Buying a new build in Ontario can be exciting for home buyers. But buying new construction is different than buying resale because you are buying directly from the builder. And these agreements are signed before construction even starts. So some of the considerations for this type of transaction shouldn’t be ignored.
Knowing the construction home buying process is key for home buyers. This includes things like warranties, living situation during construction and financial implications vs buying an existing home.
Understanding New Construction Homes
What is a New Construction Home?
A new construction home is a home built from the ground up by a developer or builder. These can be single family homes and townhomes to condos and other types of dwellings. New construction homes often come with modern features and amenities like energy efficient appliances, smart home technology and open floor plans. One of the biggest benefits of buying a new construction home is you can customize it to your needs and wants, making it perfect for those who want to build their dream home.
Types of New Construction Homes
There are several types of new construction homes to choose from, each suited to different preferences and budgets:
- Production Homes: These are mass produced homes built by big developers, often in subdivisions or master planned communities. Limited customization options but more affordable.
- Semi-Custom Homes: These homes offer some customization options like floor plans, finishes and upgrades. Buyers can personalize some aspects but still get a streamlined building process.
- Custom Homes: These homes are designed and built from scratch to meet the buyer’s specific needs and preferences. They offer the highest level of customization but can be more time-consuming and expensive.
- Luxury Homes: These high end homes often have premium materials, advanced technology and high end finishes. Designed to be comfortable and stylish for those who want to live the luxury life.
Understanding New Build Agreements of Purchase and Sale
The purchase agreement is a legal document that outlines the terms of sale for a new construction home. When buying a new build home you must review the builder’s purchase agreement carefully. New build Agreements of Purchase and Sale are different than standard OREA contracts and are more specific to the developer/builder. This legal document outlines the terms and conditions of the transaction. It outlines the rights and responsibilities of both the buyer and the builder including purchase price, payment terms, deposit structure, closing dates and occupancy and conditions.
It should also include clauses for termination of the agreement such as failure to perform or breach of contract. Know the termination and default clauses to protect yourself in case of unexpected events.
Financing and Budgeting
Financing Options for New Construction Homes
Depending on your situation, there are a few options:
- Construction Loans: These short-term loans provide funding for the construction process, typically with a variable interest rate. They are designed to cover the costs of building the home and are usually converted to a permanent mortgage once construction is complete.
- Construction-to-Permanent Loans: These loans combine a construction loan with a permanent mortgage, offering a single closing and a fixed interest rate. This option simplifies the financing process by eliminating the need for separate loans.
- Owner Financing: Some builders offer owner financing options, where the buyer pays the builder directly rather than obtaining a traditional mortgage. This can be a convenient option if you have difficulty securing a loan from a traditional lender.
- Government-Backed Loans: There may be government-backed loans available that can be used to finance new construction homes, offering favourable terms and lower down payment requirements. These loans are backed by the government, making them accessible to a broader range of buyers.
It’s recommended that you work with a lender with new construction financing experience and review the terms and conditions of the loan before signing. Also, buyers should consider monthly mortgage payments, property taxes and insurance when budgeting for their new construction home. Proper planning and understanding your financial obligations will make the home-buying process smooth and stress-free.
Closing Adjustments
The agreement should include any closing adjustments such as property taxes, utility bills or other fees that need to be split between the buyer and the builder. These adjustments ensure a fair allocation of costs and expenses related to the property.
Builder’s Warranty Protection
Builders in Ontario are required to provide Tarion warranty coverage for new-build properties. The agreement should detail the warranty coverage, including the duration and types of coverage provided. Reviewing the warranty provisions to ensure you understand what is covered and the process for making warranty claims is strongly recommended.
The Tarion addendums incorporate and outline the specific terms and conditions of the Tarion warranty into the agreement. It ensures both the builder and the buyer understand their rights and obligations under the Tarion warranty program. The addendum includes a Statement of Critical Dates and Schedules to provide clarity and transparency.
