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Why Buy Pre-Construction?
Each pre-construction project comes with its own deposit structure for which your down payment is spread out over the period of construction. The advantage here is that you don’t have to lock up the whole cash amount at once, and you can put it the dollars to work somewhere else while your project rides the market.
As the value of the unit appreciates during the construction period, you can sell the ownership of the unit before completion at whatever the current market value has risen to, by selling the contract under assignment. As you’ve only invested your down payment, this appreciation is a massive multiple of the initial amount that you have invested. An example:
Estimating a modest 10% annual appreciation in the housing market (over 20% in 2020), a $500k home would appreciate to over $700k in 4 years.
With a 20% down payment of $100k, this $200k return triples your investment.
With lower down payments, or higher annual appreciation (up to 40% in 2020), this figure only rises.
This stays true for real estate in general; with pre-construction, you can do this without incurring a mortgage, which brings us to:
Typically, in order to secure a pre-construction home, builders require a mortgage pre-approval letter from a bank or mortgage broker.
However, the mortgage does not fund until the closing date, and for condominiums, the mortgage does not actually fund until some time after occupancy. This means that a sale under assignment will subvert the actual loan in your name, and you will be free to profit from the real estate market with zero liability.
a. Land transfer tax is calculated in incremental brackets, and typically amount to 1-1.5% of the closing costs for starter homes. An accurate calculator can be found here: http://www.thegoldfellas.ca/buyers/calculators/
b. Lawyer fees typically amount to a minimum of $500, depending on the scope of work involved in the closing process.
c. Other closing costs include but aren’t limited to inspection fees, appraisal fees (ballpark of $300), property insurance , title insurance (will depend on your provider and specific criteria), mortgage insurance, and prepaid property taxes.
When you purchase a home from a builder, there are three sources of hidden costs:
- HST (Pre-Construction Only)
HST is due on the purchase of all
- Development charges (Pre-Construction Only)
It's important to verify whether these are capped by the builder (typically around $10-15k), or they can very quickly exceed upwards of $30k on closing, depending on the value of the home.