There are many advantages to buying a pre-construction condominium. This guide will go over several topics to consider when buying a new condo. We hope it will help decrease the stress of such an important purchase.
For most condo buyers, a real estate purchase is the largest purchase they will make in their lives. According to the US National Association of Realtors, as of 2017, the average price of a condo in the US was $273,900.
In most households, this is the largest monthly expense in a budget. No one wants to see those hard-earned dollars go to waste.
To add on top of that stress, condo purchases come with long term obligations such as mortgage payments and monthly condo fees. It’s not something you can easily walk away from without financial consequences.
Finally, a pre-construction condo entails different considerations than a resale purchase. It’s not just a question of dealing with a difficult seller. New condos purchases involve going through sales teams and builders.
You’re Not Alone
The good news is that the stress of buying a new condo is shared by almost everyone. Even the seasoned real estate investor skips a heartbeat when the time comes to sign the doted line. From our experience, here are the most common questions asked when buying pre-construction condos:
- In which neighborhood should I buy?
- How do I get a mortgage? Will I qualify?
- Can I negotiate prices with the builders?
- Are upgrades worth it and what finishes should I pick?
- Can I get away without buying a parking spot?
- How much are condo fees and am I paying too much?
- What questions should I ask my builder?
If you’re in condo-buying mode, at one point or another, some of these questions may have come up.
The Mortgage Broker Advantage
The first concrete step of any real estate purchase is figuring out how much banks are willing to lend you.
At SimpleCondoAdvice.com we recommend approaching a broker or lending specialist as opposed to looking for a good mortgage yourself. It’s their job to shop around for the best package for your situation and it costs you absolutely nothing. They get their kickback form the lender afterwards.
The advantage of mortgage brokers is that they have access to networks of lenders that aren’t available to the public. And no, we don’t mean loan sharks.
Aside from large banks, mortgage specialists have access to lending companies that specialize in the real estate niche. Because they are so specialized and have no overhead (ie physical branches, marketing expenses), their rates are usually competitive. In some complex real estate cases, they may also have more flexibility.
Unfortunately, these companies don’t have physical offices open to the public. A mortgage broker is the only way to capitalize on this resource.
To illustrate the impact of a good broker, consider the example of a Natalie, a SimpleCondoAdvice.com reader that allowed us to share her story:
Natalie was shopping for rates herself for a $275,000 condo.
The banks were offering her mortgages at 2.7% over 25 years. That’s a monthly payment of $1,260.
Going through a broker, she was offered the same mortgage at 2.4%. This reduced her monthly payments down to $1,220.
Sure, $40 a month isn’t much, but it’s still $480 in her pockets at the end of the year. Then consider that in 25 years, that small difference adds up to large savings!
Get Pre-Approved For a Condo Mortgage
Once you’ve approached a mortgage specialist, the process of getting “pre-approved” begins. The goal here is to find out if lenders are willing to offer you a mortgage, and at what rates. It doesn’t commit you to anything and it’s free. Later on, we’ll show why this is an important step.
You’ll be asked a series of questions which revolve around; the context of the purchase, your household income, how much is available for a down payment, and, the expected size of the mortgage.
Lenders will typically require a 5% down payment and in some jurisdictions, it may even be the law. If you have more money than the required down payment, that is good news. You can either choose to keep the difference (ie to furnish your new condo) or lower the amount borrowed.
As for the expected amount you plan on borrowing, you don’t need to give your broker an exact number. These details get sorted out later in the purchase of the condo. All your mortgage specialist needs is a “ball park” figure. This will help the specialist determine if your goals are realistic before approaching lenders.
Within a few days, your broker will call back and tell you if the major lenders are willing to give you a mortgage and on what terms. Your mortgage specialist used this time to shop around the dozens of lending companies that offer residential mortgages. In my experience, the calls always start with “The best I could find you is X”. Remember that “ball park” range you gave your broker earlier? Instead of a range, you’ll get a maximum amount.
