If you’re eager to get into the housing market, you might consider purchasing a newly, or not-yet-built, condo or townhouse.
Unlike buying a previously-owned home, purchasers will have to deal with sometimes tricky contracts and specific rules that come along with buying from a developer.
Lisa Corne, partner at Dickinson Wright LLP Toronto, joined BNN to talk about the five things buyers needs to know before buying from a developer.
1. Developers hold the cards for purchase agreement terms
“Unfortunately the contracts purchasers are asked to sign are very developer-friendly, and contain clauses that effectively waive rights that purchasers would otherwise have,” said Corne.
This is particularly important to know because if a developer fails to build the development you may end up without a home.
Purchasers should be aware of this, particularly in hot-housing markets. When demand is so high, developers tend to hold the cards and won’t hesitate to move to another buyer who is willing to accept the terms of their contract.
“Trying to negotiate out those clauses is not going to lead to a positive result given the market,” said Corne.
While there is little purchasers can do to change the terms of agreement, Corne recommends they fully read through the contract, and take it to a lawyer. “Even if it’s an unfavourable agreement, you’re aware of what you’re getting into.”
2. Purchasers need to protect their deposits
Corne recommends purchasers protect their deposits by holding them “in trust.”
“Deposits are usually 10 per cent of the purchase price of the home, and that’s a significant amount given the average home price in the Toronto market which is over $800,000,” said Corne.
With such a large amount, Corne said purchasers can also ensure they have deposit insurance that is payable. If a developer goes belly up, this will make sure buyers receive their full deposits back.
3. Freehold homes have limited protection by deposit insurance
Deposit insurance is not so cut and dry when it comes to freehold homes (properties where purchasers have complete ownership of the home and the land it sits on).
“In the purchase of a freehold home, there is no legal requirement that the developer hold that money in a trust account,” Corne tells BNN. “Your deposit money is at risk, and can be used by the developer as [they] wish.”
This means if a developer runs into financial trouble and becomes bankrupt, buyers have no guarantee that they’ll ever recover their deposit, which Corne says happens quite often.
There is a small silver lining to this.
“The Tarion Home Corporation provides some protection, but up to a maximum of $40,000 for a freehold home,” said Corne. “[But] if you’re buying an $800,000 home, or a million dollar home, your deposit is going to significantly greater than $40,000 and you [will] be left with a huge shortfall.”
4. Beware of paying for upgrades
If you’re tempted by the fancy fridge and sleek countertops featured in the model home, you may be on the hook for the cost of the upgrades, even if you never actually receive them.
“It’s very common for developers to insist that purchasers pay for upgrades directly to third-party suppliers,” said Corne. “In the event that the development fails, and those upgrades are never delivered, you have limited or [no] recourse for recovery of the amounts you’ve paid.”
To minimize risk, Corne recommends purchases try to work out an agreement with the developer that says you will pay for the upgrades on closing.
5. Research the developer before buying
Researching the developer before entering into an agreement may save you a lot of frustration.
“Make sure the developer has a good track record,” Corne said. “Research [on] social media [and] talk to other buyers who have purchased from this developer in the past.”
Most importantly, Corne says to make sure you’re working with a developer that has “a sound business practice record for delivering good, quality product on time.
Sarah Traynor, Chase Producer, BNN