Purchasing a Pre-construction Condo or a new condo directly from a builder can be a leap of faith in the builder, the economy, and your socio-economic situation in 2-5 years. Making this decision based off of plans, a location, some conceptual drawings without guidance can be an overwhelming prospect.  In addition, not only does each builder sell their building in a multitude of ways but it seems everyone else understands it but you. This all leads to the uncertainty of making this investment.

This article is designed to try to answer some questions, take away some of the unknowns around making this type of real estate investment and explaining the steps that you will need to take if you decide to make this type of purchase.  By no means are we going to go into a “deep dive” with details and, yes, there are multiple scenarios and things that can happen to alter the “script”.

First thing’s first, there are two types of buyers:

1.     Investors

2.     “End users” (or buyers who plan to actually live in the unit once completed) 

Of these two groups there are two more general subgroups:

1.     Domestic

2.     Foreign buyers

Canada, and specifically Toronto, is an attractive place for foreign investors to put their real estate dollars and the pre-construction condo market is hugely popular with this group.  Some end up being end users (children going to school in Toronto, moving here, etc) but most are investors who will either sell the unit before completion or keep the unit and rent it out.  Most of the Toronto rental market is serviced by these investors.  For our discussion we will focus on the domestic investor because the foreign investor, while looking at the same purchase price, has different down payment criteria and different tax implications.

Confused yet?

The process of purchasing a Pre-construction Condo (or Pre-Con) is almost like a flow chart of what to do depending on who you are and what will happen (See Fig. 1)

This is a very simplified view and there are several questions and scenarios that can occur:

• What if the condo prices and/or real estate markets tanks, drops, corrects or basically stops going up like it has for the last 20 years? 

• What if interest rates go back up? 

• What if the builder doesn’t make good on what he says (bankruptcy, build delays, faulty construction thus leading to an under valuation, etc)? 

All these things can occur, they may not and probably won’t, but they can.  This is where due diligence, a good real estate agent, understanding your finances and your risk threshold is important. Any investment has a certain amount of risk associated to it.

What we do know is that for the last number of years the increase in condo prices year over year has been over 6%. Compounded annually that can add up (ie. year one = $1,000 x 6% = $1,060, year two = $1,060 x 6% = $1,123, year ten that $1,000 investment is worth $1,790).

A recent example is a downtown condo project that started sales last month with a completion of early 2025 (4 years).  See Fig. 2 for the financial breakdown.

Again, this is not the full story – there are costs to the initial $140,000 deposit (interest on borrowing, opportunity cost, etc) so it is not a true $183,000 profit and there are also tax costs on the profit but that being said, I think you see where this is going. On a $140k investment the returns look pretty good.

So why doesn’t everyone do this? 

Well, many are.  We read all the time about foreign investors buying up the downtown condos and renting them out to students and people many of whom are young, who are working downtown.  What I find interesting is that it seems that many domestic investors don’t look at pre-con condos as a main part of their investment portfolio. They look at stocks, bonds, GICs and also real estate but mostly real estate they use like their home, cottage, ski chalet, etc. This is where I think there’s a huge opportunity for young professionals looking to make an investment in real estate, specifically in condo developments.

If you’ve made it this far you probably want to know, how do I purchase a pre-construction condo? 

It would seem to be pretty simple – just go to a sales centre and talk to someone there and pick one you like and buy it. In some cases it is that easy – some complexes, for various reasons, are set up in this way.  But you need to know that right now there are over 100 condo developments in various stages of construction in the downtown core (see below)

And this is just the core. So, which one do you pick? Well that often depends on price, time of completion, payment terms, builder, location, etc. 

The other problem is that the popular or “hot” projects are all sold out by agents who are “Platinum Agents” therefore get “Platinum access”. These are agents who get an allotment (a number of condos to sell) and they get first crack at them and the price can change rapidly depending on the demand (just like a stock). 1-bedroom condos could be priced at $600,000 but as they sell out and demand is high the price could go up (sometimes on an hourly basis) so when you read “starting at x” it really means that.

Let’s assume you know where and what you want to buy, and you have an agent who can get it for you. Now you need to know the payment terms because they vary from one builder to another. It used to be 25% due over time, now it is more often 20% and the time is spread out more, but prices are higher. It used to be that a “comfort letter” from your bank saying that you have assets that more than cover the investment was good enough for the builder. Now some builders will only take a pre-approved mortgage which is harder to get on a 4-year build (some banks just won’t issue them).

Before I go further, let me explain the stages (and terms) of a condo development:

• Construction Phase – this is pretty self explanatory

• Occupancy – this is when the condo is fit for habitation but is not complete yet. Usually, the builder will start occupancy on lower floors and move up the more that is built. Often, this is when carpet hasn’t been laid and walls haven’t been painted on the floors where people are living. There is an occupancy charge by the builder to the owner, but it is usually much less than what rent would be. During occupancy the Builder still owns the building, this is allowed because the demand to move in by owners or to rent out their investment became so strong that the government allowed this “in between” stage. Plus, it provides some income to the builder to cover their costs at the time. Occupancy can take up to one year.

• Registration - Once the new condo development is completed and it is finished (there will still be some deficiencies and minor things to do) the builder turns the building over to the Condo board that has just been elected from the owners and the building is “registered” with a Condo Corporation number. At this time, the owners now officially own the unit and have to pay the balance of their original contract to the builder. So, at this point, they will need to get a mortgage or pay for the unit in cash. The owner can’t get a mortgage before this time because they don’t officially own the unit and there is nothing to mortgage. Then they start paying maintenance fees, property taxes, utilities, etc. You can imagine the builder wants to get out of there and get paid and the condo board wants them to finish and get out too so the owners can fully move into a finished product.

Now that you understand some of the terms and the process, the investor needs to know if the builder will let you assign the condo (sell it before it is registered) thus avoiding getting a mortgage, paying land transfer tax, becoming a landlord.

Am I basically selling “the paper” to the unit? If so, is there a cost to the builder? When are you allowed to do it? If I decide to keep it will they charge me to rent it out?

All these things are laid out in the builder’s contract, but it is 50+ pages long of mostly boiler plate and slanted to the benefit of the builder so it is important to know what to look for.

One last word; Two very unique and very positive things about a new build condo (or home). 

1. The Province of Ontario has mandated that, unlike a resale home or condo, you as a buyer, have a 10-day cooling off period to send the contract to your lawyer and do some further due diligence on the purchase. 

2. Your new condo (or home) comes with a Warranty that is called Tarion. This is a warranty by the government that all new home and condo builders must offer. It covers buyers in the case that the builder does not fulfil their duty to cover faulty workmanship within one and two years and major structural defects within seven years.

• How long have they been in business? 

• What is their reputation? 

• How many builds have they done? 

• Have they built a similar structure to the one you’re interested in? 

• Do they look rundown after only a few years (this may be partly the fault of property management and not the builder)?

• Have they had Tarion claims against them?

   

So, in conclusion, there are obviously many things to know before deciding whether this is the type of investment you want to get involved in or the type of purchase you want to make.  Some buyers prefer to be able to see what they are buying for real (not just on paper) even if that means they are paying more for it vs. purchasing it off of plans 4 years prior.  This type of purchase would not be for them.

Either way, like every investment decision and any other serious decision, do your research, do your due diligence, ask questions and pick the right real estate agent to help you navigate the path to purchasing a Pre-Con Condo.

Look out for my deeper dives into purchase scenarios in the pre-con condo market and for exclusive information on “platinum” pre-con condos.

Happy looking!