Deposit Structures for Pre Construction Condos

read the LARGE print too!

August 16th, 2010

No two snowflakes are the same… and either are pre construction condo contracts!

With the launch of several new projects this year, I’ve seen my fair share of contracts and with all of them; the same thing remains true “THE DEVIL IS IN THE DETAILS!” It’s for this reason buyers of pre construction condos have a 10 day cooling off period for their lawyer to review the contract. But of course “reading the fine print” is basic and something all should do regardless of the type of contract…the point of this post is for something a bit more obvious! DEPOSIT STRUCTURES.

It’s typical in Toronto for a developer to ask for deposits ranging anywhere from 20%-25% from a prospective buyer. The amount is not given up front, but rather in instalments over a period of time. To better illustrate my point, I’m going to use a purchase price of $300,000 and a 25% deposit structure as an example. By the time the condo is complete and the unit registered in your name, a total of $75,000 would have been given to the developer…but before we pop the champagne and move in, let’s take a look at what gets us there!

At time of signing the contract, a $5000 cheque is given in trust to the developer. If the purchaser decides to proceed after the 10 day cooling off period, the difference of 5% ($15,000) of the purchase price minus $5,000 (meaning another $10,000) is due within 30 days of the initial contract date. So far, a total of $15,000 (or 5%) would have been given…still with me? Great! Over the next 60 and 90 days respectively another two deposits (5% and 5%) would come due bringing the total amount to $45,000 (you’ve now paid a total of 15% of the purchase price to the developer).

In most contracts I’ve worked with, the remaining 10% ($30,000) doesn’t become due until the project has registered with the City and gone through final closing. The timing of when the final 10% comes due is VERY IMPORTANT and here’s why: The initial 15% came from your pocket (your parents, best friend or anyone else that may have been nice enough to lend you the money). Since this is pre construction, no bank will forward you a mortgage to cover the initial deposits since there is no property to secure the loan against. BUT now that the condo is complete, they’ll gladly lend remaining 10% and part of your overall mortgage (provided you qualify of course). This type of procedure has typically been the case with most clients I’ve worked with… until now!

Recently, I came across a project that requires purchasers to give that remaining amount at time of interim-occupancy!!! What that means to you is: the finial 10% (or $30,000 as used in my example above) CAN NOT be financed by way of mortgage from a bank and must be given by you! That is a big chunk of change to pay up if you’re not prepared. Since this is a relativity new change very few people have been affected by it…nor would they even know about it until the project nears closer to completion (possibly 3 years down the road). Check your contracts carefully and make sure you fully understand the obligations you’ve agreed to!

Protect yourself when buying preconstruction. Use a Realtor and Lawyer who have experience with these types of contracts and don’t only read the small print…but the LARGE print tool!