What to look for in a Pre-Construction Contracts?

Shawn Quigg
 
Sarah: Shawn is with Carson Law. He's with the Carson Law family. He's got an active background in real estate investing, he's part of their corporate team. And he's going to share what to watch out for, what to include, what to consider when going through a pre-construction contract. Shawn, welcome.

Shawn: Sarah, thank you. Thanks for having me.

Sarah: Excellent. What can you share with us, from a legal standpoint, when it comes to preconstruction?

Shawn: We know, Michael touched on something a little bit earlier. He said, when I build their drafts and agreement of purchase and sale, it's not for you. It's to benefit them. And I brought along a pre-construction contract and I signed, I just wanted to give some context to just how much reading and material. This is something like 50 pages, which is a pretty long contract to read, especially if you don't really know what you're looking for.

As Natasha said, having a contract review is a pretty good idea. And so when we look at Carson law, when we look at a pre-construction contract, like the one I have here, we're looking for a few things and there's a few things as real estate investors that we want to watch over.
Number one is the distinction between occupancy and closing. When you're purchasing a pre-construction condo, you may be forced to take possession of the unit before it's done. And the title is transferred to you. So, what does this mean? It means that the unit has been substantially completed it's you can live in it. But the condominium corporation or the building is not yet complete. And as a result, the title does not pass to you.

This can be good and bad, depending on the terms of your agreement. Number one, of course you will have to pay occupancy fees, which can be relatively sizable, but you won't be paying your mortgage fee. So, this really amounts to paying rent. The occupancy fees will generally be composed of things like your estimated common expenses interest on the unpaid balance, realty taxes, et cetera. One of the disadvantages that you'll often see in an agreement of purchase and sale for a pre-construction condo is that you'll be prohibited from renting out the unit, which is too bad because the occupancy fees are typically lower than your mortgage fee.

If you can negotiate the ability to rent during the occupancy period, this may be your highest cash flowing period of time when you own this unit. You want to look out for the difference between occupant and closing. And speaking of closing, we need to look also at completion. It's important to be aware of that just because the builder has set a date in the future for completion.

I think a few of the other speakers have mentioned this doesn't mean that they will meet that deadline or that they are obligated to under the Tarion Home Warranty Program in Ontario builders have the option to extend that period, that date two times, if they give you the right amount of notice, which in this case is 90 days and each time they give you that notice they can extend up to 120 days.

If they need to do it again, they'll have to reimburse you for about $7,500, which depending on the circumstances may or may not recoup any further losses that you may have suffered, COVID is a pretty temporary topic. And it's important to realize now that COVID is being relied on by the builders as what's called an unexplained. And these delays are delays that are not the fault of the builder, but which will cause your project to be delayed without permitting around requiring the builder to compensate you. And so, COVID depending on where you bought and when you bought may cause your project to be substantially delayed without any future compensation.

It's important to keep that. The next thing you want to look for is development charges. Typically the development charges are baked into the price when you sign your agreement of purchase and sale. But oftentimes talk the way in, on page 40 will be a closet, says, the builder on a closing can adjust the price based on any increase in development charges.

You can imagine that the builder's going to want to find every single development charge that they can and tack it on there and foot the investor with the bill. Now, we don't want that as investors, we want to have some cost certainty, and we want to know that we're still getting a good deal. And so what we often do and what we find is often the case is that we negotiate for a cap on those extra development charges.

That could be 5,000. That could be 15,000, really depending on the project. And what the builder's minimum cap is. The builder's expecting you to negotiate for a cap. And so, it's important that we actually contact the builder's lawyer and make sure we get that cap. Another really important topic to consider as an investor is the ability to assign the deal. Assignments are a great way to earn some cash as a real estate investor. We're all familiar with the wholesaling strategy and probably with a number of wholesalers. A wholesaling can happen in pre-construction, but builders have wizened up to this.

What you're finding in agreements of purchase and sale is that assignments are prohibited. No, that's okay. We'll go back to the builder and say, Hey, we want our client to be able to assign this deal. Should they choose? And often the builders will say, okay, sure but you're going to have to pay us a fee. It might be 5,000. It might be 10,000. So, it's important to be aware that while you may be able to earn a sizable sinus fee, you're going to probably have to give some of it to the builder.

What we need to be aware of is HST. When you buy a new home in Ontario for a new residential home where you intend to live in it, you get a credit for the HSD on that. And that credit is typically also baked into the purchase price. The builder has already factored it in because they're already to facilitate that credit for you.

There's no need to charge you and then reimburse you. They'll just do it themselves, which is not a problem. But if you decide that you'd like to close on it and. The property, oh, this has a bit of an implication. Number one, the builder will no longer credit you the HST. So, on closing, you better be prepared to come up with an additional $24,000 to $30,000 to pay for the HST.

That's okay, because if you rent the unit for at least 12 months, you'll be able to apply for that HST credit yourself. And so you'll get that money back. It'll just not be a closing. It'll be a year or so. But if you close on that property and then sell it within a year you're not getting your HST back. That's something that you'll need to factor in when considering whether or not to purchase a pre-construction.

Sarah: Awesome deal. Thank you so much, Shawn. Lots of great tips there. I hope you guys were writing it down and where can people reach out, Shawn if they wanted to know more about what you just said.

Shawn: Best way to reach me is by email. It's sean@carsonlaw.ca. We have a great team of Carson and we can help you out.

Sarah: Amazing. Thank you so much, Shawn.