• I got a call today from an investor client, who is tired of losing out on bidding wars for existing homes and is considering putting an offer on a pre-construction stacked townhouse. Last year she had purchased a pre-construction condo as an investment but this year she was purchasing a stacked townhome as a second home for her son, who had just graduated school and did not have a job yet, which meant he could not qualify for a mortgage on his own. She had a pre-approval in place for 5% down on a purchase.

    She was concerned that even with the 5% down she planned to put down. the builder was insisting on a 20% down payment and all of it was due in 90 days, with no firm closing date. She asked if there was a work-around. I suggested she show the pre-approval to the builder and see if she could reduce it.

    She was taken by surprise by the demand for a 20% downpayment and so I thought this would be a timely article as many people are unaware of all the costs and demands that come with pre-construction. Here are some things to consider.

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    Downpayment and Deposit Required

    As builders usually have more than one project on the go at a time, having the investor put a larger deposit or downpayment helps them alleviate costs across the various projects. While it does not help the buyer, it helps the builder as bank financing can only be triggered when they have at least 75-85% (depending on the builder) of the units presold. Having a larger downpayment, therefore ensures that the buyer is serious about purchasing a unit.

    Builder Reputation

    Sometimes buyers purchase a unit from a builder because of the area and not the builder themselves. With so many to choose from you should make sure that the builder has a good reputation, that they have finished previous pre-construction projects on time, that there was no issues with workmanship, etc. How do you find this out? You speak to homeowners, who bought in different areas but are with that very same builder. Reputation in this business is everything and buyers will be the first source of honesty you should seek!

    Second, if this is an investment or even a purchase for yourself, make sure that there are amenities planned in the area, such as shopping, schools, medical clinics, etc. If you are planning to rent this property out in the future, you want to attract tenants who are looking for the same amenities as well.

    Looks Pretty But It Could Be Costly!

    Budget for upgrades. It’s always nice to walk through the model home and imagine that granite countertop or those stainless steel appliances but everything comes at a cost. Look at what you have been qualified for and add 10-20% for upgrades – with some builders it may even be higher! Remember you can move in and always upgrade later – you will probably pay less in the end!

    Last year, I worked with a client, who’s purchase price was $980,000 however just before closing he added $30,000 in upgrades without checking if he could still afford it. Unfortunately, he could no longer qualify for the A lender that had pre-approved him. We had to take him to a B lender and the rate was much higher than what he qualified for!   Be careful of what you add on – always speak to your mortgage professional to see if it is still affordable for you.

    Take The Necessary Time to Review With Your Lawyer

    With every pre-construction purchase, the builder gives you 10 days to back out of the deal. I always advise my clients to pay the few hundred dollars to have their lawyer review the deal – it could end up saving you thousands of dollars and years of heart-ache. Not every builder’s contract is the same – sometimes there are hidden costs that are not easily understood by the buyer – lawyers know what to look for and how to decipher the documents to find those hidden costs.

    Tarion Is A Must!

    Not every builder is registered with Tarion, which is the Home Builder Warranty that comes with every pre-construction home and/or condo. Most if not all lenders require the Tarion Warranty so ensure your builder has it and that it is in the contract you sign.

    Inspect the Property and Expect Delays

    Even if you are buying pre-construction you want to spend the money to have your condo unit, single family home or even stacked townhome inspected. Inspectors are trained to see defects that ordinary buyers cannot see. Having the home inspected pre-closing can save you time, money and heart-ache. If the home is defective in anyway you can demand that the builder fix it before you take possession – afterwards it might be more difficult and time consuming chasing them for every repair you find.

    Finally, expect delays. We live in a country where the weather can cause unexpected delays in construction or workers may strike without notice. These are things that builders can’t control and unfortunately they are then passed down to the homeowner – you! Hope for the best but expect the worst!

    Still considering pre-construction? I hope this article will help you look out for those things that can cost you more than you expected!