The real cost of new construction

While there are tons of benefits to purchasing a pre-construction home, in most cases the closing costs are higher when buying a new property than a resale home.

To avoid unexpected surprises on the day of closing, it’s important to make yourself fully informed of all expenses associated with your purchase, along with the standard closing costs like land transfer tax, legal fees, title insurance.

Tarion Warranty Fee

Tarion warranty covers a variety of items from defects in finishes and major structural deficiencies, to deposits. They also investigate homeowner warranty claims and assist in resolving disputes between homeowners and homebuilders. The warranty enrolment fee does come as a cost to the purchaser (I’ve only ever seen one developer cover this cost). The amount of the fee depends on the price of the home. For example, a $400,000 property enrolment fee would be around $1,080, while an $800,000 home would increase your closing costs by around $1,600.

Development Charges

This is typically the largest closing cost with pre-construction. Development charges are fees levied by the municipality on new residential, commercial and industrial projects. The fees are intended to cover the cost of growth-related infrastructure. Instead of taxpayers taking on these costs, they are charged to the developers and then later passed onto the purchasers, either partially, or in their entirety.

In Toronto a lot of developers pass on the entire cost to the purchasers and this is where most of the horror stories occur. Thankfully, historically Ottawa developers have absorbed a lot of those costs by being more flexible when establishing a cap on these charges. In many cases the development charges are capped somewhere between $2,000-5,000. It’s extremely important to ensure that this is the case in the purchase agreement you’re signing. Depending on the market and the popularity of the project, you may have the power to negotiate this cap to a lower number.

Taxes

While many experienced developers include all applicable taxes in the purchase price for end-users, I suggest triple-checking this. I have seen developers charge additional taxes on parking spots, storage lockers and upgrades.

With most big developers, the sales taxes are included in the price of the home. In which case, the homeowner agrees to assign all tax rebates to the developer. The developer then applies for these rebates on the buyer’s behalf. However, if the purchaser does not qualify for the maximum rebate amount provided by the federal and provincial governments, then the difference will be charged back to the purchaser.

Keep in mind that if you are buying the property for strictly investment purposes and plan on renting it out right away then you will be responsible for paying those taxes on closing and then going through the rebate process yourself. Also important to note—there is a maximum rebate of $24,000. Of course, I advise that you seek a real estate lawyer and an accountant’s advice regarding this matter.

Miscellaneous Fees

Often times, there are a few other random costs sprinkled throughout the purchase agreements. Here are some examples: mortgage discharge fee for the vendor’s mortgage, utility meter installation costs, two-months worth of condo fees (in order to build up the reserve fund).

Hiring a lawyer who is comfortable with pre-construction contracts is very important. An experience real estate agent can also help you navigate through the purchase agreement and negotiate with the developer on your behalf.