Preconstruction Properties vs Resale Properties in the Toronto Real Estate Market
Monday May 09th, 2022
As a real estate agent in the Greater Toronto Area, one of the most asked questions I received was how to choose between pre-construction condos, and resale condos when purchasing real estate in Toronto.
My general feeling is that pre-construction is more suitable for investment purposes, and a resale condo is better if intended for own use. In this blog we will discuss some key considerations between purchasing pre-construction condos and resale condos.
Benefits of Purchasing Pre-construction Properties in Toronto
No Need to Apply for Mortgages at Signing
The first benefit of purchasing a preconstruction property, is that the buyer does not need to apply for mortgages at the point of signing the purchase agreement with the developer. The buyer of the preconstruction only has to consider a mortgage when occupying the unit. From the time of signing the purchase agreement to occupancy, a high-rise condominium building typically takes 3 – 5 years. So buyers don’t need to worry about that financing and applying for a mortgage, yet. There is also greater flexibility in paying the deposit as most developers allow several months to pay the deposit fully or partially.
Possibly Avoiding the NSRT (Non-resident speculation tax)
The second benefit of purchasing a pre-construction condo, particularly for non-resident buyers, is that these buyers do not need to pay non-resident speculation tax (NSRT) until closing. Since typically preconstruction is 3-5 years down the road, non-resident buyers who are intending to become Permanent Residents (PR) in a couple of years, before the time of closing, then these buyers can avoid the NRST.
Pre-construction condos offer Financial Flexibility
Thirdly, pre-construction condo units offer financial flexibility. If at closing time the buyer's financial status is no longer as good as expected and therefore not be able to get enough money from mortgage, then the buyer can always have an option to assign the preconstruction. Pre-construction assignment means that the original buyer finds another buyer to take over the original contract with the developer. By assigning the pre-construction unit, the original buyer can avoid further closing costs such as occupancy fees, land transfer taxes, and, of course, mortgage payments.
Disadvantages of Purchasing Preconstruction Condos in Toronto
Priced for the Future
One of the more obvious disadvantages of purchasing a preconstruction condo unit in Toronto, particularly in downtown Toronto, is that its pricing is actually already a lot more expensive than resales. We will further examine the pricing later in this blog.
Pre-construction condos are often associated with uncertainties. For example, the occupancy could be postponed, and in rare cases, the project could also be cancelled.
What are the Advantages of Purchasing Resale Properties in Toronto?
Resale properties, on the other hand, because the building is already built, everything is much more controllable.
If the property is intended for your own residence, you may want to go to the building to see its building quality, amenities and drive around the neighbourhood to see its surroundings.
Moreover, the price is also a lot more friendly compared to preconstruction projects.
What are the Disadvantages of Purchasing Resale Properties in Toronto?
For resale properties, buyers need to be financially ready at the time of purchase. The down payment has to be available upon signing the purchase agreement, and the buyer has to be able to borrow mortgages.
Another additional cost for resale properties for non-resident buyers is that the 20% NRST Non-Resident Speculation Tax will have to be paid immediately upon closing. The new rule, which has come into effect in Ontario since March 30, 2022, also applies to non-resident buyers with a student visa, or work visa, but these buyers can potentially apply for a refund when they become permanent residents within 4 years.
Who Should Get a Resale, and Who Should Get a Preconstruction?
Of course, there are various considerations about whether a buyer like yourself should choose between resale and preconstruction condos. I would like to offer some generalizations.
If your down payment is ready and your financial status is solid, and you have a good borrowing capacity just about right now, then go for resale because the prices are friendlier.
If your newcomer you're coming to Toronto and settle then a resale property will allow you to find a neighbourhood that you enjoy right now, without worrying about possession day.
If you're an overseas buyer / investor, and you don't believe during the construction time the property price will rise over 20% (which will compensate the NRST you pay now) then get a pre-construction because in the near future you might have your PR status to avoid the 20% tax at the time of occupancy.
If you are a parent who wants your teenagers to start their lives, then get the pre-closing today. After 4-5 years, you can put their name on the title after they have become adults. This is our way of locking in today’s real estate prices while helping our children to start their lives.
Comparing Property Prices Between Pre-construction and Resale Condos
I want to show you the comparison of property prices between pre-construction and resale. I chose three neighbourhoods in downtown area; one is Yorkville, Toronto's version of Fifth Avenue, second is Moss Park, a little east of downtown, and the third is Fashion and Entertainment District such as King West. For each of these neighbourhoods, I chose one new launch pre-construction project, and a one-year-old resale condo nearby.
As you can see, in general, pre-construction condos are between 17% to 35% more expensive than the one-year-old resale properties.
During COVID-19, the resale condo market, regardless of its rental income or the sale price, was really hammered by the lack of accommodation demands. Students were staying away from their campuses, and many office workers were just working from home. Due to these reasons, resale condo prices were really impacted.
However, for preconstruction projects, the developers still anticipate great demand in the Downtown Toronto area, so they have no reason to believe that COVID will affect the prices 3, 4, or 5 years down the road. Therefore, developers did not discount the newly launched precon projects.
While the resale condo apartments in Downtown Toronto remain relatively flat and the pre-construction condo prices continue to go up like other property types, the gap between these two has become wider and wider.
Buying and Selling Toronto Real Estate
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