What You Need to Know About Buying a Pre-construction Home

Edward Trapunski
by Edward Trapunski January 18, 2016 / No Comments

Almost one out of every three homes bought in Canada are bought directly from a builder. Just last week, the Canada Mortgage and Housing Corporation announced that the seasonally adjusted rate of housing starts was 172,965 in December.

Buying a house that’s brand new and shiny is appealing. Here are a few reasons:

  • Since most brand new houses are erected in suburbs that are underdeveloped, it’s a way to beat the high cost and bidding wars you may experience in the hot urban real estate markets in Toronto and Vancouver.
  • New homes can offer more living space and property size.
  • They can be customized into your dream home with the most modern technology built in and have better energy efficiency than older homes.

But there are drawbacks. When you buy a new home, you often buy from plans. You’re looking at land as far as you can see and your dream house exists in the salesperson’s promises and in your mind’s eye. You can also buy directly from the builder without the safety net of a real estate agent and the builder may recommend a mortgage provider.

You have to be wary of unforeseen issues. Here are some suggestions to help you avoid the surprises:

Know where you’re going

Talk to homeowners already living in your chosen development or nearby. You want to to find out if they’re satisfied with the builder’s workmanship and diligence in fixing problems. Take your time, ask a lot of questions, and visit a developer’s finished community to see how it feels. Find out what the long-term plans are for the community – roads, recreational facilities, and commercial expansion. Schools and supermarkets make a difference.

Strip the make-up off the model home

Model homes always look beautiful and you might not realize that just about everything you’ve fallen in love with is an upgrade for which you have to pay extra. That doesn’t mean to say you should never order upgrades. Just know that you’ll have to pay for them. Ask to see samples of the builder’s finishing touches, such as lighting and plumbing features. Upgrades are an investment because they can add to the resale value of your house when you’re ready to move. But they have to be worth it.

Upgrades are a major portion of the builder’s profit margin. A $10,000 granite countertop that makes a kitchen look great probably cost the builder about $5,000. While there’s little room for bargaining on the base sale price of a new house, negotiating the price of upgrades is possible. The more you upgrade, the more you can haggle.

Measure twice, cut once

You can’t rely on a salesperson’s verbal assurances or a builder’s brochures for the dimensions of the house you want to buy. Often the measurements advertised include external walls and even balconies and terraces. Take out your tape measure and calculate room sizes and add them up.

Lawyer up

A new home’s purchase agreement is a legally binding document. It spells out the conditions of the sale and the obligations on both sides. It tends to be full of legalese and fine print. If you sign it without understanding the terms, you could be stuck with substitutions, inclusions, or exclusions you don’t want. Builders might insist you sign a contract on the spot to secure your sale price and lot selection. Some provinces have a cooling off period under the law. You can also insist on a clause that the deal is conditional on legal approval.

Ontario, British Columbia, and Quebec have mandatory warranty coverage on new houses. In other provinces, builders will sometimes try to convince potential buyers to opt out of warranty coverage by saying that they are saving their clients from the registration fees. Don’t fall for it.

Unlike resale homes, GST/HST is applied to the price of a new home. This can significantly increase the overall cost of the house. Also, find out about milestone payments. Are you expected to pay at certain stages during construction or do you pay the full price on the day you get the keys?

Beware of hidden costs

You may find yourself suddenly charged for hooking up gas and electricity meters, development fees, deposit verification fees, and other unexpected expenditures. These charges can be as high as 6% of the original sale price. Buyers sometimes only learn of them a few days before closing. Try to get advance warning of extra charges and set a cap if you can. Ideally, the total should not exceed more than 1.5% to 2% of the purchase price.

Inspect thoroughly

There are two specific times when it’s important to have your home inspected. The first inspection is mandatory for all new houses under warranty and takes place with the builder shortly before you take delivery.

Make sure the builder lives up to all the promises in the purchase agreement. If there are any deficiencies, write them down and have the builder sign off. If a problem isn’t written down, the builder isn’t obligated to fix it.

The second inspection should take place about a month before your home warranty expires. Your house should have gone through all four seasons to allow enough time for any major defects from settling or cracking to appear.

There are different deadlines for different types of warranty claims. Mark these deadlines on a calendar and get the claim in at least five days before the deadline.

As a new homeowner, you also have a responsibility to ensure that the warranty remains valid. For instance, you have to change your furnace filters and clean your gutters if you claim for heating deficiencies or water penetration into your basement.

The builder should leave you with copies of the manufacturers’ warranties on the components and products that were used to construct your house.

Delay, delay, delay

Critical dates should be included in the purchase agreement. If the builder misses a critical date, you can accept the change, seek compensation, or get out of the agreement. Living in a hotel is fun for only so long. It can cause problems if it affects your children’s new school year or your employment plans.

When you sign the purchase agreement from plans, the house might not be ready for two or three years. Try to negotiate the right to transfer your contract before closing if your circumstances change.

Buy a dust mask

Chances are you’ll be living in a construction zone. Even when your house is finished, you may not be free of dust. The developer will still be paving the roads and putting in public spaces. Prepare yourself for dirt and noise. You’ll have to live with it.

Buying a brand new house is a big decision and an important investment. By asking the right questions, you can buy with confidence.

Flickr: Melissa