Deposit Structure for Pre-Construction Condos - How Do They Work?
Thursday Apr 23rd, 2020Share
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What’s up everyone! Welcome to another video in my series for Pre-Construction Condos. In this series, you’ll learn about every single aspect of the process that you can think of.
Just a bit about myself. I’m a Realtor in Toronto and I’ve been working with pre-construction buyers, sellers and investors for several years now.
This video series will answer the most commonly asked questions. They’re a resource for you if you’re thinking of buying, or if you just simply want to learn more about how the process works.
So today, we’re gonna be talking about deposit structure.If you’ve ever thought about buying a pre-construction condo but had no idea how the payments worked or you’re just curious about the process, then this video is for you. First, we’re going to look at how it works.
What do the payments look like? How much time are you given to pay? What if you miss a payment? That’s number one. Next, we’re also gonna look at an example of how the payments work.
So you’ll understand how much you need to save based on some real numbers, and when you need that money throughout the various pre-construction phases. We’ll also look at the advantages of a scheduled deposit structure, and why this is sometimes a preferred option for homebuyers. The last thing we’ll look at some of the risks involved.
What if the developer can’t financially support the construction of their project anymore? What happens to your deposit?
This one is big because there was a recent case of this in Toronto, and we’re gonna talk about that too.
So now let’s get into it.
Purchasing a pre-construction condo unit is different from the average resale condo process in so many ways. This unique purchase option allows you to make several payments, usually spread out over the course of a few years.
Let’s say you found a pre-construction unit you want to buy and you’re now looking Into how payments work. You’ll learn that your payments are made through several deposits.
The developer sets out a payment schedule for you to pay these deposits. It’s usually about 20% of the total purchase price. Here’s how it works
So let’s say the unit costs $500,000 for a one-bedroom condo in Toronto. 20% of that is $100,000. That $100,000 is the total deposit you’ll need to make over several payments. The remaining BALANCE is $400,000, which is what your mortgage loan will be in the future assuming you make no further supplementary deposits. (As math calculation)
In the case of a resale home purchase, which is just another way of saying a home is not brand new and title already swapped from the developer to someone else, then your downpayment with a resale home can vary from anywhere as low as 5%.
So what’s the difference between a deposit and downpayment? In short, your downpayment amount is determined by the full amount of your deposits.
On the other hand, when it comes to traditional resale transactions, you’ll probably make only a single deposit with the offer, and likely one before you take on a mortgage. Usually a deposit with resale homes is 5% of your offer price. The percentage might vary with where you live, but this more or less the standard here in Toronto. That amount goes toward your downpayment. When it’s time for you to get your mortgage, you can make an additional deposit with your real estate lawyer, in trust, who then disburses the funds to your chosen mortgage lender. This is typically done to avoid things like higher ratio mortgages and mortgage insurance.
So now you know how deposits work.
Before you and your Realtor walk into a pre-construction sales office to sign the purchase documents, you’ll be told to bring your cheque book.And just a heads up, these will probably be some of the biggest cheques you will ever write. Which… makes sense, (FACT) because someone’s home is typically the largest purchase they’ll make in their lifetime, and often turns into the largest investment of their lifetime without ever realizing it.There. I’ve mentally prepared you, so now you’re ready. Go! No wait, there’s still more I need to tell you. Now we’re gonna look at an example of a deposit structure for a condo project I’m currently working on, right after this short video.We’re gonna use a purchase price of $500,000 with a purchase date is May 1st, 2020.
A series of deposits are made out to the developer’s real estate lawyer, in trust.
The 1st cheque would be for $10,000 on Signing. So when you sign that dotted line, you immediately owe $10,000.
The 2nd cheque is the balance of 5% in 30 days. 5% of the purchase price is $25,000. If $10,000 was already paid, then the balance is $15,000. So the 2nd cheque owed 30 days later on June 1st, 2020 is $15,000.
The 3rd cheque is another 5%, so another $25,000, in 300 days. For simplicity, let’s say that’s 10 months from the signing date. So on March 1st of the following year in 2021, your third deposit will be taken.
Your 4th and final cheque is 5% on occupancy. This development has an occupancy date (i.e. MOVE IN DATE) of December 2023.
Between March 1st, 2021 to December 1st 2023, you have zero financial obligations to make any further deposits. And even when that day comes, it’s 2.5 years later. So you’ll have 2.5 years to save up $25,000. That’s a long time!
