With the ever-rising house price in GTA, more and more people have looked to condos to fulfil their homeowner dream. A unit in a condo that has not been built can feel like one of the most viable ways to secure a home in this crowded market. The prospect of living in an entirely new build that is tailored to the buyer itself is appealing. To some, they view the pre-construction as a way to profit in this bullish housing market by selling the home right after or before closing. However, buying a pre-construction condo can be highly risky.

1. Financing Risk

Most people buy the pre-construction when they are in a sound financial situation. However, their financial situation may change down the road. Their income may decrease. The market value of the condo unit may fluctuate. If they fail to get a mortgage approval prior to the closing, they may face the reality of breaching the agreement of purchase and sale.

A lot of agreements have the clause which gives the builder sole discretion to approve the assignment of the unit. However, if the builder does not grant approval or the buyer cannot find an assignee, the buyer may find itself stuck in the transaction and lose the deposit they have put down, or even face a lawsuit.

2. Construction Risk

Buying a pre-construction condo is essentially buying a spot in a building that does not exist yet. In a typical pre-construction scenario, the condo developer needs to sell around 80% of the units before banks will agree to finance the project. If the developer cannot meet this quota, the project may be forced to end. There are also other risks that may prevent a construction project from being completed such as government approval, environmental risks, and bankruptcy.

If the construction falls through, the buyer will likely get the deposit they’ve put down back, but they may very well find themselves already miss the best time to buy a home. Even if the construction development runs smoothly, there is a chance that the closing will not take place at the scheduled time.

3. Change Of Design

Builders have a fair amount of leeway to make changes to the units and buildings even after they’ve pre-sold them. A buyer may find a lot of unexpected changes when the building and unit is actually complete. Buyers are protected from any “material changes” but what is considered “material” may be subject to the builder’s interpretation.

There are also costs that the buyer may not be aware of at the time of signing the agreement of purchase and sale. Buyers should expect an increase in the condo fees during the first 2 years as the amount of condo fees are not known or quoted much lower at the time of signing the agreement. The buyer will also be responsible for all sorts of closing costs such as development charges, reserve funds, HST, etc. that don’t apply to resale units.

So, what can you do to avoid the tragedy?

You may want to do your own research, buy from a builder that has a proven past record. To avoid the surprise bill at the time of closing, negotiate for capped fees before you sign an agreement of purchase and sale. Usually, the earlier you buy, the more leverage you have in the negotiation. Please contact one of our experienced Real Estate Lawyer today for more questions.

Disclaimer: Use of this site and sending or receiving information through it does not establish a solicitor / client relationship. The views expressed and the content provided on this blog is for non-profit educational purposes. It is not, and is not intended to be, legal advice on any specific set of facts. The use of this website does not create a solicitor-client (attorney-client) relationship. If you require legal advice, you should contact a lawyer directly.

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Use of the site and sending or receiving information through it does not establish a solicitor / client relationship. The views expressed and the content provided on this blog is for nonprofit educational purposes. It is not, and is not intended to be, legal advice on any specific set of facts. The use of this website does not create a solicitor-client (attorney-client) relationship. If you require legal advice, you should contact a lawyer directly.