If you’re looking to buy your first property or possibly to invest in one, you’ll likely look into buying a condo. There are many major decisions to make in the condo-buying process. One is whether to purchase a pre-construction or a resale. Either option comes with its own pros and cons, and the pre-construction vs resale condos debate remains a hot topic among realtors and home buyers.

This article breaks down both the benefits and cons of purchasing either a pre-construction or a resale unit. It also articulates some other factors to look for when buying a condo.

The benefits and cons of a pre-construction

Pre-construction buildings have many benefits versus their older counterparts. The first involves the beauty of a new building. The newness provides buyers with the opportunity to customize the cabinetry and appliances of the apartment at the sales office before the building is even built. Also owing to the building’s newness, appliances are more energy efficient and the aesthetics of the building are modern. Everything, from the toilets to the countertops, should last 15-20 years simply because it’s brand new. However, if you move in before the condo is completely done, you’ll have to endure noisy living environments filled with the sound of drilling and hammering. Furthermore, for those looking to move in fast, developments are frequently plagued with delays that can go on for months or years.

There are financial benefits to buying a pre-construction. Pre-constructions are usually cheaper than resale properties. This is due to numerous factors such as the need to secure early buyers to help the builder secure financing from lenders and to compensate for potential delays or cancellations.

However, this isn’t currently the case with Toronto. Jim Burtnick, Senior Vice-President of Sales at Sotheby International Realty Canada, notes that pre-construction properties in Toronto over the past few years have gotten more expensive than resale units due to increased costs of land, construction material, and for acquiring building permits from the city. Burtnick also factors in increased competition for the high cost of pre-construction units:

In new constructions, you’re competing against a lot of foreign buyers, specifically Chinese buyers, who aren’t necessarily looking for the best sort of value in a place to live. They’re looking to land bank some money. [These buyers] have different reasons for only looking at pre-constructions, as compared to people who are local or are planning to live here.

Garden District Development

One of the reasons that foreign buyers gravitate towards pre-constructions is because of their payment structure, which is made in installments (as opposed to a lump sum with the help of a mortgage).

Because a pre-construction property is paid in installments, foreign buyers are able to pay their deposit and installments to get money out of the country.

So for, specifically Chinese buyers, who can only take out a certain amount of money every year from China, pre-construction properties are a convenient way to bank money outside of their home country.

The benefits of this payment structure also extend to Canadians. You’re only required to pay the deposit and the installments (typically equivalent to 20% of the price) to secure the purchase price and the unit while the building is under construction. You typically won’t even need a mortgage until you move in.

An example deposit structure can be:

• $2000 with the offer
• 5% of purchase price in the first 30 days
• Another 5% of purchase price in 90 days
• Another 5% of purchase price in 180 days
• Another 5% of purchase price upon occupancy.

To those who cannot afford a 20% down payment immediately, a pre-construction’s payment structure can be tempting.

The glitz and glamour of building models and floor plans can sweep most buyers off their feet, but what you see in the sales office aren’t always what you get as an end product.

If you read the fine print of your document, a lot of the things [in the model units] are upgrades or the builder has the prerogative to change how the finishings will be. The agreement is written totally in the builder’s favour, as opposed to a resale, where you get full disclosure on what you’re buying.

The One Bloor Street

The benefits and cons of a resale

Despite some downsides, it’s hard to resist buying into a pre-construction building, but Burtnick feels that resale condos are the way to go:

[Resale condos] is where the best value is. Because pre-construction units now cost more than existing resale units do, you’re banking on the idea that prices will continue to rise. If you buy a resale, however, you’re paying less and you’re paying today’s market value—not some future and hoped-for value.

Beyond price, resale buildings owe plenty of their benefits to not being new. They’ve been up and running for a while and have developed a reliable staff, property manager, and Board of Directors. There’s also a reserve fund that has been contributed to, and the occupants of the building are known. In a resale property, you’re provided with a status certificate that states how many units are renters and how many are owners. This information is something unknown to those buying a pre-construction unit.

