• Capped Closing Costs. If you don’t have caps in place for things like development levies and hydro/gas hook-ups, your closing costs could theoretically be in the tens of thousands (not including land transfer taxes and legal fees). The number one thing your lawyer will recommend is having a good cap on these costs. What constitutes a ‘good cap’ is always up for debate. 5 years ago, caps were in the $1-2K range. Now developers are pushing things up into the $8-9K range. Most lawyers push for something in the $2K range for levies, $1K for utility hook ups, but frankly, most lawyers are out of touch with what is normal for pre-construction contracts in 2010.
• “Nickel and Dime” charges. Developers are notorious for trying to sneak in charges for all sorts of things related to the purchase. They can be very creative. Your lawyer will probably point out some of them and recommend you ask them to be waived. Most builders will say no.
• Square Footage. You will get a copy of your floor plan in your agreement but 90% of the time the square footage and dimensions are not listed. Your lawyer will point out that you may get a unit that is 600 sq ft instead of 700 and there is nothing you can do about it! In one sense they are right: there is no protection in the Ontario New Home Warranty Act (provincial legislation) for consumers on this issue. There is a bulletin that Tarion put out in 1989 stating that the size of unit should not be off by more than 2%, but this is just a guideline (not written in law). In reality, variances are usually negligible, but if there was a major discrepancy, it would be a legal issue that you would have pursue through the courts. One option would be to have an amendment added to the agreement that explicitly states variance will be in accordance with the Tarion Bulletin, however, be prepared that most builders will not agree to this. Proceed with caution and understand this is part of the risk of buying pre-construction.
• Rent During Occupancy. Make sure you tell your lawyer if you are planning on using the property as your principal residence or as investment. If investment, they will probably tell you the contract says you cannot rent during the occupancy period. You may want to request a clause which allows you to do this.
• HST Rebate. There is an HST rebate (formerly GST rebate) for end-user buyers that is built into the purchase price of condos in Ontario. If you are not planning on living in the unit, you might have to pay this amount back to the developer on closing. You may apply to the government to receive the exact same rebate given back to you after final closing. Your lawyer should advise you of this reality of buying for investment.
• Assignment. If your lawyer is really sharp, and he or she knows you are buying for investment, he or she will recommend you get an assignment clause that allows you sell prior to occupancy.

There may be other issues that come up like mistakes in the contract or inaccuracies that will need to be changed, but most of the time these contracts are 95% the same from one to the next. Questions or comments? Please contact me.

I think this law is valuable and necessary and that it does what it is supposed to do – protect buyers from doing something they will regret. Unfortunately, some people are thinkers, and thinkers often think too much.  A lot what-ifs and worst-case scenarios can play out in your mind over the course of 10-days and the initial joy and excitement of buying a condo can be replaced by anxiety and fear over future events that may or not occur.

Typical rescission rates for most new condos is about 20%. That means out of every 5 purchasers, 1 will change their mind during the 10 days and will return their unit. By contrast, conditional deals in the resale market go firm about 95% of the time.

In my own experience, buyers who rescind on their agreements tend to do so because of one reason: risk. They just don’t have the stomach for the risk involved in buying pre-construction – and there is a lot of it! This has led me to believe that some people just should not buy a pre-construction condo. They are not cut out for it, and they would be far better off looking at lower risk investment opportunities in the resale market.

Buying a pre-construction condo is a high-risk, high-reward scenario. If you tend to be a risk-averse person, understand the inherent risk involved and use the 10-day cooling off period to carefully consider whether you are comfortable proceeding.  Questions or comments? Contact me.

I have a client who is in the middle of purchasing a new condo and we are currently in our 10-day rescission period. I am helping my client do their due diligence in reviewing their contract with a lawyer, making sure the financing is in place for the deposits as well as the mortgage, answering any questions that come up, and generally making sure they are totally comfortable before moving forward and finalizing the purchase.

In the course of our due diligence, this particular client had some concerns about occupancy fees or ‘phantom rent’ as it is also known. Whenever you purchase a new condo, there is a period of time between when you take occupancy of your unit and when you take ownership of your unit. This is known as the ‘occupancy period’ or ‘interim occupancy’.

You can’t own something that doesn’t exist, and in real estate in Ontario, a property does not exist until it is entered into the Land Registry system (until it is ‘registered’). This process takes some time in a new condo because there are often hundreds of units to register at the same time. 

Once your unit is ready and liveable, you take possession of it, but not ownership. You must pay the developer for the right to live in the unit (no free lunch). The amount of the occupancy fees is roughly equivalent to the interest on the amount outstanding on the purchase price. For example, a $300,000 condo with 25% down means you must pay monthly occupany fees roughly equal to interest payments on $225,000.

The occupany period ends when the building is registered, your mortgage kicks in, and you get the deed to your property.

So should you let the occupancy fees deter you from purchasing a new condo? Absolutely not! Here are 5 things to know about occupancy fees:

1. Occupancy fees will have to be paid to the developer every time you purchase a new condo.  It is normal and there is no way around it. 
2. The occupancy period is normally 3-6 months, but the higher up you are in the building, the shorter the occupancy period will be. So if you buy a unit on the ground floor, you can expect a long occupancy period. If you buy the penthouse, you will likely have a very short occupancy period.
3. There is no way to say absolutely how long the occupancy period will be.
4. There is often a relationship between the length of the occupancy period and the experience level of the developer. The more experienced the developer, the shorter the occupancy period. Experienced developers who are familiar with process and who have diligent lawyers working behind the scenes for them know how to build and how to register a building as quickly as possible.
5. It is in the developer’s best interest to register the building as quickly as possible and to have the occupancy period as short as possible. This is because they don’t get their money from the banks until the building is registered and all the unit owners have their mortgages commence. 

I always appreciate your feedback. Leave a comment or send me a private message via my contact form.

Link to a recent Globe and Mail article on occupancy fees.