Recently, we assisted a couple in navigating the complex process of purchasing a pre-construction condo townhome. Their journey was fraught with challenges, leaving them disillusioned and vowing never to buy pre-construction again. But is this sentiment fair, or is it shaped by the critical media narrative surrounding pre-construction properties, particularly high-rise condos?
Historically, pre-construction purchases were seen as a secure path to capital appreciation. However, the once-reliable strategy of paying a premium over resale properties no longer guarantees substantial returns. While this couple successfully closed their deal on time, the unexpected final costs were a tough pill to swallow.
A Snapshot of Their Experience
As their December 2024 closing date neared, they faced two significant challenges:
1. Appraisal Issues
The property was appraised at $630,000—$100,000 less than the purchase price. This shortfall created a financial scramble. Initially worried they wouldn’t close, we reassured them by exploring alternative lending options. While traditional “A lenders” required a larger down payment based on the lower appraised value, the builder’s bank stepped in with a favorable solution: a 65% loan-to-value (LTV) mortgage based on the original purchase price.
2. Unexpected Costs
The statement of adjustments revealed several additional expenses, including:
- Utility meter installations: $5,528
- Parkland levies: $20,978
- HST on bonus items: $2,626
- Estimated property taxes for 2025: $10,241
These costs, along with optional upgrades, added $45,000 to their completion expenses, bringing their total cash requirement to $301,187—substantially higher than the $255,465 they had budgeted for a resale property with a 35% down payment.
When combined with a perceived $100,000 loss in value and higher mortgage rates, the experience left these buyers disheartened.
Lessons Learned
Buying pre-construction properties offers advantages, like avoiding bidding wars and customizing a home, but it’s not without risks. Unexpected costs, fluctuating markets, and financing challenges make the journey anything but straightforward.
If you’re considering pre-construction, here are some key tips:
- Budget for Extras: Save for unforeseen expenses.
- Partner with a Real Estate Lawyer: Understand the fine print.
- Prepare for Market Shifts: Appraisals and financing can be impacted by market changes.
- Secure Financing Early: Reassess your mortgage options at each stage.
- Ask About the Builder’s Lender: They may offer terms that mitigate financial risks.
The Broader Pre-Construction Landscape
Toronto’s high-rise condo market illustrates the challenges. Units purchased years ago at $1,200–$1,300 per square foot are closing in a market where similar resale units sell for $900 per square foot.
For Angelo and Sarah, the carrying costs also became a burden. Their interim occupancy payments of $4,738 per month far exceeded the unit’s projected rental income of $2,700–$2,900.
Key Facts:
- Purchase Price: $729,900
- Purchase Date: October 2021
- Upgrades: $5,150
- Interim Occupancy: August 2024
- Closing Date: December 2024
- Appraised Value at Closing: $630,000
The 2021 Real Estate Frenzy
In 2021, Canada’s real estate market was booming. Record-low mortgage rates and a housing shortage drove double-digit price growth, making bidding wars the norm. Despite their efforts, Amanda and Bryn struggled to secure a resale property in the Greater Toronto Area, eventually shifting their focus to pre-construction as a way to avoid the competition.
The Waiting Game and Market Shifts
After purchasing a townhome in October 2021 for $729,900, they watched property values rise above $800,000 by February 2022. However, the Bank of Canada’s interest rate hikes in March 2022 cooled the market. By mid-2023, rates had climbed to 5%, placing financial strain on buyers and eroding the value of pre-construction properties.
Interim Occupancy: A Confusing Phase
Interim occupancy allowed them to move into their unit in August 2024, but ownership didn’t officially transfer until December 2024. During this phase, they had to make monthly payments to the builder, which added to their financial burden.