Buying off plan: How to protect yourself
Published on December 8, 2023
When a new real estate project is very popular, it is not always possible to wait until construction is completed to reserve a condo or house. Buying off plan is a common practice that has several advantages for buyers, provided they know how it works and how to protect themselves.
Here’s what you need to know before buying a condo, a detached house, a semi-detached house or an apartment off plan.
Summary:
- Advantages of buying a house or condo off plan
- Disadvantages of buying off plan
- The importance of the preliminary contract and its 3 major clauses
- The memorandum
- How to protect yourself
- The pre-acceptance inspection
Advantages of buying a house or condo off plan
Buying off plan has many advantages, the first being that the property is brand-new: no cleaning up after previous owners, no holes to fix and no smells to get rid of. A blank canvas awaits, to the delight of those who love a clean, new space, and creative people who want to add their personal touch. Many people want to be the first to live in their home.
Since the dimensions are determined in advance, buyers will know the layout of the rooms and can purchase anything they still need, such as furniture and curtains, saving themselves several trips to the store. However, be sure not to overfill the space, because the real estate promoter will often give the gross area, not the net area.
The gross area includes uninhabitable parts like load-bearing walls and columns, while the net area excludes all uninhabitable parts. The net area is the actual space that can be used.
Customization potential
When the off-plan purchase is made early on in the construction process, buyers can customize certain elements, especially with regard to the finishing materials used:
- Flooring
- Countertops
- Ceramic tiles
- Faucets
- Cabinets
- Light fixtures
In some cases, changes can be made to the overall design and the floor plan. It depends on the nature of the real estate project, the company in charge and the agreements made in the preliminary contract.
Attractive prices
The Government of Québec introduced new building standards in 2020 to improve the energy efficiency of new buildings. This means that in addition to being built with materials that are less harmful for the environment, new homes will consume less electricity than older buildings, which will considerably lower energy costs.
Also, it is reasonable to believe that you will save money by not having to do maintenance work for several years. A new property should naturally increase in value over time and have excellent resale potential, making it a low-risk investment.
Given these features, buying a new house or condo off plan can cost less in actual expenses than buying an existing home. However, it is important to calculate the overall costs over 10 years to get an accurate picture.
A safe investment thanks to the construction guarantee
The Guarantee Plan for New Residential Buildings applies to all homes and most condos. This document is administered by the Garantie de construction résidentielle (GCR) organization, for buildings built from 2015 onward. If the purchase is made from a company accredited by the GCR, it will automatically be covered under the guarantee.
The plan guarantees that the seller will fulfill several legal and contractual obligations. It includes a guarantee against construction defects and deposit protection (maximum $50,000). Defective work is covered for one year, hidden defects for three years and more serious problems (design, construction or soil defects) for five years.
The guarantee plan is transferable, with the remaining duration of the coverage staying in effect when the property is sold. There is also the possibility of claiming relocation, storage and moving costs if the home is not delivered on the agreed upon date, up to a maximum of $6,000.
Disadvantages of buying off plan
A home bought off plan does not physically exist when the contract is signed, so you will not have the certainty you may want regarding the final results.
The difficulty of imagining yourself living there
It is not easy to imagine yourself living somewhere without setting foot in it and seeing it with your own eyes. Construction companies use graphic renderings and 3D tours to give buyers an idea of what the final product will look like, but features such as the view, natural light and the texture of the materials are difficult to convey this way.
It is recommended that you visit the site where the building will be erected to look around and try to see yourself living there. Even so, the experience will not be the same as standing in the different rooms, thinking about where the coffee maker or TV should go and the ideal spot for a reading nook.
A strategy builders sometimes use to counter this drawback is to build a model unit in a residential complex or condo tower that buyers can visit. Although it will not have all the same features as the unit the buyer will own, this option shows a result similar to what will be delivered and showcases the quality of the construction.
The delivery time
Construction projects nearly always run into issues. Materials, labour and work schedule problems are just a part of the reality of an industry that requires several professions (plumbers, electricians, etc.) to each play their role at a given stage of the project, which can throw off delivery times.
It is crucial to have a plan B in place if circumstances are such that the home or condo you purchased cannot be handed over for final delivery. The seller will provide compensation under the construction guarantee, as explained above. However, you should plan for the possibility to avoid having to scramble at the last minute.
The importance of the preliminary contract and its 3 major clauses
Of course, such an important transaction requires a contract between the two parties, which is reinforced by a construction guarantee. Here’s what you need to know about these documents, which are of utmost importance to buyers.
