You’ve been fantasizing about that stunning new pre-construction condo for months. The glossy visuals, sophisticated facilities, and breathtaking views all appear so ideal. You’ve studied the statistics, and the purchase price appears to be acceptable for getting in on the ground floor of an exciting development.
But before you throw your entire life savings at a new home builder, you need to be aware of the dark secret of pre-construction deals: closing expenses. If you don’t keep an eye out for these bothersome fees, they can completely deplete your budget.
Let me shed some light on some of the pre-construction home closing cost traps that can deplete your savings while purchasing a pre-construction property in Canada.
The Debut of Developer Fees
Right away, the developer will charge you a slew of administrative costs.
These may include contagious things like:Â
- Fees include administration/education, utility setup,Â
- Enrollment,Â
- Review, and the frightening “Miscellaneous Fees” category.Â
Sometimes these are combined into a single “Signing/Administration Fee,” whereas other developers will try to bury them among many line items. In any case, psychologically prepare yourself to pay $500-$1000+ up front for the privilege of giving the developer your money.
The Taxman Cometh
You know what they say: nothing is certain except death and taxes. Even in your gorgeous new pre-construction home, the taxman takes his piece. You should plan for two major tax hits:
- Federal and Provincial Sales Taxes: Unless you qualify for a rebate, you’ll be charged 5% GST on the total purchase price plus the Provincial Sales Tax rate in your location (basically another 5-8% on top of the GST). Ouchie!
- The Land Transfer Tax: This is the major one that surprises many pre-construction buyers. Depending on your location, you may pay numerous percentage points of the total purchase price in land transfer tax at closing.
The meter starts running
Another sneaky one: the developer begins charging you a monthly occupation charge as soon as the building is move-in ready, even if it’s months before the formal closing date. This allows the developer to recoup part of their costs while you enjoy your new home.Â
These occupancy fees can be quite high, typically equaling 50% or more of your expected mortgage payment, plus additional amounts for property taxes, utilities, and maintenance fees.
Remember that these occupation fee payments are not used for your down payment or mortgage; they are practically thrown away rent money until the closing.
Nickel-and-Dimed for Upgrades
All the bells and whistles, such as beautiful hardwood floors, granite counters, frameless glass showers, etc., were set up in the sleek model suite. Spartan finishes, such as laminate floors and basic appliances, are likely to be present in the base model you purchased.
Upgrading to those premium things will cost you frequently exorbitant amounts considerably exceeding what you’d pay in a regular retail store. If you want to zhuzh up your flat, it is not uncommon to pay $50,000 in upgrading fees in addition to the purchase price.
The advantage is that many pre-construction projects allow you to select your layout and finishes at the initial stages. Simply be prepared for those upgrades to pile up if you want to build your dream home.
Set a larger budget and be prepared
I don’t want to sound too pessimistic about pre-construction deals; there are still numerous benefits to investing early with a reputable developer in an exciting new neighborhood. The trick is to be acutely aware of all the many closing charges that can accumulate and to create a realistic budget that accounts for them.
Most experts advocate spending 5–8% more than the purchase price to cover all of the taxes, administrative expenses, legal expenditures, and occupancy payments you may incur. For a $600,000 pre-construction purchase, you may need $30,000–$48,000 in addition to your down payment to cover closing expenses.
Being prepared for these additional expenses ahead of time will save you from unpleasant shocks and cash flow constraints later on. Then you can unwind and buy your dream pre-construction home; it will be well worth the investment!
