Four questions to better understand the purchase of a condo on plan
You love the neighborhood, the plans, the model unit... in short, you're in love with a condominium that's still in the project state. Here are four answers to your most common questions.
1. How many units will the promoter need to sell before obtaining financing?
"With the current state of the market, financial institutions ask that at least 50% of a condo unit project be sold before authorizing a loan to begin construction," says Ronald Panneton, vice-president of the Alta-Socam Group. That minimum tends to increase based on the risk factors evaluated by the lending institution.
Despite their enthusiasm and goodwill, some promoters will never clear that benchmark and will have to give up construction. This could be because the intended clientele for this particular market share isn't there or even because the resale market has slowed down, negatively affecting the new market. The majority of buyers already have a living unit they'll need to sell before signing on to a new project, explains Ronald Panneton.
Read: How to buy a new condo and save money
If they cannot go ahead with construction, the promoter must reimburse the buyer.
Buying a condo that has yet to be built therefore presents a certain risk. So much can happen during construction! Between signing the contract and taking possession of the unit, an average of 12 to 24 months can go by.
2. What does the preliminary contract contain and what does the buyer agree to when signing it?
The civil code obliges the promoter and the buyer to sign a new preliminary contract, according to Ginette Allaire, notary with the De Grandpré Joli-coeur cabinet. There is however no obligatory model. Some promoters will use the formula established by their existing warranty plan, while others will draw up their own contract.
The preliminary contract describes the unit you're purchasing, where it's located in the building, its sale price and delivery date, amongst others. It is a legal agreement between the promoter, who agrees to deliver what is described in the contract and the buyer, who agrees to purchase it," explains Ronald Panneton.
Watch out: the preliminary contract must obligatorily contain a 10-day forfeiture clause, or else it can lead to a maximum penalty of 0.5% of the sales price, says Mrs. Allard. Past those 10 days, if the promoter respects the clauses of the contract and its delays, it will no longer be possible for the buyer to back out.
For buildings containing at least 10 units, the promoter must also join the following information: the names of the architect, engineer, builder and promoter, a plan of the entire project, its technical specifications, a provisional budget, a description of the common areas as well as a summary of the property declaration that specifies the building's major characteristics (unique ou by phase, residentiel or mixed), the number of units and a summary of the rules that apply to the building.
Read: The preliminary contract: 5 important questions
3. What is the required deposit upon signing the preliminary contract and how will payments be set up afterwards?
Calculations for the initial deposit vary from one promoter to another. Some will ask for a set amount, while others request a percentage of the sale price. After that, many promoters will ask for additional payments that will be spaced out as construction progresses. These amounts must be clearly laid out in the preliminary contract.
"It's a way for the buyer and the promoter to show how serious they are, and I think that one should be pretty wary of very small deposits," says Ronald Panneton. Buyers who refuse to commit financially and who decide to back out halfway through can endanger the outcome of the project and cause serious problems to the promoter and to other consumer who are respectful of the contract and await their own unit, he explains. Even if the promoter can take them to court, would it be worthwhile, given all the costs and delays, to go to court for such a small amount of money?
4. By whom and how is the money given to the promoter protected?
When a building consists of four or less superimposed units, the Garantie de construction résidentielle plan is obligatory and protects all deposits up to $50 000. For higher building, the promoter is free to choose whether or not they subscribe to a warranty plan. Its protection must then be confirmed by this plan's administrators.
It is also possible to hand these sums over to a notary who will keep them in a trust. "It's a formula that I recommend," says Ronald Panneton. The consumer is therefore protected against any and all problems that may occur further down the road, thereby affecting the financial health of the business.
A warranty plan and a trust are the only two ways to protect the sums you're putting up as a down payment.
Buying on a plan? If the deal is good, jump on it - but do it smartly.
Stock images: Shutterstock
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