No, we’re not talking about a jolly old fellow in a red suit.
When purchasing a pre-construction condominium unit from a developer, the contract you sign is called an Agreement of Purchase and Sale, or APS for short.
The APS is the legally-binding agreement between the developer and the individual purchaser.
Most APS documents have a similar format, which we’ll delve into deeper on a future post.
As an investor, there are certain clauses to look out for…including:
1) THE ASSIGNMENT CLAUSE
An assignment clause provides the purchaser with the opportunity to sell or ‘assign’ their unit to another purchaser prior to completion of the building and closing of the property.
We advise our investor clients to treat an assignment as a ‘Plan B’ – an exit strategy should their situation change between the time of signing the agreement and closing of the unit (usually a 4-5 year window).
Typically, a developer will not include an assignment clause. A good agent will know to ask for it. If you’re working with Platinum Agents like us, the developer will typically offer this clause.
2) THE CAPPED CLOSING COSTS CLAUSE
There are various closing costs on a typical pre-construction condo purchase. Some of them include development charges, levies, the new home warranty enrolment fee, and more.
Some of these costs are charged to the developer from the municipality, and passed on to the purchaser. When working with a Platinum Agent, the developer will typically ‘cap’ some of these costs (like the development charges).
A typical cap could be between $5000-$8000, depending on the size of the suite. This means the MOST you will pay is the cap amount (if the cap is $5000, and the development charges are $4000, you only pay $4000.
If the DC’s are $8000, you only pay the cap amount at $5000). We’ve heard horror stories where the purchaser didn’t work with a Platinum Agent and was slapped with an additional $10,000 in closing costs because they didn’t have caps.
3) THE RENTABILITY CLAUSE
If you’re planning on using the property as an investment, you’ll want to start earning rental income as soon as possible.
When purchasing a pre-construction condo, there are usually a few months between the time you occupy the unit (receive your keys and able to occupy the suite) and closing of the property (when ownership begins). Some developers have a clause in the APS that restrict you from renting out the suite during occupancy.
We highly recommend a clause that permits you to rent during occupancy.
(Want more great info on pre-construction condo investing? Download a free copy of our latest book,Condo Investing 101)