The fact that resale condos are already built also means that you can move in immediately. And it’s a lot easier to see what the apartment looks like when you can visit it in person instead of looking at 3D-rendered models and floor plans. But because you’re buying from another person, there’s a potential for bidding wars—something you won’t see when going to a builder’s sales office.

Even despite the pretty and new amenities promised by the pre-construction condos, Burtnick argues that resale units are still the more livable of the two:

If you’re buying into an older building, you’re getting good sized rooms, as compared to new buildings which are much smaller. Some [new buildings] are fitting three rooms into less than 900 sq ft. I compare it to buying a brand new car, where you lose 30% of its value because you bought it new. You’re paying a premium for that new condo smell.

2181 Yonge St #1411 Balcony

The other factors

Whether you decide on a pre-construction or resale, remember that there are other factors to consider:

Location is everything. And as the city gets more congested, the walkability to various amenities, be it schools, subways, shopping, and green space, are always going to be more relevant to what unit you buy.

Additionally, developers are important too. With the booming condo market, new players are constantly jumping in. Burtnick advises that:

It’s better to go with an established player who knows what they’re doing than to pay for someone else’s mistakes.

We are currently in the midst of the greatest generational wealth transfer in the history of the world. Economists and financial observers estimate that the Baby Boomer generation has a collective net worth of US$30 trillion – more than any previous generation. And much of that money will be transferred to children and grandchildren. Economists are calling this shift of financial assets the “great wealth transfer.” And it will likely impact people younger people who are now entering the workforce, getting married and settling down.

Many Baby Boomers may look for creative ways to transfer their wealth to their children and grandchildren. They may consider factors such as return on investment, interest rates and time horizons when figuring out the best way to enrich their heirs. And one of the best investments continues to be real estate.

Few assets build equity and appreciate as well as real estate – particularly in the Greater Toronto Area (GTA). Even in slow times, house prices in the GTA continue to appreciate by more than 3 per cent a year, according to the Toronto Real Estate Board. A 2018 report by one of the largest brokerages in Canada (RE/MAX) found that Toronto-area home prices increased 119% between 2007 and 2017. The average price of a home in the GTA in 2007 was $376,236. Today, the average home price in the GTA is $822,681, according to the report.

Add to this more stringent requirements for securing a mortgage from a bank, and, for many people, getting money from their parents or grandparents for a downpayment on a house is the best chance they have for entering today’s residential real estate market. New federal guidelines require all federally regulated financial institutions, including Canada’s big six banks, to vet borrowers’ applications using a minimum qualifying rate equal to the greater of the Bank of Canada’s five-year benchmark rate (currently 5.34%) or their contractual rate, plus two additional percentage points.

2 Pine Ridge Drive

“Young people today are finding it extremely difficult to become homeowners,” says Jim Burtnick, Senior Vice President of Sales at Sotheby’s Realty in Toronto:

Not only are prices out of reach for many young adults, but the stress tests today are more difficult than ever before. Help from parents can go a long way.

But while helping your kids get into the real estate market with a financial gift is a wonderful gesture, withdrawing money from the bank of mom and dad is not without risks. There are many things to consider before placing a bet on your children and the housing market. Here are five important tips for purchasing real estate through the bank of mom and dad.

1. Make a long-term investment

For any real estate transaction to yield a solid financial return, it needs to be a long-term investment. It is therefore important that your children not place the money you give them on a short-term residence. Buying a property and then selling it in two or three years is not a smart move. Make sure that if you give your children money to buy a house or condominium that they plan to live there for a minimum of five to 10 years. That will be sufficient time for equity to build up as they pay down a mortgage, and for the value of the property to appreciate substantially.

