Canada’s residential real estate market is considered a booming investment hotbed. Whether you are investing from overseas or putting in an offer locally, it’s important to keep some practical legal considerations in mind when purchasing pre-construction projects.
Drive anywhere in the GTA and you are bound to witness a seemingly endless fleet of cranes, bulldozers and construction projects. Within the past decade, Toronto has experienced a boom in new-build housing projects, drastically changing the skyline and city lifestyle. Many real estate investors are attracted to pre-construction projects. In most cases, purchasers will commit to new condominium units, townhouses or homes even if these spaces aren’t ready for occupancy for many years to come.
Despite some negative press, Canada’s residential real estate market is still considered a booming investment hotbed. Whether you are investing from overseas or putting in an offer locally, it’s important to keep some practical legal considerations in mind when purchasing pre-construction projects.
Financing and the Future
Many pre-construction projects are concentrated within up-and-coming urban and suburban neighbourhoods. While some of these areas will appreciate sharply in value over a few short years and create worthwhile bargains, investors should carefully consider their finances before hedging for the future. As cliché as it may seem, the future is never certain. With that in mind, property that was once seen as a promising investment may produce negligible returns or even worse, drop in price!
Investors relying on mortgage financing should be aware of this risk from the outset. Oftentimes, builders will require buyers to provide mortgage pre-approval letters from their banks or lenders before signing off on an Agreement for Purchase and Sale. While each lending institution is different, pre-approvals usually imply vague assurances of creditworthiness and do not guarantee a person will be able to obtain a mortgage (let alone a locked-in rate) many years down the line. In some cases, banks won’t commit to funding a borrower until the pre-construction is within its final year of completion!
The obvious concern is if property prices decline sharply or the project is deemed to be overvalued. Apart from preparing for a possible rejection from being financed, investors should protect themselves by factoring in a ‘what if’ cost to cover their closing costs. Even if investors are purchasing pre-constructions with their own cash they need to be comfortable with agreeing to pay more now than for what the land is actually worth.
Pre-construction projects have very strict timelines regarding when certain portions are to be completed, liveable and finally transferred over to buyers. However, the government, via TARION, has recognized that construction delays are inevitable. To mitigate potential delays becoming a burden for buyers, every pre-construction Agreement of Purchase and Sale contains a TARION Addendum that outlines how delays are managed and the coverage to be provided to a buyer if builders fail to comply with timelines and building quality.
Investors should be aware of the coverage that TARION offers and the timelines for their specific purchase. A real estate lawyer should be contacted before or shortly after singing any Agreement of Purchase and Sale to advise investors of their legal rights. In addition, prospective purchasers should create a timeline of the TARION completion dates as a self-check procedure.
Owning to Rent
Many investors purchase pre-construction projects with little intention to live in these properties themselves. Oftentimes, purchasers utilize these investments as a means of incurring future rental income, sometimes using the proceeds to offset the mortgage payments.
Care should be taken to understand that some pre-construction projects do not allow investors to rent out their properties during the occupancy period. That means that even if a project is deemed to be liveable while still under construction, investors are barred from renting their home out until the project has been officially registered with the Ontario Land Registry. Likewise, if the builder allows for rentals during the occupancy period, consent is often given at a price. Builder approval is usually given for a substantial fee and extensive criteria to ensure a tenant does not damage the building before final completion.
Investors should also be aware of is Ontario’s laws relating to residential tenancies. The Residential Tenancies Act provides the framework for managing landlord and tenant interactions. Generally speaking, this legislation strongly favours tenants and imposes strict standards on rental increases and evictions. It’s important to keep these issues in mind if rental income is the ultimate objective for investing in pre-constructions. Managing a tenant, let alone a troublesome one, while simultaneously dealing with a builder can be a cost that vastly outweighs rental income.
A Word About Tax
Most pre-construction homes are subject to HST. However, if a buyer is purchasing a home to utilize as their primary residence, the HST, or a portion of it, can be refunded. This creates a massive saving incentive for investors. Whether rental income or a new home are investors’ objectives, it is important to seek the expertise of a lawyer so that any plan for the future complies with tax authorities. An additional 15% tax may be applied to overseas investors. In cases where foreign investments are entering the Ontario market, it is advisable that a lawyer be consulted beforehand.
Disclaimer: Information made available on this website in any form is for information purposes only. It is not, nor is it intended to replace, legal advice. Contact Chu & Huang Law to discuss a specific legal issue and please note that contacting Chu & Huang Law, on its own, does not create a lawyer-client relationship.