With the real estate market changing rapidly, buying a home can take multiple visits, many rounds of deal negotiations, and years of savings in order to raise the necessary funds. For some buyers, these barriers can make it difficult to access homeownership, especially in the current environment where the number of properties available for purchase is limited and interest rates remain relatively high.
When looking for a property, some buyers prefer to adopt a different tactic that allows them to avoid many of the pitfalls associated with second-hand home transactions by opting to buy a house off plan. Popular with investors, buying a property before it is built is also an option for end buyers who prefer to buy new and who have the luxury of being able to wait before moving into their home.
Over the past few years, buyers who acquire a property off-plan and plan to live there once construction is complete have remained a consistent group of buyers in the presale segment in Canada. In fact, according to a recent survey conducted by Royal LePage, end users are currently the most active type of buyer in the presale market. This observation is the same as before the pandemic where end users were the most common type of pre-construction property buyer.
For first-time home buyers, buying a property before it is built offers a unique advantage. Unlike resale transactions, where the entire down payment is required upfront, the down payment requested in the case of a presale is divided into several installments which are paid to the promoter over a period of time. , often a few years. For first-time home buyers who don’t have a 20% down payment, this structure gives them more time to save while still having a contract for a home. Given today’s market, where interest rates are at 22-year highs, closing a property purchase at a later date also allows time for a potential drop in the cost of borrowing before a mortgage loan is necessary.
Pauline Chen: Buying a property before it’s built is appealing to all demographics, especially first-time home buyers who can enter the market through a pre-construction condominium project as well as those looking to expand their property investment portfolio, thereby adding much-needed supply to the rental market.
Félix Villeneuve: These are typically buyers with access to equity or cash that allows them to make a down payment and whose annual household income is between $90,000 and $150,000. These buyers acquire a property before its construction to help their children, invest for their retirement or opt for an alternative investment to GICs or low interest savings accounts.
Pauline Chen: With increasing prices and competition, we are seeing more and more end users interested in pre-construction projects. First, because they allow them easier access to property, and this, without suffering competition and, second, because it allows them to guarantee their purchase today, without having to obtain a mortgage loan at the rates of inflated current interest.
Félix Villeneuve: In the past, investors bought properties before they were built for the purpose of generating income and as an alternative to other types of financial investments. However, nowadays, end buyers are also interested in properties offered in presale to help their children enter the real estate market. This type of purchase is also interesting for newcomers to Canada. As applications for permanent residence can take a few years to be finalized, more and more newcomers are choosing to buy a property before it is built, which will be completed around the time their permanent resident status is confirmed.
Pauline Chen: Potential buyers do not always have access to project details. Many people think that pre-sale properties are out of their reach, but if advised by a professional, it is actually one of the best ways to enter the real estate market. One of the advantages of properties offered before construction is that they are usually completed within two to four years, giving buyers time to prepare their finances. In addition, the payment of the down payment is generally spread over several months or years, without additional expenses until the completion of the project.
There are, however, a few risks to be aware of when buying a property before it is built. If you don’t review your finances ahead of time, you may not be able to secure a mortgage upon completion of construction. There is also the risk of dealing with an unreliable builder who may deliver a poor quality product or even withdraw from a project in a market where costs are rising. Some builders may decide to suspend or cancel projects in the event of rising prices for labour, materials or financing. This is why, when buying a property before it is built, it is important to work with specialists who are familiar with the contracts and procedures of the builders.
Félix Villeneuve: One of the biggest mistakes buyers make is not considering the full financial cost of buying a property before it is built. Some buyers do not realize that depending on the contract and the fact that they are buying as end users rather than investors, they may be liable for development charges and harmonized sales tax (HST) at the closing of the transaction. It is always advisable to consult a real estate professional before investing in projects of properties offered before they are built and to review the offer before signing the contract.
Félix Villeneuve: In the case of the sale of a property before its construction, the purchase is made directly from the promoter or the builder, while in the case of the assignment of a contract of sale, the house is acquired from a buyer who has already obtained a firm agreement from the developer or builder and who is now seeking to sell this purchase agreement to another party.
Pauline Chen: Acquiring a property offered in presale is an option that offers greater flexibility to buyers. The down payment required to secure a property is spread over one or two years and there are no expenses until the project is completed. The advantage of this type of acquisition is that it gives people time to plan their business rather than being ready immediately, as is the case with resale. It doesn’t always cost less, but it gives buyers a lot more time to plan.
Félix Villeneuve: It really depends on the market and the timing of your investment, as well as the structure of the deposit required by the developer for the particular project in which you are investing.
Pauline Chen: I think the main factors to consider are: is it an investor or an end user and what purpose will the property serve? How soon must the buyer make the purchase and complete the transaction? If the buyer needs to take out a mortgage, can they get financing today or do they need more time to sort out this aspect of the purchase?
Pauline Chen: Since developers choose to market their properties through multiple channels, there is not always a one-stop-shop to find all pre-sale property listings. It’s best to start by contacting a real estate professional in your area who specializes in selling properties before they’re built. This person is likely to be the one with the most up-to-date information on current and planned real estate projects in your area. Do you want to work with an agent who specializes in selling properties before they are built in your area?
