Pre-Construction or Re-Sale, Which One is Better?
When it comes to buying residential real estate, there are two options for investors and buyers: resale (buying a unit in an existing building or a home that has been lived in by owners or tenants) or pre-construction (buying a condo unit or home in a development that hasn’t been built yet). What’s better or right for you boils down to a number of factors including budget, down payment availability, timeframe, and even comfort level.
What is a New Construction or Pre-Construction Home?
Buying pre-construction means purchasing a house or condo before it’s finished— and in many cases, before the construction phase has even begun.
In fact, it’s very common to buy into a condo development well before the building is complete—even before construction has begun—which can be several years before the estimated completion date. When buying freehold pre-construction, the purchase is typically closer to the move-in date in comparison to pre-construction condos.
Learn about the types of pre-construction homes here.
New construction houses are homes that are inhabited for the first time by the home buyer/builder. There have been no previous residents and the house itself has typically been designed to fit the homeowner’s unique needs. Newly built houses tend to have modern appliances, more eco-friendly or “green” features and are less likely to need immediate maintenance. Owners of newly built homes enjoy brand-new everything and won’t have to worry about maintenance costs for a while, but miss out on some of the perks of buying a resale home like living in a more established neighborhood, enjoying a more classic style of architecture and the freedom to negotiate on the home’s purchase price.
What is a Re-Sale Home?
The distinction between the two is quite easy. A resale house or a resale property is one that has been owned in the past and is not newly constructed like preconstruction properties.
Purchasing an existing home (resale home) is commonly regarded as the standard choice among prospective homeowners for a variety of reasons including access to finished assets. Although an existing home may not offer the same level of personalization as a newly built property, it presents a range of benefits that can be appealing. In fact, numerous homebuyers might find the prospect of acquiring a pre-owned home more attractive than opting for a tailor-made new construction.
Pre-Construction vs. Re-Sale Homes
| Pre-Construction | Re-Sale |
|---|---|
| You buy using predicted pricing, for the time period when the building is registered with the city, upon completion. | Buy using today’s prices, comps, and market values. |
| You get access to view floor plans, details, and builder renditions, but plans can change before the building is complete. | You get access to viewing the property first-hand, including walk-throughs, viewing construction-finish quality, and more. |
| You select unit/home finishes and floor plan layouts, (which could be subject to change by the decision of the developers) | You buy the house and the state of everything as-is. |
| You can buy as an investor but are unable to occupy with tenants until the unit or home is complete. | You can buy as an investor and start earning cash flow on day one once tenanted. |
| You typically pay a deposit of 5%–20% to the builder in timebound phases. Generally, the builder will take anywhere from 2.5% to 5% down upon signing, with additional installments of 5% leading up to completion. Learn more about pre-construction deposit requirements and payment structures. | You pay a down payment upfront with a minium down payment of 5% under $500,000, 5–10% between $500,000 and $1M, and 20% over $1M |
| You do not need a mortgage until the building is registered with the city, which happens upon completion. However, it’s important to ensure your mortgage application is in place well before. | Your mortgage for your new home begins upon closing of the property. |
| You must pay occupancy fees for the occupancy phase, meaning the time between getting the keys and the building’s actual registration as a condominium corporation. Think of this as rent to the builder once your unit is livable, but the building is not yet complete. | You must pay occupancy fees for the occupancy phase, meaning the time between getting the keys and the building’s registration as a condominium corporation. Think of this as rent to the builder once your unit is livable, but the building is not yet complete. |
Assignment Sales in the Context of Pre-Construction Real Estate in Canada
Overview of Assignment Sales
Assignment sales, particularly in the Canadian pre-construction real estate market, represent a unique aspect of property transactions. This concept involves the sale of one’s contractual rights in a pre-construction property to another buyer. It’s essential for buyers and investors to understand this mechanism, especially in dynamic real estate markets like those in major Canadian cities.
Detailed Example of an Assignment Sale
Imagine you have invested in a pre-construction condominium in Toronto. You’ve paid a 20% down payment, amounting to CAD 100,000, on a property valued at CAD 500,000. As the project nears completion, you decide not to proceed with the final purchase but instead opt to sell your contract. This is where assignment sales come into play.
You find a buyer interested in taking over your contract. The terms of the assignment sale would typically include the CAD 100,000 you’ve already paid, plus an additional amount for the rights to the contract, say CAD 60,000. Therefore, the new buyer pays you CAD 160,000 in total. They will then be responsible for the remaining balance of CAD 400,000 to the builder upon completion and registration of the property.
Market Dynamics and Profitability
The profitability of assignment sales in Canada can fluctuate significantly based on market conditions. For instance, during a period of rapid market growth, such as Toronto experienced in the early 2000s, assignment sales can be highly lucrative. The scarcity of available units can drive up demand, making it easier to find buyers willing to pay a premium.
Conversely, during periods with a saturated market, like Toronto witnessed around 2016, where both pre-construction and resale units were abundant, assignment sales can become challenging. Potential buyers might prefer purchasing directly from builders, avoiding the additional costs associated with assignment sales.
Restrictions and Limitations
It’s crucial for investors to be aware of any restrictions imposed by builders on assignment sales. Some developers include clauses in the purchase contracts that either prohibit assignment sales outright or impose specific conditions. These conditions might include a designated time period before which assignment is not permitted or administrative fees associated with the process. Understanding these terms is vital for anyone considering an assignment sale as part of their investment strategy in the Canadian pre-construction real estate market.
