Purchasing in pre-construction condominium within emerging condo communities can be an exciting opportunity, but it comes with its own set of risks that potential buyers should consider. Understanding these risks can help in making an informed decision and potentially prevent future unpleasant ‘suprise’ or financial setbacks. Here are the 11 risks that you need to know before signing the APS:
1. Premium Pricing and the Risk of Negative Equity
Pre-construction condos in recent years command a premium price compared to existing resale condos. This can be a considerable risk, particularly if the market experiences a downturn. Buyers might find themselves in a situation of negative equity, where the market value of their condo is less than what they paid.
2. Condo Maintenance Fees: The Increasing Burden
Initially, condo maintenance fees might seem reasonable and affordable within the budgets when signing Agreement of Purchase and Sale. However, these fees can increase significantly after the condo is completed and the real costs of maintaining the building become apparent after first 2-3 years.
3. Unexpected Development Fees
Development fees are another area where buyers can face financial surprises. These fees can increase unexpectedly. Often, developer’s contracts are designed to pass these increases directly to the buyers.
4. Occupancy Fees
During Interim Occupancy Periods During the interim occupancy period, when the condominium unit is has not been final closed and the title has not been transfered from developer(declarant) to the purchaser, buyers are required to pay occupancy fees. These fees do not contribute to the mortgage principal, which means buyers are essentially paying rent for their own homes without building equity.
5. Completion Date Delays
Delays in the completion date are common in pre-construction projects. These can disrupt move-in timelines and financial planning, particularly for those who may need to arrange temporary housing or whose leasing arrangements may run out before they can move in.
6. Changes of Floor Plans and Unit Size
The floor plans and the unit size promised at the time of purchase may differ from what is actually delivered. These discrepancies can affect the usability and enjoyment of the space, potentially leading to disappointment.
7. Changes in Building Amenities
Advertised amenities—such as gyms, pools, and community areas—that attract buyers to pre-construction condo communities can be altered, downsized, or completely removed by the time of completion if developers cannot be approved by government planning authority or not willing to deliver due to the concern of cost increase. Such changes can affect the lifestyle and property values of the condominium purchasers perceive.
8. Deficiencies and Material Defects
New constructions can have their share of deficiencies and material defects. While these are typically addressed by the developer, the resolution may take longer than expected, up to 130 day according to Tarion Warranties, impacting the comfort and convenience of the residents.
9. HST Implications
The Harmonized Sales Tax (HST) implications can vary significantly between end-users (who plan to live in the units) and investors. This affects the final cost of the condo, with potential rebates applying differently depending on the buyer’s status.
10. Challenges of Ongoing Construction
Early occupants of new construction condominiums may face ongoing construction. This can mean noise, dust, and general disruption, along with delayed access to promised amenities, without deduction of condo maintenance fees.
11. Potential for developer bankruptcy or insolvency
This is the most serious result of all 11 risks! In recent years, there has been an increasing number of condo projects that have been canceled. If your condo development fails to materialize, you can recover your deposit, but it will not include any interest. Sometimes, developers encounter financial troubles or even bankruptcy, as was the case with “The One Condo.” In the worst-case scenario, you might lose your deposit. Tarion offers a safeguard, providing compensation for deposits up to a maximum of CAD 20,000.
