Are pre-construction homes the best choice for Millennials?
Buying a brand new home is a satisfying experience — from signing the documents to the closing date, where you finally get to experience the ‘new home smell.’ The pre-construction vs. resale debate is a common one among many first time homebuyers looking to enter the housing market. The choice you make depends on many factors — from lifestyle preferences to financial circumstances. However, pre-construction is usually the best bet for first time homebuyers for these five reasons:
1. Purchase Price
In general, purchase prices for pre-construction homes are typically lower than the resale value. Developers typically claim the HST rebate on behalf of the buyers and this cost saving usually gets transferred over to the buyer. In some cases, the developer may charge an above market value purchase price, though is more common in hot markets.
Fixed pricing is another huge benefit of pre-construction homes. For resale homes, many agents use the tactic of setting an asking price that is below the market value which can lead to frenzied bidding wars. Pre-construction homes save you from the possibility of overpaying for your home.
Here’s the fun part for many homebuyers: you get a chance to customize your home, from the size of the baseboards to the colour of the kitchen cabinets (it’s typical to spend hours at the design studio). This is a perfect opportunity to choose the modern finishes for your home.
In terms of customization, it’s always best to focus on structural upgrades, such as having hardwood stairs (instead of carpet). Structural upgrades are more costly to get completed after closing. Simple changes (eg. paint job) can easily be done after closing.
3. Save Faster
In many cases, time can work in your favour for pre-construction homes. For the duration of the construction, you have the chance to save up for additional money to go towards your downpayment and/or closing costs.
The two main costs you need to worry about are the deposit and lawyer fees. The deposit amount depends on the developer and/or project. Condos usually require a 10 per cent to 20 per cent deposit, and low-rise homes usually require between $40,000 to $150,000 on average. It’s important to consider that there are no additional costs/mortgage payments for the duration of the construction of your new home. However, it is important to set aside between 2 per cent to 4 per cent of the purchase price towards closing costs.
4. Better Resale Value
On average, newer homes have a better resale value, since they typically consist of the modern features many buyers desire in a home. Fundamentally, the upkeep (maintenance) of the home is cheaper for pre-construction homes. For older resale homes, buyers may have to worry about higher maintenance costs, such as wiring and plumbing, roof repairs, and remodelling. Any deficiencies in pre-construction homes would be covered by the Tarion Warranty. This provides the following coverage for pre-construction homes:
- Certain defects in work and material (one and two year warranties)
- Seven-year warranty for major structural defects
- Protection against unauthorized substitutions
- Deposits paid to the builder
- Coverage for common elements in condominiums
- Compensation for construction delays or occupancy
- Financial loss for contract homes
The enrollment fee is calculated using the purchase price – this cost is added to the closing costs.
In many cases, new homes have the structural upgrades (such as nine-foot ceilings and open concepts) that many older homes don’t have. Upgrading a older home to the modern structural features of a new home would be a huge additional cost on top of the purchase price.
5. Energy Efficiency
Owners of newer homes enjoy the benefits of lower utility bills. Pre-construction homes are equipped with energy-saving appliances, windows and doors, and a more efficient insulation. Many new homes are Energy Star-certified — in other words, this helps reduce the carbon footprint, your utility bill.
There are pros and cons for resale and pre-construction homes. In general, first-time homebuyers benefit the most from pre-construction homes. In a sense, pre-construction homes have a locked price. In other words, when the property closes one to three years later, the purchase price is typically the market value of when the agreements were made. This saves the homebuyers a lot of money, especially in heated markets where prices keep reaching new records.
When buying a pre-construction home, make sure the location is suitable for you, and always ask the sales office for incentives. Incentives can range from a discount on the purchase price, cap on development levies, and design studio credits.
By: Jelani Smith
Jelani Smith is the founder of Bay Street Blog, a financial hub that aims to help Millennials expand their knowledge on personal finance and self-directed investing related topics. Readers can stay up to date on the current real estate trends via the Bay Street Blog real estate section.