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Pre-construction builds privy to market correction

Toronto’s softening housing market is a good reminder that pre-construction homes and condos are also vulnerable to price fluctuations, Toronto real estate lawyer Daniel Bernstein tells AdvocateDaily.com.

While the real estate market was red hot a year ago, a recent article shows home sales are down 40 per cent compared to the same time in 2017, while condos are down 30 per cent.

The Toronto Star reports that some buyers are upset to learn their builder is selling nearly identical houses for significantly less than they paid. An early buyer said she paid $955,000 for a 2,749-sq.-ft. detached house, while similar models are now selling for about $859,000.

Some of the Phase 1 buyers are “devastated,” the Star reports, but Bernstein says in a free-market economy, pre-construction pricing behaves the same way resale prices do.

“If a builder cannot sell homes at a set price, then it will have to attract buyers either through lowering its prices or offering some other incentives,” says Bernstein, a founding lawyer with Weltman, Bernstein. “Perhaps this builder's selling model doesn't allow for holding onto unsold inventory until the return of a rising market.”

He notes that because the dates between signing the contract to buy a pre-construction home or condo and the closing can be several years, no one knows what the market price of the home will actually be. 

“It has generally been the case in recent memory that because of a rising market, there really is no risk. However, we are now seeing that purchasers who have bought homes a year ago or longer with closing dates in the near future may well have problems due to a slowing market,” Bernstein says.

He adds that appraisals could come in lower than buyers expected, which will result in lower mortgage loans being offered or they will have to stretch their budgets by getting high-ratio insured mortgages.

“The former would require higher down payments, the latter would require higher monthly payments,” he says. “No one can predict the future, but buyers should remember that markets can move in both directions.”

One of the disgruntled purchasers in the Star article started out with a budget of $500,000-$600,000 but spent $899,000. Bernstein says such an "overextension" of a budget is a gamble that can be lost. 

“Buyers really need to budget responsibly,” he says. “With pre-construction, the contract price is not the final amount. There are closing adjustments that will bring the price of the home up in some cases by many thousands of dollars.”

He says there are extra charges that appear in all pre-construction purchase agreements, including Tarion warranty; connection charges for hydro, water and gas; development and educational levies; tree-planting charges; security deposits; and even fees to pay the builder's lawyer to prepare closing documents and discharge their mortgages on closing.

As well, investor purchasers who do not intend on living in the property will not qualify for the HST rebate and will have to pay back this amount to the builder on closing.

He notes there is a 10-day cooling-off period with new condominium purchases, during which a lawyer can review a purchase agreement to point out issues in the contract or extra charges. However, there is no similar period for pre-construction homes.

“Unless a condition is written in the purchase agreement to allow a lawyer to review it, then a purchaser is stuck with its terms,” Berstein says. “This could mean tens of thousands of dollars in unexpected closing costs.”

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