What is a preliminary contract?
Every sale of a new build or a property to be built must be preceded by a preliminary contract in which a person promises to buy the property. It must include key elements:
- The contact information of the selling and buying parties
- The work to be carried out
- The price
- The delivery date
- The rights in rem (real rights) that encumber the property
- Useful information about the building’s features
- The revision terms if the price is revisable
It’s similar to an Offer to Purchase, since it contains the same clauses, while offering additional protections. This document can be amended and is negotiable according to the needs of the buying party. Consulting a lawyer or a notary when filling out this document could be a wise decision.
1. Right of cancellation
The preliminary contract must contain a stipulation by which the buyer can withdraw within 10 days of signing. This is the right of cancellation. When a memorandum has to be submitted, the preliminary contract must also indicate that the buyer can cancel up until they receive this memorandum or within 10 days of its receipt. When the contract is being drafted, the promoter can require compensation in the event the buyer uses their right of cancellation, but this amount cannot be greater than 0.5% of the agreed selling price.
2. Return of the deposit
In most off-plan purchases, a deposit has to be given before the sale. In return, the construction company undertakes to return the deposit if the home is not ready on the date agreed in the preliminary contract. It is also possible to agree on monetary compensation if the property’s net area differs by more than 15% from the gross area initially declared.
3. Taxes
A simple clause that indicates whether ornot the selling price includes taxes (GST and QST).
The memorandum
The memorandum completes the preliminary contract and must be submitted to the buyer if the sale concerns a fraction of a divided co-ownership, an undivided share of a residential building or a residence forming part of a set of residences with shared facilities. It contains the following information:
- A statement of the names of the architects, engineers, builders and promoters
- A plan of the entire real estate project and, if applicable, the project’s general development plan
- The summary of the technical specifications
- A statement of the forecast budget
- A list of shared facilities
- Information about the building’s management
- If applicable, the building’s guarantee plan and how to access it
Copies of the Declaration of Co-Ownership or the Indivision Agreement and the building rules are also attached to the memorandum. When the sale concerns a fraction of a divided co-ownership, it contains a statement of the leases granted by the developer on the private or shared parts of the building and indicates the maximum number of fractions intended for rental purposes.
How to protect yourself
Make sure the builder is reliable
It is of utmost importance to look into the builder who is leading the project to make sure they are reliable. Getting hold of all the information available about the builder’s experience and the projects they have carried out will be very helpful. Don’t hesitate to ask for references while also checking whether complaints or lawsuits have already been filed or brought against the builder.
It is strongly recommended that you search the directory of GCR-accredited companies before starting serious talks and signing a preliminary contract.
Carefully read the terms of the contract
To avoid unpleasant surprises, carefully read the preliminary contract before signing. This task should be taken very seriously, because the contract is irrevocable once it comes into effect. If in doubt, consult a legal professional.
Get title insurance
Buying title insurance will protect you in the event of non-payment by the project promoter. If the promoter does not pay its subcontractors, they could come after the buyers. Having title insurance transfers this responsibility to the insurance company.
Expect delivery delays
Although the preliminary contract will usually include a clause providing compensation in the event of late delivery, such a situation will cause an unfortunate setback. It is therefore a good idea to have a plan in place so you are prepared should this occur, to lessen the impacts.
The pre-acceptance inspection
The pre-acceptance inspection is a pivotal step in the off-plan purchase of a house or condo. Required by the Regulation Respecting the Guarantee Plan for New Residential Buildings, it is mandatory for the purposes of applying the guarantee.
Check that the property is delivered in due form
Make sure the final product respects the plans and examine the building components and systems to identify any work left to be completed, visible defects and major construction anomalies. This is the time to let the construction company know which components to complete or correct.
The buyer must fill out a form during the pre-acceptance inspection. As soon as it is signed and the “Accepted – without reservation” box is checked, the guarantee comes into effect. Since there is no going back after this, it is advisable that you be accompanied by a building professional. Their expertise will ensure a more thorough inspection.
If you have all the necessary information and include all possible points of dispute in the preliminary contract, buying a condo or a house off plan can be an interesting option for buyers looking to live in a new home, customized to their tastes.
Planning to sell? Keep the commission by selling without an intermediary, with the help of DuProprio’s services! You will have access to a team of professionals to support you during the process. Find out more by scheduling a free consultation or watching our short webinars.