2. Consider the location

It is a cliché, but location continues to be one of the most important factors when purchasing real estate. In many cases, it remains the most important factor. Not only does the location of a property dictate how much it will appreciate, but it can also determine how long it will take to sell in the event that your children decide to move. As a rule, properties in Toronto proper, or within the 416 area code, tend to sell easier and quicker than real estate in the 905 suburban regions. Give consideration to the location of a house or condo that your children are considering buying and that you may be helping to pay for, and, if needed, steer them towards a more established and desirable neighbourhood.

434 Sackville Street

3. Buy a condo in an established building

If your children or grandchildren are considering purchasing a condo, it is best to choose one that is located in an established building rather than buying a condo “on spec” that has yet to be built. Condos in established buildings already have a track record and have settled many of the issues that tend to arise with brand new condos, such as repairs and finishes that often need to be completed with the builder; creating a condo board; setting condo fees and so on.

These headaches are often out of the way in condo buildings that have been around for three to five years. Also, purchasing a condo that’s a few years old means you can be sure it has been built and is move-in ready. With condos that have not been built yet, you run the risk of the builder going belly-up before the building is completed. This unfortunate situation continues to happen more often than it should.

4. Treat the financial gift as a business transaction

Many parents worry about the complications that can arise when family and business become entangled. Parents may also worry about what could happen if they help a child purchase a property with their spouse and they later divorce. One way to alleviate such concerns is to treat any financial gift given for the purchase of a house or condo as a business transaction between yourself and your child. For example, you could give money for a house down payment as a loan rather than a gift. You could make arrangements for that loan to be paid back within a certain time frame and with interest.

You could also jointly purchase a property with your child and their spouse, placing your name on the mortgage documents as well. Or, you and your child could purchase a house together as a rental property – with your child living in the house while renting out part of it and sharing the rental income with you. There are many ways to structure a house purchase as a business transaction, and some favourable tax implications for doing so. Eligible home buyers in Canada may receive a tax credit of up to $750, and may also qualify for a rebate for some of the taxes paid on a home purchase.

5. Take out a second mortgage

In the right situation, it might be advisable to use a second mortgage to secure the money to give a child or grandchild for a house down payment. A second mortgage is when you borrow against the equity in your house to fund other projects or expenditures. The advantage of a second mortgage is that you would be on the title and have control over the property purchased by your child.

Home equity loans also tend to have more favourable interest rates and more flexible repayment plans that loans taken out on credit cards or with unsecured lines of credits. Keep in mind that there are costs associated with second mortgages, including appraisal fees, costs to run a credit check and origination fees. Taken together, these fees can cost as much as $1,000 or more. However, you can negotiate with a bank and may be able to have some, or all, of these fees waived.

Samuel Chinniah, Senior Vice President of Family Office Services, at T.E. Wealth in Toronto says:

A second mortgage is a simple and easy way to give money to a child while retaining some oversight of the transaction.

Using your wealth to help your children and grandchildren is one of the best things you can do. And real estate remains one of the very best investments. Giving your heirs a down payment to purchase a house, condo or property can be a solid financial decision. But be sure to give consideration to the risks involved and think of the best way to structure such a wealth transfer.

JB00KV

In the past few years, Automated Valuation Modelling has become very popular within the Real Estate Industry. Appraisers started using AVM’s to assess the value of a residential property rather than going out and doing a full inspection of the property as happened in earlier years.

Zillow, which has come to the Canadian market, has been providing “Zestimate’s” for years as did Zoocasa. Sometimes value is understated and sometimes overstated causing some Real Estate firms wanting the data directly from the Real Estate Boards released so that they have another source with up-to-date information that could be added to the mix in the AVM.

A Realtor does have access to Land Registry information and Municipal Data through payment to companies like MPAC (Municipal Property Assessment Corporation) and Teranet, but more and more you will see more public options for a seller who is interested in knowing the value of their home and be able to access that information electronically without speaking to a Realtor.