During this call, you should also ask your specialist how much your maximum borrowing amount relates in bi-weekly or monthly payments. This will help you refine your budget. It will also help you better understand what the monthly obligations of a mortgage are. Few people know what a 25 year $300,000 mortgage at 2.5% interest costs them bi-weekly. But if you are told it will be bi-weekly payments of approx. $620, that is an easier number to relate to.
Budget, budget, budget…
At this point, you need to write a detailed and honest budget.
Start with your current living conditions (assuming you are renting or own real estate already). Ensure that any surplus in your budget matches reality. If your budget says you should have a monthly surplus of $400, but you’re only really saving $100 a month, something is off. You’ve forgotten some lines. Rework it so that it is accurate.
- Bonus Tip: If you can’t find where that difference is, that’s ok. Just create a line in your budget called “adjustment” and insert that difference as an expense.
Now write a budget with the information you got from your mortgage specialist and include municipal taxes and estimated condo fees (look at MLS or Realtor.ca for comparables). Odds are, you won’t be able to afford the amount the lenders are offering. That’s because when the economy is humming along, lenders are willing to offer larger mortgages.
Re-write a new budget with lower mortgage payment numbers so that it matches the surplus calculated from your first budget. The goal is to ensure that your pre-construction condo purchase won’t decrease your lifestyle… unless you are willing to forego some of those luxuries.
With all the information mentioned above in hand, you will be equipped to speak with a builder’s sales team. Being pre-approved and knowing how much you are willing to spend tells the salesperson the following:
- You’re serious about purchasing a condo and will be exploring other options. You’re not just “kicking tires” (helps you negotiate);
- You’ve done your research and understand how pre-construction purchasing works (helps you negotiate).
Finding Pre-Construction Condos in Your Area
Unfortunately, there aren’t any big box stores that sell new condos and Amazon isn’t selling in on this (yet). There are three easy methods you can use to find pre-construction condos to buy:
- Google: search for ‘new’ + ‘condo’ + ‘targeted neighborhood’ + ‘city’.
- Bonus tip: if you’re not finding results you like in the main search page, switch to Google News. Developers will push press releases of their intentions to build in an area.
- Newspaper: most papers have a real estate and/or condo section. You can usually find ads for developments or featured articles in there.
- Physical survey: drive around the neighborhood to find sales centres.
- Bonus tip: if there are already developments built in the area that interests you, look near the entrance or inside the lobby. Sometimes developers leave a ‘built by’ plaque. You can then go on the developer’s site to see if there are plans on building a new phase in that neighborhood.
What you want to avoid is going condo shopping, finding one or two developers and sign. Then 3 weeks later, another developer opens a sales centre offering condos that better suit your needs.
If you found a few developments but aren’t sure if buying in that neighborhood is a good idea, use the same search tactics mentioned earlier. Look for news articles that may indicate whether a neighborhood is about to boom.
Later in this guide, we recommend approaching a realtor. He or she will have unique insight into this matter and will be able to guide you.
In some municipalities, crime reports per area are available. Finally, you can consult experts like the staff at SimpleCondoAdvice.com who will help find answers for you.
With all this information in hand, you should now be able to plan visits to pre-construction sales centre.
Visiting Sales Centers
For the unexperienced, the very thought of going to condo sales centers brings memories of visits to used car dealerships. It shouldn’t be this way. Yes, you will be dealing with sales staff, however, they’re on your side (sort of).
Unlike a car purchase, they can’t sell you more than you can afford. You’re capped by the lenders. On top of that, if you’ve done your budget, you will have your own maximum amount you’re willing to spend.
Also consider that most builders construct developments that offer a wide price range. The sales staff will find what you can afford.
Where a sales team might up-sell is on upgrades. However, depending on their commission structure, losing a 6-figure condo sale isn’t worth the extra commission of a $2,000 back splash installation. After taxes, the sales staff will see little of that $2,000.
Essentially, the pre-construction condo sales team’s job amounts to getting you to buy into the development, rather than upsell the most expensive unit possible. They’ll pitch the perks of the condo development such as location, amenities, affordability, etc.
