5 things to know about building closing costs

August 10th, 2018 - by UrbanCondo Team

high rise in construction

If you're investing in a pre-construction condo, there's a lot of misinformation out there. Whether it's about down-payments, shady developers, or extravagent closing costs; what can you believe? Do unsuspecting buyers really get slapped with closing costs upwards of $75k? 

In this post, we're going to look at closing costs and what you can expect before you rent or move into your new purchase.

Real estate experts know that staying up to date with contractual obligations is the surest way to avoid becoming a horror story; this includes doing some prepartion and research about your municipality and its construction history.

Professional advice before you sign on the dotted line will also go a long way towards protecting the integrity of your bank account.

Defining closing costs

Closing costs are what condo buyers pay on top of the purchase price listed on the property itself. Both buyers and sellers incur these costs normally as part of a complete real estate transaction, no matter the property type.

Every pre-construction condo will have different closing costs

When it comes to closing costs, there is no rule of thumb that dictates how much they will be. It won’t be an exact percentage of the sale price, and it’ll depend on a number of factors.

The costs change from year to year, and looking at a random record from a 2018 closing in Toronto, irrecuperable closing costs were approximately $12,000 on a two-bedroom condo at a purchase price of $579,000. 

The closing costs aren’t the only charges you will pay to get the rights to your condo, however. There are land transfer taxes, capped development charges, legal fees for your lawyer, utility hooks ups, a warranty for your investment, and smaller miscellaneous fees as well.

Development charges should be capped, always

The local municipality charges the developer a fee that get transferred down to the home buyer in the form of development charges (or development levies). However, in your Agreement, these charges should always be capped and should never exceed that number.

If you meet a developer who makes excuses like, “We won’t know the development charge until such and such a date” and refuses to cap it, stay as far away from this development as possible.

These charges pay for the city’s property that the developer has in effect changed or damaged during the building process such as sidewalks, lamp posts, pavement, and anything else associated with the new build.

The city will charge the developer on closing, and if the city decides to triple their charge to the developer while you're hanging around with no cap on your development charge, you’ll fall victim to the spontaneous increase too.

Though the development costs should always be capped, they are still rising every year

The city makes a lot of money from the development charge, and many GTA cities are upping the price for developers to break ground. Fees doubled around Toronto recently amid developers’ protests, but the city increases based on market demand, which is ever-present.

Again, make sure your development charges are capped. Five to seven years ago a normal cap in most agreements was $2,000 to $3,000. Today, a normal development cap could meet or exceed $10,000.

Let’s talk HST for investors

When developer sales reps tell you that the purchase price includes HST, they aren’t lying, they’re just assuming this new condo will be your principal residence for you or your family.

If you’re an investor and you won’t be moving in, then you must disclose this to your lawyer at final closing. As an investor, you should expect to pay around 7.8% of the purchase price as HST at closing. This is sent to the CRA by the developer; the purchaser may apply for an HST rebate afterwards.

There is good news: if your condo is under $350,000 you could get as much as 100% back as an HST rebate provided you’re renting out your unit. Condos costing above that figure get decent HST rebates as well.

There could be even more fees to pay

Developers have been known to ask buyers to pre-pay for expenses at final closing. They aren’t always part of ‘closing costs’ but they should be part of your budget as an attached, miscalaneous, or administrative fee.

Property taxes are a good example of this, something that the developer is allowed to charge for up to two years in advance. This money goes to the city, and it should not be understood as a closing cost. It’s an expense related to property ownership that you would have to pay (now or later) no matter what.

Ways to save

Talking to a real estate lawyer should be your first move when it comes to closing costs and buying pre-construction.

As we mentioned above, people who are planning to live in their residence save money on the HST charge (over $10,000 in most cases) and as another word of advice, first-time buyers can have their land transfer tax waived.

Always do your research ahead of time to avoid uncessesary fees, and always consult a professional!