Pre-Construction Condos: the Good, the Bad and the Ugly (and What to Do About It)

The Good

Clients often approach me for advice about pre-construction properties. Pre-
construction condo purchases are popular with buyers for many reasons. For one thing,
the pricing is usually much more competitive earlier on in the construction process; for
another, buyers may get the chance to customize the home according to their own
preferences. They can choose their tiles, flooring and cabinet finishes; they can even
opt for an open plan layout or change the location of their electrical outlets. The list of
choices goes on and on…

Buying pre-construction also gives the buyer time (usually up to three years) to raise the
money required: the buyer only pays a small deposit at the outset, with the balance of
the down-payment (around 20%) payable in instalments over the months that follow.
As well, pre-construction buyers have the benefit of warranty programs (such as Tarion
Warranty Corp.) that offer protection against faulty workmanship or construction,
delayed occupancy, and even deposit protection.

But buying a pre-construction property does have some potential risks. We’ve all heard
the horror stories…

The Bad and the Ugly: What can go Wrong?

At one end of the spectrum – and by far the greatest risk – is the possibility that the
development could fail. Though this does not happen often, the risk does exist, and it is
enough to scare away some would-be purchasers. Imagine paying your hard-earned
money as a deposit, only to find out several months or years later that the project has
failed.

At the other end of the spectrum – less serious but still vexing – is the risk that a builder
will diverge from the original plans. I have seen many instances where the unit ends up
looking very different from what the purchaser envisioned. This can, indeed, happen,
because most builders’ agreements contain a provision that permits the builder to
change the plans in certain circumstances. When this happens, the buyer may or may
not have recourse, depending upon many factors.

Buyers should also be aware that brand-new places often experience “teething
problems” that take some time to be sorted out. For example, elevators may not initially
function as required, or fire alarms may go off more often than expected. Overall,
teething problems in new buildings are natural, but can entail extra, unexpected costs
and a lot of inconvenience.

What you can do about it, and how your lawyer can protect you

Despite all the risks outlined above, your lawyer can be a great help in protecting you
and making sure you are not disappointed. Your lawyer can also play an important role
in helping you understand what your rights are. The crucial thing to remember, however,
is to get your lawyer involved from the very start.

When you sign the contract with the builder, you will no doubt receive a somewhat
boring package of paperwork. Don’t be fooled: as boring as the documents appear,
someone has to read them. Your real estate lawyer can review the paperwork and
explain everything you need to know. This will often include things like budget
statements, proposed condo declarations and bylaws, as well as rules that will affect
every resident down the road. It only makes sense that you would want to know, ahead
of time, what you are committing yourself to.

There are countless examples of issues that your lawyer will identify for you before they
become problematic. For example, does the agreement give the builder the right to
make changes to the layout, or to use materials that are different from the ones you
saw? What other changes can the builder make? Builders often ask their lawyers to
prepare agreements that give them as much flexibility as possible, so it is your lawyer’s
job to make sure you understand exactly what your position is, and what you are getting
yourself into, before it is too late. A good lawyer can also help you negotiate caps on the
extra charges that a builder is entitled to add to your overall costs, or raise issues that
you may not have considered (for example, do you have the right to assign your rights
to another person?)

Understanding your Rights, Obligations and the Legal Jargon

What happens if you have second thoughts about your purchase?

You signed a contract with the builder, but now you’re having second thoughts. If you
react quickly enough, though, you’re in luck: the law gives you a ten day “cooling off”
period after you sign your agreement with a builder. This means you have ten days to
reconsider your decision, or request amendments to the agreement. You even have the
right to back out completely, without any penalty, should you so choose. At the end of
the ten day period, however, you are fully committed and the agreement is binding.

What does it mean when people say there are “two closing dates”?

In addition to the potential (and somewhat expected) delays before construction is
started – and during the construction process – you may even have to wait once you
have moved in before the unit is officially registered in your name. Ownership only
passes to you once the building is officially “registered”. This process can take several
months.

1. The Interim Occupancy Date

This is when you can move in, though you are still not, technically, the owner yet. From
this date until the actual closing date, you will be required to make monthly “rent”
payments to the builder (to cover your share of the common expenses, the property
taxes, and interest on the unpaid portion of the purchase price). The payments you
make at this stage are not applied to the overall amount that you still owe to the builder.

2. The Final Closing Date.

This is when the balance of the purchase price is due, and you take actual ownership of
the property. Title is finally registered in your name. You also start making your monthly
maintenance payments and bear all property taxes associated with the unit you have
purchased.

Tips for Managing your Risk: 10 Questions to Ask your Builder

1. How long have you been in business?
2. Where else are you building?
3. Do you have a track record of successful projects? Were they completed within the
time-frame promised?
4. Can I talk to prior customers/references? You really need to dig deeper than the
builder’s own promotional materials.
5. What’s your experience?
6. How many homes or condos do you build each year?
7. Are you licensed with the proper registrations?
8. Is there a model unit for us to view?
9. Can I get a site tour? (This isn’t always possible, but it’s definitely worth asking. You can
tell a lot about a builder by seeing them in action.)
10. Can I see the master plan? Request this from the builder as well as the municipality. A
brand-new community will look very different in 10 years than it does today. Know the
future plan for retail, schools and services, public spaces and infrastructure. These all
affect the value of your home.

The Bottom Line

Buying a pre-construction property can be a very positive experience with a huge
upside, so long as you are able to avoid the pitfalls. A seasoned lawyer can provide you
with the advice and guidance you need.