The ins and outs of pre-construction financing

Considering buying a pre-construction condo or custom-built home? Financing for homes that don't exist yet can be complicated, and the details differ for each build type.

Julie Dempsey, a REALTOR® and certified condo specialist with Julie Dempsey Group – Royal LePage Benchmark, says the long period between the signed sales agreement and the move-in date makes pre-construction condos an excellent choice for first-time homebuyers or those looking to move up in the market.

"They have a great chance to save a lot of money for the down payment," said Dempsey. "The closer to the sales release, the better the selection for price point, design and other considerations."

However, Chris Richards, licensed mortgage broker with Quantus Mortgage Solutions, says new-build financing for a house can be more difficult.

"It's much riskier for the homeowner and the lender," he said. "Because these projects take so long, and the market can change, building for spec is a risky game."

FINANCING THE PRE-CONSTRUCTION CONDO

The down payment
In Alberta, banks typically require 20 to 25 per cent, although Dempsey has recently seen as low as five per cent. They're also usually structured to be paid over the course of several months.

Cooling off period
Under the Condominium Property Act of Alberta, the purchaser has the right to rescind their offer, for any reason, within 10 days of signing the purchase agreement.

Closing costs
These include legal fees. Dempsey suggests selecting a lawyer at least 30 days prior to possession.

Phantom rent
Also called "tenancy at will." Banks cannot distribute funds for a building that's not yet registered with the land titles office, a process that can take months after the condo is move-in ready. Builders will often allow owners to take possession, but charge them the interest portion of the mortgage payments.

Dempsey's top recommendation for potential pre-construction condo purchasers is simple: "Go with a Realtor who has an in with the condo project."

Here's why:

A Realtor in the business might know the builder and get buyers in before the public.

Builders can incentivize their suites initially, often lowering the price. "For buyers who get in first and have the best selection, it's a great way to make money," she said.

Realtors can negotiate contracts with pricing guarantees. In down markets, builders might offer discounts, periods of no condo fees or upgrade packages. Realtors can ensure the price is protected and new offers and incentives are received.

A mortgage broker can guarantee the purchase price, saving the buyer from responsibility in case of any shortfalls. "If values drop during the construction period, buyers can be on the hook for the extra value towards their down payments," she said.

FINANCING THE NEW-BUILD HOME

Land loan
Before home construction, the land must be acquired, usually with 30 to 50 per cent down.

Construction/progress-draw mortgage
These funds are dispersed throughout the various stages of the build. Banks do not provide money upfront to develop a property, they advance in arrears based upon progress. "You spend your money first, and the bank reimburses you in stages through progress draws," said Richards. Remember, the borrower pays the interest on this loan during the build time.

Completion mortgage
Typically, a five-year mortgage for the buyer once they have their keys.

Richards also recommends reaching out to a professional before making any decisions. His top considerations are:

The costs. "You must know what it will cost you to build and what the market value of the property you're creating will be as-if-complete."

Lenders will only finance based upon the lesser of either your full cost-to-complete, or the appraised value as-if-complete.

For progress-draw mortgage approval, you need deep pockets. Richards suggests buyers need about a third of the total project cost, including the land value, available in liquid resources.