January 28th - 2017

“Unreal” estate – Protecting buyers of unbuilt property

When buyers purchase an unbuilt property, common problems can arise. Three REALTORS® discuss ways to guide buyers through the pre-construction phase.

Unreal Estate

When buyers purchase an unbuilt property, common problems can arise. Three REALTORS® discuss ways to guide buyers through the pre-construction phase.

Unreal EstateSelling a home or condo from the drawing board before it has been built is quite different from dealing with a resale property.

When a buyer is purchasing from plans, REALTORS® can tell them more about the pre-construction phase and protect them from problems that may crop up. The Edge newsletter talked to three Ontario real estate professionals experienced in this segment of the market to obtain additional insights.

A purchase in the blueprint stage means navigating a challenging process, they say. It is important to guide clients and prepare them for common problems that occur in the pre-construction stage. REALTORS® experienced with this type of construction should outline the process clearly so the clients are prepared for the issues that may crop up when they make this type of purchase.

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One major issue that happens regularly is the change in the amount of waiting time between purchase and occupancy. When buyers purchase a house or condominium from plans, not only does it take time for construction to begin, but there are often also delays in the occupancy date originally given.

“A new condominium project must typically reach 70 per cent occupancy before a builder gets financing, so many of them won’t even put a shovel in the ground until then,” says Charles Sezlik, an Ottawa REALTOR® with 26 years’ experience. “Condo buyers should be aware that the amount of time it takes from their purchase until the start of construction may be a couple of years.

“For single homes in a development, the land is usually serviced already and the builder can construct a number of single homes at one time, so it’s easier in that case to stay within the scheduled time frame,” says Sezlik.

“Buyers should always be made aware of potential delays.”

Nevertheless, prospective owners must stay tuned to the actual move-in date, because delays often occur, says Hersh Litvack, a Toronto REALTOR® with 27 years’ experience who specializes in pre-construction sales.

“Not all delays are due to the builder,” says Litvack. “You may encounter a backlog in the city’s issuance of permits, or there could be a labour strike,” he says. “If you’re planning to sell your existing home, confirm 100 per cent that you have the final move-in notice on your new place.”

Litvack witnessed a delay that has spanned 10 years between the original sale and completion -- from a combination of circumstances that no-one could have foreseen.

“We initially handled the pre-sale for 1 Bloor East [in Toronto] in 2007, but then the U.S. housing market tanked and Lehman Brothers was one of the partners,” he says. “Great Gulf purchased the development and we re-sold the units in 2009. It is set for completion in 2017.”

Buyers should always be made aware of potential delays, and should understand what prospective floor plans will look and feel like, as well as what sightlines to expect if view is an important factor in their purchase, says Toronto REALTOR® Kevin Crigger.

“In many cases purchasers are surprised about how the space looks or how the floor plan feels in person. Many are also surprised when they see what the view from their window actually is,” says Crigger, who has been a REALTOR® for six years.

“As REALTORS®, it’s our role to help put a purchaser’s investment in context for them, and help them understand what things can change between the time of purchase and their move-in date,” he says. “If they buy early on, it’s important that they understand what development opportunities exist around their building that might affect the view. I often show buyers existing buildings [with similar floor plans or room dimensions] so they can get a better idea of the space and ceiling heights. It’s best to illustrate for them as much about what they’re purchasing as possible.”

"We are there to ensure the maximum protection for our clients."

Prospective clients often tell REALTORS that they can save money by purchasing a unit directly from the builder. However, REALTORS® can warn consumers about the possible gaps between expectation and reality when buying from plans -- and the value of using a REALTOR® in that case.

“We are there to ensure the maximum protection for our clients,” says Crigger. “The biggest part of our responsibility in a pre-construction purchase is mitigating unforeseen items and risks. Buyers may believe that they can get a discount by purchasing directly from the builder, so our task is really highlighting the value proposition we bring to the table with our experience. As in a resale transaction, we need to articulate what we provide in our fee for service.”

Litvack says that if clients wait for builders to sell units, they’ve probably already missed the best opportunities, because agents who represent builders often offer special promotions to other salespeople in their orbit.

REALTORS® can provide information about the reputation of the builders, Sezlik notes. They can also ask tough questions and negotiate for their buyers to get upgrades or free parking, if the market and circumstances allow for it.

“We know how to leverage market conditions to the client’s advantage and do our best to ensure they don’t overpay,” he says. “We can also negotiate a cap on some of the fees that the buyer pays the builder at closing.” This can be a big help to buyers, because land transfer taxes, for example, may increase between the time of purchase and occupancy.

Occupancy fees are something that a new condo buyer may never have encountered, and REALTORS® can help prepare clients for those as well, says Litvack. “If a building has 15 storeys, the builder can usually move in one floor a week once it’s ready, but the building must be about 75 per cent occupied before the builder can register it and turn it over to the condo corporation. That means buyers may be living there for several months before they actually own the suite. During that time, they may have to pay an occupancy fee comprised of three parts: the monthly maintenance charge, the tax and the interest portion of the mortgage they’ll be taking.”

When buying from plans, clients are warned to consider the cost of such things as landscaping and window coverings, Sezlik notes. These items are often forgotten by consumers when they budget for closing costs and other things.

“They may also need new furniture because of the scale; they may not have checked the dimensions and their current furniture won’t work well,” he says. “There are a lot of nuances when buying from plans. The job of the salespeople at the building site is to sell, so having a REALTOR® is very important for clients to ensure that their interests are represented.”

Before buyers sign a purchase contract, the REALTORS® all suggest it would be worthwhile to have a lawyer review it. Lawyers who specialize in pre-construction sales will have an eye for problems or inconsistencies that are common to this type of purchase.

Tips for working with pre-construction properties

  • Do your due diligence: understand upgrades, the community as a whole, the location of the unit within the building [e.g., is it near the trash chute?], whether the common areas will be furnished according to the brochure, etc.

  • Seek out experts in pre-construction, including other REALTORS® and lawyers with experience in this type of real estate. Ask questions. Also, look for educational opportunities provided by boards and brokers to learn more.

  • Check comparable properties to see if pricing is in line.

  • Research the builder’s background and reputation to see whether repairs are completed once the client moves in.

  • Have your client database ready, because priority or special offers can happen quickly in the pre-construction phase.

Story by Elaine Smith

Sources: Kevin Crigger, Hersh Litvack, Charles Sezlik

Editorial Policy: The REALTOR® EDGE newsletter is produced 11 times a year by the Ontario Real Estate Association. The newsletter aims to provide practical and useful news and information about the real estate industry to members of the association. The opinions expressed in the newsletter are not necessarily those of the publisher. The newsletter welcomes submissions from the real estate community, including letters to the editor, opinion pieces, events and news. The newsletter reserves the right to edit, based on space restrictions and/or suitability, and/or to refuse submitted material for inclusion in the newsletter without reason. All rights reserved. Reproduction in whole or in part without the express written permission of the publisher, OREA, is prohibited. Contents are copyright of the Ontario Real Estate Association.

Editor: Mary Ann Gratton

Contributors to this issue: Elaine Smith, Merv Burgard, Mary Ann Gratton.

Senior Web Editor: Shade Lapite; Web Specialist: Damond Rawls.

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