What to consider when buying a new construction home

When it comes to purchasing a new construction home as a first-time homebuyer or seasoned investor, you may be unsure whether to choose a pre-construction home or a resale property that’s already built. A brand new or pre-construction, never-lived-in home may seem like the ultimate dream, but it can be challenging to navigate the home buying process of this type of home. When you take the time to understand the process, buying new construction can be a great investment of your time and money.

Research the builder for new construction homes
When buying pre-construction or a resale home, you need to do your due diligence and research the home builder. There are risks to consider especially when you are purchasing a pre-construction home that hasn’t been built yet, such as project cancellation, the home builder failing to obtain financing, mortgage challenges for home buyers, underestimating the closing costs and the project incurring construction delays. You want to buy from a reputable home builder who has a great track record of successfully built homes that last. Research the home builder and the new community, and look for reviews, testimonials and any news on new or past projects.

Get a new construction home warranty
Every new construction home from a reputable home builder comes with a new home warranty to provide protection and peace of mind, adding coverage for items your home insurance does not include. The warranty may protect against material deficiencies, water penetration problems and issues relating to major structural defects. Coverage varies from builder to builder and is either provided by the builder or the builder will involve a third-party home warranty company. In Ontario, all new homes must enroll in the Tarion warranty program, which lasts for seven years, including in the event of a sale. When purchasing a resale home in Ontario that is less than seven years old, there is a good chance you are still covered and you will need to contact Tarion to transfer the warranty. The warranty is not automatically transferred to you on closing.

Buying a pre-construction home

One of the main differences between buying a pre-construction home and purchasing a resale home is that a pre-construction home is a not-yet-built condo or house you buy directly from the home builder, before construction begins or during the construction phase. Whereas, a resale home has already been built.

One of the main benefits of buying pre-construction is that it is often more affordable than if you purchase after the construction phase. The market value of your new home increases from the first day you purchase the new condo unit or single-family home.

When acquiring a pre-construction property, a deposit is required to secure your unit or home. No two projects are the same, but a pre-construction deposit is typically 20% and is usually broken down into payments of 5% over time. Buyers do not need to have the entire deposit available at once – this allows home buyers to save enough to pay in increments. A set amount of the deposit is required when the agreement is signed and the balance of 5% is usually due within a month, depending on the home builder. There are various arrangements for the remainder of the deposit to be paid, such as 5% in 90 days, 5% in 365 days and 5% on occupancy. Purchasing pre-construction affords you more time to pay the deposit – it can be spread out over 3 to 4 years if you purchase very early in the pre-construction process.

Another main benefit is the ability to choose a floor plan, and personalize the finishings and fixtures to determine what would be the best fit for your lifestyle or investment. Typically, the model home or suite that builders show is full of upgrades and amenities, so it’s important to understand what your model or suite does and does not include.

A pre-construction project many incur delays — this is one of the larger risks when buying pre-construction. Home builders usually set their closing dates early and are allowed to push the closing date back, meaning most projects are not being built on the schedule initially presented. It may take several years beyond the agreed upon move-in date.

The pre-construction process
Buying a new construction home that has yet to be built is a complex process and it’s important to know what to pay attention to when you are putting together an Agreement of Purchase and Sale, protecting you and reducing any risks associated with your purchase.

Get your mortgage pre-approval
When purchasing pre-construction, you will require a mortgage pre-approval that will satisfy the home builder’s terms within a stated period, which could be 30 to 90 days from purchase. A mortgage pre-approval ensures the home builder that the purchaser can afford to close on the property when the time comes. This is important to have in advance of purchase, in case there is any trouble with getting financing. Your mortgage pre-approval does not guarantee financing a year or several years later when the project is entirely complete, at which point you would re-negotiate financing. During this time you can’t be certain whether interest rates will rise or what your financial situation will be when the project is complete.

Protecting home buyers
In Canada, there is a 10-day cooling off period in Ontario and a 7-day period in British Columbia after signing the Agreement of Purchase and Sale to cancel without penalties. British Columbia will soon extend this cooling off period to include resale homes in spring 2022. In Florida there is a similar 15-day cancellation period. During this time, you want to ensure that you are confident with the purchase by reviewing the documentation and any other due diligence, because after the cancellation period, you can no longer walk away without legal repercussions.

Understand the assignment clause
The right to assign means you have the right to sell the contract to your new condo or house before you take possession. This is beneficial to have in your purchase agreement because it gives you the option to sell, so you’re not locked in until close. Often there’s a long time between when you originally enter into the agreement, the interim occupancy period and the closing date, and it’s not uncommon for a buyer’s circumstances to change come closing time.

Closing date and interim occupancy
When it comes to purchasing a pre-construction condo, there are two important closing dates:

• Interim occupancy
  During interim occupancy, the condo is on its final leg of completion and the buyer is able to move in, but the unit does not belong to the buyer yet. Since the project in its entirety is not done, the condo is not registered with the local municipality, and the ownership cannot be transferred to the buyer. The builder still owns the unit and the buyer will have to pay a fee to the builder on a monthly basis until ownership is transferred. Mortgage payments will not begin during this period.

• Final closing
  The final closing date will occur when the entire condo building or home is complete, title of ownership transfers and your mortgage payments start.

Pre-construction single-family homes generally don’t have an interim occupancy period. Instead, closing day is the final step in the purchasing process and the day when the single-family home is transferred from the home builder to the buyer. By closing, the buyer already selected any upgrades, secured financing and completed a final walk through of the new home to ensure everything is up to standard.

Be ready for closing costs
Whether buying a pre-construction or resale home you should include closing costs in your budget. Closing costs on pre-construction homes can be high; these costs pay for additional fees that don’t apply to resale homes. Closing costs vary by province and state, but may include lawyer fees, land transfer tax depending on where the home is located, education and development charges, utility connection fees and new home warranty plan fees. If you are buying a pre-construction condo, you will need to contribute to the condominium’s reserve fund, which is most often equivalent to two months of condominium or Home Owner’s Association (HOA) fees. The sale of a pre-construction home generally is subject to sales tax on the purchase price, depending on the province or state. In Canada, there is a GST/HST rebate which you’ll receive right away in the form of a discounted purchase price, if you have the intention of living in the new home. The home builder receives the rebate and uses the rebate to reduce the purchase cost of the home.

Buying a resale home

A resale home is a brand new construction home that you will be one of the first to reside in or purchase — this is much faster than a pre-construction home. This is the main benefit to buying a resale home; no waiting for the completion of the construction of a condo or house. You can tour the property prior to purchase, but this also means that customization options are limited outside of post-purchase renovations.

The resale process
For resale homes, you will need a mortgage loan. The mortgage process is simple because you already know current interest rates, your current employment income and your financial situation. Once you are pre-approved for a mortgage, you can secure your mortgage right away. There is no need to worry about real estate market shifts prior to closing.

A deposit is typically smaller for a resale home which can be 5% of the purchase price with no pre-construction deposit structures. The lower deposit amount can make a resale home more affordable upfront. This setup does not require sales tax – the price negotiated between the home buyer and seller is the total price.

Purchase prices for resale homes are not fixed, meaning there is a possibility you can end up in a bidding war and pay above the asking price. Alternatively, you may be able to negotiate for a lower price. Pre-construction purchase prices from home builders are mostly fixed.

Resale homes are a great option if you want to invest in a rental property, as you can rent it out directly after purchase and start seeing immediate income.

There is no doubt that buying a new construction home is appealing, but deciding between pre-construction and resale homes, and understanding the benefits and risks of each process is key. With the right real estate agent working for you, you will be able to find the perfect home.