a great feeling. New car sales are still high despite them being terrible investments. Compare that to condos which are actually really good investments in the current market and you can see why there’s such a frenzy to buy them.

 

Old condos have risks, too

Unfortunately, an older condo can have its share of problems as well. You are more likely to know about them if the building has been around a while, but resale units should be carefully inspected by a home inspector before you decide on purchasing it. The fact that it exists already means the inspection will be able to tell you everything you need to know about the unit, unlike a pre-construction. Check out the resale condo listings in Canada here.

 

 

 

Chris Auty Chris Auty 01/17/2019

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