One of the biggest benefits of having a scheduled deposit structure is the flexibility of time with the payments.
Time is on your side. If you’re not in a rush to move for the next couple of years, then having payments spread out can be a huge benefit to you. Time is a limited resource. That’s a fact. There’s only 24 hours in a day, and on average we’re only awake for 70% of that time. But for once in your life, you have the luxury of time on your side. so you can continue saving up for each of these deposit payments. What’s going to happen in a few years after making those deposit payments?
Your pre-construction investment will probably have appreciated in value, which means your money is growing for you over time.
It sounds really sweet when I put it like this, but it’s not a perfect system. Just like anything else in life, there’s no reward without a certain amount of risk involved. Which brings us to the final topic.
What happens to your deposit when a developer can no longer financially sustain their home construction projects? This happened with a Toronto developer probably well known for it’s name now.
Cresford Developments went into receivership earlier this year on March 27th. This means they defaulted on their loan payments, so the the receiver took action which led to three of Cresford’s projects getting cancelled.
The biggest question for home buyers and investors is, what happens with their deposits?
When a project is cancelled, the seller is supposed to return the deposits. If they don’t, the buyers are entitled to up to $20,000 under Tarion’s Ontario New Home Warranties Plan. So even though deposits are insured up to $20,000, the receivership process can be lengthy. So keep this in mind when you are considering pre-construction homes, and don’t forget that there’s no reward with no risk.
Ok so now here’s a quick recap on what we learned today:
How it works - We talked about what a deposit structure is and why it works for people when they’re buying pre-construction homes. We also looked at a real example of what the payments look like. Use that example and crunch in your own numbers to see if it’s something you can manage.
Flexibility - You do not have to make your full 20% downpayment on your home in one shot. This is great if you don’t have hundreds of thousands of dollars saved up compared to a resale home which could require your 20% right away. You get the benefit of payments that are spread out.
Benefits - You’ll have time on your side because of the payments being spread out. You can save as you go for your upcoming payments based on the payment schedule. Also, since these projects will take a few years to complete, your money is likely going to grow for you since good real estate investment choices appreciate over time.
Risks - There’s a certain mount of risk involved when you buy pre-construction homes. We looked at three projects that were cancelled, but they’re only a fraction of the 300+ projects currently under new development in Toronto. That doesn’t include the rest of the GTA.
What did you think of this video? Was there something about deposits I didn’t talk about that you’d like to hear about? Or something that was covered in this video that you want me to expand on? Let me know in the comments and I’ll be sure to get back to you. I’m releasing new videos about pre-construction homes every week so be sure to SUBSCRIBE to stay updated.
Thank you for watching and I’ll catch you guys in the next video.
Real Estate Education • https://www.youtube.com/playlist?list=PLVt1mFxDHaHpbHJlypoQnAjJw_xYU_I5y
Pre-Construction Condos - Everything You Need to Know • https://www.youtube.com/playlist?list=PLVt1mFxDHaHp5MIXX5mhfpHDA_h4yhUp_
Toronto Regional Real Estate Board (TRREB) • https://www.trreb.ca/
Ontario Real Estate College • https://www.orea.com/
Real Estate Council of Ontario (RECO) • https://www.reco.on.ca/
Canada Mortgage and Housing Corporation (CMHC) • https://www.cmhc-schl.gc.ca/
Canadian Real Estate Association (CREA) • https://www.crea.ca/
Tarion • https://www.tarion.com/about/warranties-plan-act-and-regulations
Humber College Real Estate • https://humber.ca/realestate/
National Association of Realtors • https://www.nar.realtor/
The Star • https://www.thestar.com/business/real_estate/2020/05/18/is-covid-19-an-unexpected-shot-at-home-ownership-for-first-time-gta-buyers.html
CTV News • https://www.ctvnews.ca/business/pattie-lovett-reid-three-real-estate-trends-emerging-from-the-coronavirus-pandemic-1.4950069
Global News • https://globalnews.ca/news/6688074/ontario-doug-ford-coronavirus-covid-19-march-17/
City News • https://toronto.citynews.ca/2020/05/23/trinity-bellwoods-packed-coronavirus/
Daily Hive • https://dailyhive.com/toronto/trinity-bellwoods-cherry-blossoms-fences-enforcement-patrol-coronavirus
ReMax • https://blog.remax.ca/no-nosedive-ahead-for-canadian-real-estate-prices-re-max/
My website • https://www.fredericktam.com/
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