See the form below, just enter your address and the AVM will give you a range of value that your house will fall into. If you are interested, please try it and let us know if the valuation is close to what your thoughts about your property would be…

FREE HOME EVALUATION FORM

If you want a more accurate assessment we would be happy to research and inspect your property and give you a Comparative Market Analysis that would also give you our thoughts on the kind of pricing you could expect in Today’s marketplace. Remember always that either an AVM or a CMA is very time specific as the market changes and fluctuates.

SK00SK

A detached home in Toronto or the GTA this days is easily over $1 million, and when the asset has such a huge price tag, the closing costs associated with buying can creep up on you. This can result in thousands of dollars of fees you completely forgot about.

Richard Silver, Senior Vice President – Sales at Sotheby’s International Realty Canada, recommends that, “a buyer should have on hand about 5% of the purchase price—4% for taxes and roughly 1% for lawyer fees.”

While tax and legal fees may be the largest costs to closing, they’re not the only ones. Other costs include home appraisal, a land survey, home inspection fees, mortgage default insurance.

Taxes (4%-15% of the purchase price)

Possibly the largest closing fee that the buyer is responsible for is the Land Transfer Tax. This is a provincial and/or municipal tax that is a percentage of the home’s purchase price, and usually only affects resale homes—though having to pay Land Transfer Tax on a new construction is not out of the question.The exact percentage of the tax varies from province to province and municipality to municipality.

Toronto buyers have to pay both the Ontario (provincial) land transfer tax and Toronto (municipal) land transfer tax.

As Richard says:

In the City of Toronto the [Land Transfer Tax] amounts to 4%—2% for the province and 2% for the city. If you are a foreign buyer, it jumps to 15%.

At the moment, the system works in tiers marginally and each portion of your home’s value is taxed at a different percentage, but this system averages out to approximately 4% in land transfer taxes.

You can also use our calculator to figure out how much are you about to pay.

Land Transfer Tax is expensive, but first-time homebuyers can find solace in various rebates. First-time homebuyers get a full tax refund for the first $368,333 on the taxable purchase price from the province and on the first $400,000 from the city. The next $400,000 to $2 million can receive a maximum tax rebate of $4,000 from the province and $4,475 from the city. And lastly, the taxable amount over $2 million can receive up to a $4,000 tax rebate from the province and a up to another $4,475 from the city.

Who is eligible for Ontario/Toronto land transfer tax refund?

• first-time home buyer
• must be a Canadian citizen or a permanent resident of Canada, 18 years or older
• must occupy the home within 9 months of buying
• cannot have owned a home anywhere in the world
• their spouse could be a previous homeowner but cannot have owned a house while being married to the applicant
• in case of newly constructed homes, they must be eligible for home warranty
• must apply for the rebate within 18 months of buying

The tax rebate application should include:

• a completed Ontario Land Transfer Tax Refund Affidavit for First-Time Purchasers of Eligible Homes
• a copy of the registered land transfer deed
• a copy of the agreement of purchase and sale
• a copy of a document proving residence (driver’s licence, phone bills..)

You can find more information about tax rebates and different scenarios here. But taxes are always changing depending on both the local and the provincial governments, so it’s advised to ask your lawyer or notary for the most recent calculations for your region to budget properly.

Another tax to keep in mind is HST. Though relatively minor, many services, such as realtors and lawyers, required during the closing process charge a standard 13% sales tax. And a 13% sales tax is also required in the purchase of a new home.

Lawyers and Realtors ($500-1,000)

Legal fees can vary between $500-$1,000 depending on the purchase price of the home and the lawyer. Some lawyers, similar to the Land Transfer Tax, also charge based on a tiered system.

This fee covers:

• title search
• title insurance
• managing the paperwork in obtaining a mortgage
• verifying the paperwork of the seller’s lawyer.

A lawyer is an important expense because they help you avoid trouble and are a preventative measure.

