This may just be the most helpful thing you read this week.
When taking your first tentative steps toward buying a new home, you’ll find yourself entering a world that seems to have an entirely different language (and it may just be Elvish). As your ever faithful sherpas, we’ve constructed a nifty little guide for some terms you’ll no doubt come across when seeking a new home.
Ok, here we go:
1 pre sale
Pre-sale – When you buy pre-sale, it means that you are purchasing your home before it is ready for you to move in. In fact, they may not have started building it yet. Yikes! Is that even responsible? Although this might sound like a huge gamble, this is a very popular way of buying a new home. Usually, you will choose a home layout and style from a builder’s plan and select certain features from what they offer.
newbuild
New build AKA Pre-sale – A new build home is when you buy a home before the project is completed. Yes, that does sound awfully like what we just defined above. That’s because it is and they are different ways of saying exactly the same thing. Welcome to real estate jargon 101.
A big plus to buying a pre-sale or new build home is that you can often get a lower price than if you buy after the project is completed. Developers offer discounts for pre-sale/new builds to speed up sales so that they can meet the sales quotas set by their lenders.
preconstuction
Pre-construction AKA New Build aka Pre-Sale – A pre-construction home, yes you guessed it, is another way of saying “new build” or “pre-sale”. Another plus of buying your new home this way is that buyers of pre-construction/new build/pre-sale homes will get in before things like bidding wars even begin.
New to bidding wars? Ask any hard-bitten homeseeker and they will no doubt tell you that this is something to avoid if at all possible. A person can only stand so many cycles of hope and disappointment.
Production Homes
Average Joe homes (aka Production (or Spec) Homes) - These are built in a cluster of similar homes all by the same builder in a newly developed community. You can often choose to buy a production home off plan as a pre-construction or pre-sale (or new build) home. Alternatively, if the builders have enough funding, they will often build move-in-ready homes on new lots. These homes are known as ‘speculative’ (or spec) homes and are built with the ‘average’ homeseeker in mind.
Yes, yes, we know you aren’t average. What we mean is that these homes are built to appeal to a wide market and designed to sell, so they make excellent investments if you decide to sell at some point.
customhomes
Exacting Karen’s Dream Home (aka Custom Homes) – Unlike production homes, here the homeseeker will purchase the land and hire the architect and builder to design and build an original home according to their specific requirements. Because no one else will get it right.
These are not usually pre-sale or pre-construction as the cost given at the start is an estimate (that often keeps growing). The homeseeker will have to pay the builder and architect and other contractors as building progresses. And you better believe Karen will be on site making sure she gets what she paid for.
semicustom
Dan’s Almost Ideal Home (aka Semi-custom Homes) – This is a home that fits somewhere between a production home and a custom home. The floor plan has been decided upon by the builder (and/or the build has been started already), but the buyer has some control over the interior and exterior finishes.
You find these new home opportunities when a builder starts a project and the sale falls through or when the build is not yet completed but the owner has decided to sell.
bonus
Bonus content! Loan and payment options for the above, explained.
Pre-Construction mortgages
- Deposits, Trusts, and Deposit Schedules
The biggest FAQs around presale/pre-construction/new builds are about deposits. When buying a presale, the first step is paying a deposit. Typically, there is a small initial deposit due when you put in an offer, followed by a 5% to 10% of purchase price due as further deposit after a rescission period (more on that a little later). There are more deposits that come later but it all generally adds up to about 20% which is common for a downpayment in today’s market. - Rescission or Cooling-Off Periods
Did Friday lunch drinks and a feeling of euphoria cause you to act rashly? A rescission period is there to protect you (from yourself sometimes). It gives you a period of time to cancel the contract if you have a change of heart (or sober up). Once you have put in an offer and signed a form acknowledging you’ve read the disclosure Agreement, and the purchase of sale of has been signed, the rescission period starts. The length of this period varies by province, with British Columbia having a 7-day window, and Ontario having a 10-day rescission period, or “cooling off” period. - Mortgages
While you’ll likely need pre-approval if you’re buying a pre-sale condo, you won’t need to secure or start paying a mortgage until your property is fully built, with your mortgage loan payments beginning upon final closing. This is when the building is officially registered with your city and when you get the title to your condo. When it comes to interest rates, you can likely lock in a rate if you’re purchasing a pre-sale condo that will be completed in less than two years. Speak to your bank or mortgage broker and request a commitment letter to lock in rates if you’re trying to secure a mortgage at today’s rates.
With custom or semi-custom homes, you have the following loan/payment options: You will usually get one loan to cover the purchase of the land and costs of construction, and a second loan for the mortgage on the finished house. If you want to build a home from the ground up, your first move is to purchase a plot of land. Go Karen go.
But you can save time and money by getting a construction-to-permanent loan. This option simplifies the financing process by providing one loan and one closing transaction.
- Construction-to-permanent
With this type of loan, your lender pays your builder in instalments as the phases of the build are completed. You will still pay a deposit of 20% toward the total cost. Once your home is completed and you move in, the loan will become your mortgage and you will only then pay closing costs. - Construction-only
This type of loan covers the total cost of building your home in full upfront (pre-construction). When construction is finalized, the construction debt becomes your mortgage (considered a second loan, for which you pay closing costs a second time).
For a bit more clarity on the above, we've built a handy guide here
REW.money
