Five things to know about closing costs when investing

When it comes to closing costs on pre-construction condos, there is a lot of misinformation out there.

You may have heard horror stories of buyers being hit with closing costs of $40,000 on final closing, and you start to wonder, if this is true, why are 20,000 people buying pre-construction condos every year in the GTA?

The reality is that if you are educated and prepared when buying a new condo, closing costs are nothing to be worried about.

These horror stories of $40,000 closing costs are from buyers who were given bad professional advice, or worse, no professional advice when they were signing their condo contract.

Here are five things every condo investor should know about closing costs for pre-construction condos:

1 |Closing costs are different for every pre-construction condo.

There is no set amount of closing costs for every condo.

There is no rule of thumb that closing costs should be this much or a certain percentage of the price.

It really depends.

That being said, usually, if buying a pre-construction condo in Toronto in 2016, you can expect unrecoupable closing costs for most condos to be approximately $8,000 to $15,000 for a studio or one-bedroom condo, and approximately $12,000 to $18,000 for a two-bedroom or larger condo.

Here are the major items that you can always expect to pay for when purchasing a pre-construction condo:

Land Transfer Taxes (Toronto has provincial and municipal land transfer taxes). Approximate cost for units less than $450,000 is one per cent for provincial and one per cent for Toronto land transfer tax.

Development charges (these can include levies, educational levies, section 37 levies). These amounts can vary wildly from project to project and builder to builder. Assuming you have them capped, Toronto averages right now are $5,000 to $7,000 for one bedrooms and $8,000 to $10,000 for two bedrooms.

Legal fees to your lawyer. Depends on who your lawyer is. Fees including everything will usually be somewhere between $1,500 to $2,000

Utility hook ups. When you purchase a new condo, the utilities have to be connected for the first time.

Tarion Warranty. Yes, you get a warranty with your new home, but you have to pay for it. Usually around $600 to $1,000 for most investment units. Check out this blog post for more information about Tarion Warranty Enrolment Fees: truecondos.com/tarion-enrolment-fees-2.

Miscellaneous ($500 each or less) fees and charges (these include law society fee, deposit cheque administration fees, mortgage discharge fees, status certificate fees). These usually amount to approximately $1,000 for a typical condo contract.

2 |Development charges should always be capped.

Development charges (or development levies) are fees put on the developer of any new home or condo by the local municipality.

These should always be capped in your agreement.

Let me state that again —development charges should always be capped.

If the developer you are buying from says they will not put a cap on your development charges, run away!

Development charges are supposed to pay for the many things associated with building new residential units like sidewalks, lamp posts, streets, parks, schools, hospitals, etc.

The problem with development charges is that they are charged by the city on closing. So you don’t know what the city is going to charge because the building won’t be completed for three to four years after you sign your contract (assuming you are buying pre-construction).

It’s really these fees that you need to watch out for in your contract and most importantly, they should always be capped.

When you cap your development charges, this means that they cannot exceed the capped amount.

If you don’t have a cap, and the city decides to double or triple the development charges between the time you buy your unit and the time the building closes, you could be on the hook for any possible amount. It could be in the tens of thousands of dollars for this one thing alone.

3 |Development charges are rising every year in pre-construction condos.

Development charges are a huge source of revenue for municipalities.

New development is a golden goose that keeps on giving, and as such, cities across the GTA are constantly pushing the limits on developers and raising these charges.

Just recently fees nearly doubled in Toronto, for example. Developers all protested, but at the end of the day, if the market is willing to pay for it, the city will keep increasing them.

This underscores the point that you must always have your development charges capped in your agreement, but it also means that just because you have a cap of $5,000 this year, doesn’t mean you will the next time you buy.

Five years ago, a cap of $2,000 to $3,000 was normal in most agreements. Today it’s $7,000 to $10,000.

On the bright side, these charges are an inflationary pressure on prices which ensures that real estate values will continue to rise across the GTA. Investing in hard assets like real estate is a great hedge against inflation.

4 |Is HST included in the purchase price? It is and it isn’t…

Most developer price lists will say “prices include HST.” And if you ask most developer’s sales reps, they will tell you that the prices include HST.

But here’s the thing, the prices only include HST if you are moving into the suite yourself or someone in your immediate family is moving in.

If you are an investor and you will not be moving in, then you will be required to disclose this fact to your lawyer at final closing and you will no longer qualify for the built-into-the-price HST rebates.

In short, investors should expect to pay approximately 7.8 per cent of the purchase price on final closing as HST. This money is sent to the CRA by the developer, and it is up to the purchaser to apply for the HST rebate to get it back.

The good news is that if you purchase an investment condo that is less than $350,000, you should get 100 per cent of the HST rebate back (as long as you are renting out your unit) and it only takes about one month to get the money back after applying to the CRA.

If your purchase price is between $350,000 and $450,000, you should get most of your HST money back, but not all of it.

If your purchase price is more than $450,000, consult a tax expert for your specific situation.

HST is something you need to budget for on final closing, but it’s not really a “cost” because in most cases you get all or nearly all of this money back.

For more information on HST and condo investing, I strongly recommend you check out the many other articles, podcasts, and videos we have on this site: truecondos.com/tag/hst-rebates.

5 |You may be asked to pay for other things at time of final closing.

Developers may also ask you to pre-pay for certain expenses at final closing. These are not necessarily closing costs, because you have to pay them anyway, but you do need to budget for the possibility that you have to pay them.

The biggest example of this would be property taxes. The developer has the right to make you pre-pay up to two years of property taxes up front on final closing. This money is remitted to the municipality, but purchasers need to be aware of this.

Again, you should not consider this a closing cost, as it is an ongoing expense of owning any property that you would have to pay now or later no matter what.