There shouldn’t be pressure to buy something out of your price range. If there is, just stick with what your budget lets you buy.
Once you arrive at the sales centre, most sales teams will let you wander around and look at the promotional material. Eventually, someone will approach you. One of their first questions will be what your budget is. It’s fine to give it to them as it will help them find units you can afford. If many units are available, it’s even easier. Simply chose what you like and they will see on what floors remaining ones are.
During the visit, try and get a feel on what the sales team is able to negotiate. As we’ll explore below, negotiating for parking is usually the best option. It’s also important to figure out if the builder has plans on future phases. You wouldn’t want to pay more to be on a higher floor just to have a new tower built in front of you 2 years later.
The sales team will do their pitch and send you off with brochures, floor plans and prices. Keep all this material, even for developments you aren’t interested in.
Imagining What an Unbuilt Condo Will Look Like
One of the major challenges of buying a pre-construction condo is not knowing what it will look like before you buy. All you can work with are floor plans, dimensions and samples of finishes and upgrades.
Compounding to this problem is the fact that most showrooms will feature the fully upgraded and often high-end units. This isn’t necessarily a shady sales tactic. Builders are just trying to show you their best product and get you to buy in their development. However, being aware of this reality will help you adjust your expectations.
Visualizing is key. For some it’s easy. For others (like me), it’s not. Here are a few ways you can get around this challenge:
- Map out rooms of a prospective condo in a larger existing room with painter’s tape. This will help you get a feel for each room. If you have a parent or friend with a large area like a basement, you may be able to map it out there.
- Use digital design tools to create 3D models of your pre-construction condo. There are many out there, however here are three we recommend for desktop computers:
- PlanningWiz: very easy to use and intuitive. Options are limited so you’ll have to visualize some features the tool can’t handle. Great to get a rough idea of what your next condo will look like.
- HomeSketcher: also easy to use and with real-world furniture that can be dropped in your sketches. To visualize in 3D requires a VIP account which will cost you $49. If this is your first condo purchase, we recommend purchasing the VIP package as it will help you in your furniture selection.
- Autodesk Homestyler: not as easy to use as the first two options but the most powerful. The tool also has the ability to stack objects (ie place lamps on nightstands). This is particularly useful for those who already own most of their furniture. For first time home buyers, this tool lets vendors upload their products in the catalogue. This makes it incredibly easy to purchase furniture that suits your condo.
Choosing Finishes and Appliances When Buying a Condo
When visiting the sales centres of new condo developments, you’ll be presented with several options of finishes and appliances.
The easiest decision to make is on a storage locker (if available). They are usually affordable and are practical for storing bulky items like winter tires, skis and empty luggage. A storage locker also helps for resale.
The next decision relates to appliances. Developers may offer the standard white or black and stainless steel. We recommend choosing stainless because it helps for resale. The cost is usually not much greater than the standard appliance set and the difference on your mortgage payment will be miniscule. Make sure to validate with the developer which appliances come with the new condo purchase.
The hardest decision comes to choosing standard finishes vs upgrades. Unfortunately, there are many variables to consider when choosing them which is why we created this handy decision tree:
PICTURE PICTURE PICTURE
One of the most popular questions we get relates to flooring. SimpleCondoAdvice.com suggests you make this decision based on your lifestyle. If you have kids or pets, go with laminate instead of hardwood.
Modern laminate flooring is durable, stylish and much more affordable than the other options. Compared to hardwood, it will last much longer. After all, there’s no point paying money to tear it out years down the road.
Condo Developers: Things to Consider
The best way to protect yourself as a pre-construction buyer is to choose a developer that has a robust condo building portfolio in your city.
When at the sales office, ask the builder the following questions:
- Where have you built before? How large were the projects?
- What were the delays in delivery?
- Do you expect delays in this particular delivery (if work has begun)?
- How long have you been operating in this city?
- How many employees do you have (excluding contractors)?