Pre-Construction Home Due Diligence
Buying a pre-construction home can be a great investment but requires careful planning and thorough research to mitigate risks. Here are the steps and things to consider to do your due diligence:
1. Research the Builder’s Reputation and Track Record
- Builder’s Reputation: Research the builder’s history by reading online reviews, testimonials and industry awards. Check with local home builder associations or regulatory bodies for complaints or recognition.
- Track Record: Review the builder’s completed projects for quality, timelines and customer satisfaction. If possible visit their past projects to see the craftsmanship and ask current homeowners about their experience.
- Financial Stability: Make sure the builder has the financials to complete the project as promised. A financially sound builder is less likely to walk away from the project mid-way.
2. Project and Timeline
- Development Scope: Review the entire project scope including number of units, phases of construction and timeline of completion. Larger projects take longer and may face delays.
- Construction Timeline: Confirm the delivery date and ask about the contingency plan for delays. Understand the penalty or compensation clause if the completion date is extended.
3. Review Documents
- Agreement of Purchase and Sale (APS): Review all clauses including deposit structure, cancellation rights, builder adjustments and closing costs.
- Disclosure Statement: Ask about zoning approvals, amenities plan and infrastructure. Verify the proposed design complies with municipal by-laws.
- Tarion Warranty Coverage (Ontario Specific): Confirm the builder is registered with Tarion and your purchase will be covered under the Ontario New Home Warranties Plan.
4. Amenities and Infrastructure
- Community Features: Review the community amenities such as parks, schools and recreational facilities to see if they meet your lifestyle requirements.
- Location Infrastructure: Check the location of major roads, public transit and essential services like grocery stores, healthcare and schools.
5. Design Options and Upgrades
- Standard Features: What is included in the base price and what will cost extra. Builders usually have a list of design options with prices.
- Customization: Confirm whether customization aligns with your budget and timeline if it is available.
6. Financial Commitments
- Deposit Structure: Be clear on the amount, timing, and conditions under which deposits are paid and refunded.
- Closing Costs: Estimate the additional costs at closing, such as land transfer tax, legal fees, development charges, and utility connections.
- Financing Approval: Secure pre-approval for your mortgage and ensure the financial terms match your budget.
7. Get Professional Help
- Real Estate Lawyer: Work with a lawyer who has experience in pre-construction purchases to review contracts, protect your interests and clarify the legal obligations.
- Realtor: Consider hiring a realtor who knows pre-construction projects to guide you through the process and negotiate for you.
- Home Inspector: Although it’s a new home, an independent inspection before closing can help identify defects or incomplete work.
8. Monitor the Construction
- Stay on top of the construction timeline and visit the site if permitted to see the progress. Make sure the builder is following the agreed upon specifications.
9. Plan for Interim Occupancy
- Understand the builder’s interim occupancy terms including fees and responsibilities during this period before final ownership transfer.
By going through each of these points, you can minimize the risks and maximize your investment when buying a pre-construction home.
Interim Occupancy Period
During the interim occupancy period, it is crucial to understand your rights and responsibilities as a buyer. The interim occupancy can be tentative or firm. Usually, condominiums are available to occupy before the legal ownership is transferred. In this case, the buyer must pay the Occupancy Rent until closing.
Final Closing and Transfer of Ownership
Before buyers take possession of the property, they can walk through their new home with the builder to inspect if anything is damaged or incomplete. This is also referred to as “Pre-Delivery Inspection”.
Summary
A new-build Agreement of Purchase and Sale is critical when purchasing a new-build property. Understanding its key elements is essential for prospective buyers to protect their interests. It is also important to understand the state of the real estate market when purchasing a new construction home, as market conditions can affect property prices and the potential for appreciation in value. If you need legal assistance from a knowledgeable real estate lawyer in Toronto to review your agreement before you embark on your new-build property purchase, contact us today.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
