February 22, 2017
Should You Buy a Condo On Concept?
Entering the Toronto real estate market for the first time is intimidating. Purchase prices continue to rise at unheard-of rates, while rent is at an all-time high. This makes buying a preconstruction condo or townhouse on concept seem like the best possible compromise. The condo fees are low, the amenities are brand new, and the cost is competitive in this tough seller’s market.
But there are big risks associated with this purchase. While the majority of these units are bought by investors whose risk is minimal, if you’re thinking of buying your first Toronto townhouse on concept for your family to live in, there are a few key things to consider before signing the papers.
Units Being Removed or Changed
Because you are buying based on the initial architectural drawings the developer has provided, and not based on seeing the unit yourself in person, there is a risk that the layout you’ve had your heart set on could completely change by the time you move in. Often, as construction happens, changes to the floorplan are necessary to ensure the stability of the building – and there’s absolutely nothing you can do about it.
Mortgage Financing Issues
While you might be approved for the mortgage you require at the time of signing your initial agreement, by the time your home is built and you move in years later, you risk that your financial situation has changed and the bank could refuse to provide the loan. In this case, you would have to sell the contract before closing, which could potentially lead to a significant financial loss once real estate commissions are factored in. Negotiating a clause that allows you to cancel the contract for a set fee in the case of major life changes such as loss of employment or serious injury is a smart way to protect yourself from this.
If you are able to sell it for a profit, because you didn’t receive the title to the unit, CRA will see this profit as taxable income as opposed to capital gain, where only half the profit would be taxed. Avoid this by ensuring your contract states you have the right to sell or assign it before closing.
Deceiving Condo Fees
Condo fees for preconstruction homes are always priced low to attract new buyers, but this price is only guaranteed for the first year after the buyer takes possession of the unit. What looks like a good deal now won’t be any different from the condo fees you’d find elsewhere once the first year is up. Expect the price to increase considerably from the second year on.
If a developer goes bankrupt – like Urbancorp did – you risk losing your deposit. Their buyers thought they were getting a good deal at the time, but because the homes were considered freehold, and not kept in a trust, they are now undergoing a tedious court battle in the hopes of retaining their deposit.
There is also the risk of purchasing in the early stages when the developer is still in possession of over 50% of the units. If there is a lack of demand for this condo, prepare to experience a rapid decline in the value of your unit.
Down south, many buyers in Florida were forced to sell back their condo to the developer at half the price using a statutory loophole so they could turn the units into rentals.
Finding an excellent lawyer to help negotiate a fair purchase contract is of incredible importance when buying on concept, in order to avoid these situations.