Additionally, while a buyer may not always hire a realtor, they still pay for one, which can amount to 3%-7% of the closing costs. Silver says:

The buyer does, in essence, pay one half of the [realtor’s] commission. But it flows through to the seller through inclusion in the asking price.

Home appraisal ($300-$500)

A home appraiser is often needed to provide a professional opinion about the value of the property being purchased and is required by the lender to see if the purchase price is fair. The lender needs this information to determine whether to provide the buyer with a mortgage. An appraiser usually costs $300-$500 but is something the lender often covers. The lender, in the end, provides a percentage of what the appraiser determines is a fair market price.

Home inspection ($500)

A home inspector is similar to an appraiser but evaluates things like the home’s structure and system to see if there are any issues before you purchase it. Although not mandatory, it’s common for purchase offers to be firm upon a positive home inspection report. Without a home inspection, you could discover poor water quality due to bleeding pipes, bad roofing, or poor foundation when it’s too late.

Home inspection costs depend on the size of the house, and for the typical suburban home, it can be around $500. Some buyers try to skip out on this cost, but Silver warns to never skip on an inspection:

If you [skip the home inspection] then you may miss out on things that need to be fixed and that could be fixed by the seller in the negotiation. Also, because no house is perfect, it gives you a schedule for upcoming expenses.

Land survey ($1,000-$2,000)

Lastly, a land survey is something to keep in mind. Between the buyer and seller, this cost may be split or given to one party depending on how the purchase agreement plays out. However, you only need a land survey if the seller cannot produce an up-to-date survey, and title insurance can replace the need for a land survey. If you do plan to get one, it costs $1,000-$2,000 depending on the size of the property. Similar to the home appraisal, it’s required by the lender.

Mortgage default insurance (0.6%-6.5% of the amount you borrow)

When buying a home, a 20% downpayment is ideal, but if you’ve decided to go less than 20% you’ll have to buy mortgage default insurance which adds another expense to your purchase. Mortgage default insurance is there to protect the lender from high-ratio mortgages (i.e., less than a 20% downpayment) in case you can no longer make payments.

The insurance costs between 0.6% and 6.5% of the amount you borrow and is payable upon closing or added to your monthly mortgage payments. If you decide to add it to your monthly mortgage payments, know that there will be interest. Where your insurance falls between that 0.6%-to-6.5% range depends on how much of a down payment you’ve made.

For example, on a $500,000 mortgage with a 10% down payment ($50,000), a $450,000 mortgage is required. And a 4% insurance premium would result in an added expense of $18,000.

These are only the major closing costs for a buyer, but remember that moving into a new home, especially if it’s your first home, results in additional costs like moving and hydro. Make sure to plan out a budget for all these things and to not only focus on that massive purchase price. You don’t want to be in for a surprise. Silver warns:

Moving day can be one of the worst days of your life…Do not underestimate it and get all the help you can. Remember the adage: You get what you pay for.

AZ00KV

Richard was recently a guest on Michael Lafido’s podcast show called Luxury Listing Specialist Podcast. They talked about Richard’s career, his beginnings in real estate, building and working in teams, the importance of networking and also about dealing with luxury properties.

Key Takeaways:

• Change is essential, and should be embraced.
• Diversity of agents with regards to race, religion, age, culture and language only stands to benefit your business. This is particularly true in multicultural societies.
• Use of new technologies is vital, from testing personalities to marketing homes.

Listen to the podcast below.

Michael Lafido is a top-producing Realtor and real estate consultant with over sixteen years of experience in the industry. Michael’s a best selling author and his marketing has been featured worldwide. He is the founder of the nationally recognized “Verified House” Program for home sellers. He is a leading authority in the real estate field and is highly sought after as a national speaker.

Jim was recently interviewed for CityNews.ca about the current state of the Toronto real estate market and the predictions for 2019. Watch the whole interview below or read the article here.

[fvplayer id=”11″]

SK00SK