• Possibility of improving or selecting these elements: exterior cladding, floor coverings, plumbing and electrical accessories.
• Construction according to recent standards (building, electricity, energy efficiency).
• Contractor’s or builder’s warranty.
• Application of taxes such as GST and QST. Partial provincial refunds are nevertheless offered under certain conditions.
Existing house
• Neighborhood already established.
• Land landscaped and fenced.
• Possibility of certain additions (inground pool, finishing of the basement, etc.).
• In the event of major renovations, possibility of being considered as a new house and application of GST.
This type of property purchase requires being available on a regular basis to make important decisions. For self-construction, plan an involvement that can range from 20 to 30 hours per week1 for the duration of the project.
Of course, you can hire a project manager who will take care of everything, but since this is your home, some decisions are still up to you, and you will have to provide a significant personal investment.
Financing the construction of a house requires greater involvement from your bank. An authorized inspector comes to check the progress of the work before gradually releasing the funds. During the last inspection, he must certify that the work is 100% complete and that the house is ready to be occupied.
You will benefit from carefully selecting the professionals with whom you deal, either the builder or the manufacturer, in the case of an off-plan or prefabricated house. Ask them about their experience, visit their completed projects, ask for references and evaluate their quote. Also, make sure the builder has the necessary licenses and permits to undertake the planned work.
Follow the progress of the work and ensure that the budget is respected. The main stages of construction are generally as follows: excavation, concreting of the foundations, erection of the frame, installation of the exterior cladding, doors and windows, gypsum, and finally the interior finish.
Find out about the privileges to which you are entitled concerning the new home guarantee plan, which can protect you in the event of a construction defect or a delay in the schedule. In addition, be aware that you can benefit from tax refunds from the Quebec government, i.e. 50% of the QST (for a maximum of $9,804) and 36% of the GST (up to a maximum of $6,300).
Also find out about the legal hypothec, which allows the professionals who participated in the construction of the building to have it sold in court or even to take possession of it in the event of non-payment.
Building a house exactly how you want it is the dream! Here are the main stages of your project: after having defined your budget, find out about the sites that hold your attention.
Then draw up your construction plan and have it assessed by the Bank or the loan insurer. Obtain the necessary permits for the construction, without forgetting to take out insurance against damage for the duration of the construction site, as well as insurance for the residence once the work is completed.
Find your builder or manufacturer You can opt for a custom home builder, who will build a property exclusively for you, or for a new house model. Whatever your decision, there are several factors to consider when looking for a builder.
• What is its reputation?
• How long has he been in business?
• Is the company part of any industry organization or association?
• Does it offer a list of past clients you can contact?
• Is he licensed in the province where you want to live?• Has he carried out other projects that you can visit?
• Does it offer a guarantee? If so, what is its warranty history?
• How much say will you have in the final look of your home?
• Is it covered in the event of a claim (liability insurance, fire, theft, vandalism)?
• How much does the builder charge for extras?
BEFORE WORK
Before embarking on your project, it is advisable to visit the various sales offices of the builder or the house models offered and to obtain information from the various builders or manufacturers of prefabricated/prefabricated houses.
WHAT TO PLAN
Quebec Residential Construction Guarantee (GCR) Optional Plans: Association of Construction and Housing Professionals of Quebec (APCHQ), Quebec Construction Association (ACQ)
The amount is calculated based on a percentage of the sale price of the house. As a general rule, there are two possibilities in the case of a principal residence:
• 5% of the purchase price of the house
The minimum down payment amount for most homes is 5% of its purchase value. Example: for a house that sells for $400,000, the minimum down payment will be $20,000.
Keep in mind: if your down payment is less than 20% of the purchase value, the financial institution granting you your mortgage loan must take out insurance with the Canada Mortgage and Housing Corporation (CMHC ), Sagen™ or Canada Guaranty™. Result: you will have to pay a premium¹ on top of your mortgage payments.
• 20% of the purchase price
If you make a down payment corresponding to 20% or more of the purchase price of your property, you could obtain a conventional loan and avoid the costs associated with mortgage loan insurance.
• Cash (like money in your bank accounts)
• Investments (which can be built through systematic savings)
• Gifts (from a family member, for example)
• Your TFSA or RRSP
The trick with the RRSP (because the link with the houses is not so clear at first glance, we grant you):
The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP tax-free to use as a down payment for your first home. If you are two to buy, you multiply by two and are entitled up to $70,000. Your withdrawal:
• Must begin to be reimbursed from the 2nd year following the year of your withdrawal (example: a withdrawal in 2021 must begin to be reimbursed in 2023)
• Must be repaid in full within 15 years
You don’t have $35,000 in your RRSP (because money doesn’t grow on trees)? It is possible to consider the RAP² all the same with an RRSP loan. Please note: in all cases, the money must have been in the RRSP for at least 90 days before the withdrawal.
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Chen-Villeneuve | Royal LePage Real Estate Brokers | Montreal | South Shore
7503 Taschereau Boulevard
Brossard, QC, J4Y 1A2
Phone : (514) 887-9081 or (514) 295-0228
Toll free: (833) 215-0228
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