- Have any of your developments undergone special assessments? What were the causes?
Being sales people, the answers are likely going to sound great. Read between the lines and don’t take the answers at face value. Here are a few extra steps you can take to ensure the builder is worth purchasing from:
- Google the developer. Look past the first pages of results (usually their promotional material or press releases). Look for forums, blogs or other types of content that provides first-hand accounts from previous purchasers;
- Visit completed condo developments by this builder. Look at the current state of the development. If possible, speak to residents about their experiences with the builder. 15 minutes of lurking near the lobby could reveal interesting information! It may be creepy but it’s the best way to get honest information.
- Ask advice from a real estate experts. Aside from realtors, your mortgage specialist (you contacted one right?) is often well-connected as he or she will be aware of issues with certain builders. They may know if a developer has a history of delaying deliveries as it affects their dates for signing mortgages.
Incentives to Buying Pre-Construction
When attempting to pitch a unit to you, developers will offer perks to a sale. These can range from paying your condo fees for a year, to vouchers for cleaning services and in some cases, even a car!
The most important condo perk is parking. Why? Because parking is the only sales perk you can get that will help resale and is permanent (doesn’t lose value or expire).
If there is any sort of incentive regarding parking spots, consider it. Even if it’s a reduction in price, it’s worth it. Think about it, would you rather the developer pay the first two years on the lease of a Mercedes (it’s once been offered to me) or throw in a $40,000 parking spot?
Other perks are still worth considering. In early pre-construction, developers may reserve condos with a view for clients on the verge of buying. If the view can never change (ie waterfront) this should be considered as it also affects resale.
Non-essential perks such as upgraded appliances, flooring and countertops are good too. However, considering that they may be changed in 10 or 15 years, they aren’t as valuable as a parking spot or better view.
The best time to negotiate for these is in early pre-construction. Developers are attempting to secure sales to validate their project. If you come in early, negotiate hard and don’t be afraid to make it known that other builders are offering you better incentives.
It’s getting harder and harder to negotiate the actual price of the condo. Unless you’re comfortable at haggling or are an experienced negotiator, focus on sales perks rather than the final number.
Hidden Costs of a New Condo: Fees and Taxes
Like a new car purchase, there are hidden costs when buying pre-construction condos. These come in the form of taxes and condo fees. Such costs fluctuate based on the area or jurisdiction you’re in.
When you’re at the sales office, ask them what the final price of the condo will be with the upgrades you want. If you get a convoluted answer, ask again until they show you a final amount.
You also need to make sure whether it will be you or the developer that will pay the government sales tax. Some builders will handle the state or provincial tax and even apply for a rebate or exemption for you! The ideal situation is for any hidden fees and taxes to be rolled into the final sales price. This way, you are paying it off monthly rather than in an up-front lump sum.
When it comes to condo fees, developers will set them at the lowest possible rate (usually capped by law). Be aware that in the first 5 years after the condo project is delivered, they may rise by 5-10%. Take this into consideration when running these numbers in your budget. You don’t want to live a life of luxury for 1-2 years to then be cash-strapped by year 5.
How much your condo fees will be depend on the development’s amenities such as pools, spas, gyms, lounges, wine cellars, doorman, etc. The more amenities, the more condo fees will rise. To see if you are being overcharged for condo fees, consult MLS or Realtor.ca to see how they compare to developments in the area.
Involveing More Experts Is Always Better
You’re about to make the biggest purchase of your life. Why not have more experts working with you? We recommend approaching a local broker or realtor or even one of the members of the SimpleCondoAdvice.com team.
Parents, relatives and in-laws all have opinions and their real estate purchasing experience counts, however, nothing beats the wisdom of an expert. Don’t forget, real estate professionals do this full-time and often have crucial information and insider information not available to you.
What You Need to Know About Realtors
Realtors are a fantastic resource for area knowledge. Just don’t forget that they also need to make a living. The bulk of their income is usually commission-based from resale transactions. They get a percentage at the time of sale.
When it comes to pre-construction, this doesn’t apply. Developers may offer referral kickbacks but they are nowhere near the amount realtors make on resale transactions. That’s why less ethical realtors may attempt to sway you towards buying resale than new.
Don’t discourage though. Large cities have realtors specialized in the pre-construction market. They make an honest living by helping clients find the right condo.
The best way to avoid any misunderstandings is to ask for a realtor specialized in pre-construction. If none are available in your area, be up front about your purchase expectations (you want new) and the realtor’s expected compensation.
There’s No Rush
In hot markets like Toronto or Vancouver, it’s easy to get caught up in the hype. Sales centres will create buzz around the opening of a new pre-construction phase. Their development is the next big thing! Is it really? Let’s face it, a sales team’s job is to sell fast.
In reality, there is no sense of urgency. No one will be there to console you if you made the wrong choice in the heat of the moment. Here at SimpleCondoAdvice.com, we strongly encourage you to visit many different developments before committing to anything. The old saying “sleep on it” applies more than ever.
Communicate With Your Team
At this point, there are many people involved in your new condo purchase: you, your broker, potentially your realtor, and a developer’s sales team. Think of it as a team with each member providing you with crucial information. You’re the coach so it’s now your job to keep them updated.
Let’s say you want to purchase a unit on a higher floor. The sales team will tell you if its available and at what price. Your realtor will then advise you if it’s a good move. If the new price is near your borrowing limit, your broker needs to be kept in the loop.
As you close in on your condo purchase, you need to keep relevant members of your team updated. Once you’ve found your dream pre-construction condo, make sure to keep your broker informed so that final financing can be secured.
Time to Buy a New Condo
You’ve done your homework and now you’re ready to buy. No matter what your level of real estate experience is, signing that dotted line is always a stressful moment. This is normal.
When you’re signing your pre-construction purchase, make sure to read EVERYTHING. This is the time when that cliché “read the fine print” quote is used. While it may be awkward to have the salesperson staring at you while you’re doing it, it could save you headaches in the future. If you’re susceptible to sales tactics (be honest with yourself), ask to review the contract in a separate room. They won’t say no and it’s your right to know what you’re getting into.
If you find something you’re not comfortable with in the contract, ask for clarifications. Now is not the time to accept weak answers. Get to the bottom of it. If the contract is substantially different than what was pitched to you earlier, walk away and bring it home. Your realtor will be able to clarify some of those points.
For those not well-versed in “legal speak” or “legaleze”, bring someone you trust like a best friend or relative to go over the contract with you.
In reality, the days of shady sales tactics are mostly gone. Developers have too much to lose if they get a reputation of being dishonest. The internet being at everyone’s fingertips gives the common man a voice. All it takes are a few negative online mentions and a developer’s reputation could be ruined.
You Signed. Congrats! Now What?
The good news is that after you’ve signed, you have months to sit back and relax. During this downtime, there are a few more things to do which aren’t as stressful as the new condo purchase process.
Because there is a time lag between obtaining pre-approval and the delivery of the condo, set a reminder to contact your broker 3-4 months prior to taking the keys. The lender may request more documents to finalize the agreements. It’s better to get them way ahead of time than last minute.
Depending on the jurisdiction you’re in, you will have a lawyer or notary. These legal professionals handle the legal documents involved in the transaction from the developer to you. You should contact yours 3-4 months prior to delivery as well. In most cases, it’s up to you to pay their legal fees.
Wrapping It Up
There’s always uncertainty surrounding a real estate purchase. Both resale and pre-construction condo purchases are major life decisions. The bottom line is that you need to do your own research, preparations, and, double-check anything someone tells you.
The good news is that you read a 4,000 word article on the subject. This means you’re taking this seriously and will be asking the right questions.
If you need guidance on buying your pre-construction, be sure to send an email to the staff at SimpleCondoAdvice.com. We’ll do our best to guide you in the right direction.
Happy buying everyone!
The SimpleCondoAdvice.com Team