(as a brief editorial note, the last week of the Supermarket experiment and a final analysis will run early next week. Thanks for your patience.)
I have never been a supporter of buying a new home. Why? Firstly, workmanship in many new homes and condos is poor; I visited a friend’s new condo earlier this month to discover that the developer’s painter had painted over the electrical sockets because they were in such a hurry to finish the unit. In booming local economies, there simply are not enough qualified trades-people to properly finish a new home or condo; a lot of amateurs are learning the trade on your home!
More importantly, there are a myriad of hidden costs to purchasing a new home or condo which the developer tends to gloss over during the sales period which are not found in pre-existing home. Suddenly, your affordable new home or condo comes with a lot of financial strings attached. This post dove-tails with Million Dollar Journey’s post about the costs of buying any home; I would suggest that you read his post first since I am going to avoid over-lap as much as possible.
The process of buying a new home/condo always reminds me of the saying: “the devil is in the details.” Somewhere in 9 point font on your 15 page Agreement of Purchase and Sale is a clause which states additional costs which have to be paid on closing. These additional costs can run in the thousands. How bad can it be? Try 1-2% of the purchase price of your home in some cases. Some common additional costs, and which be included in the purchase of a pre-existing home/condo, include property taxes, utilities etc.
However, purchasers of new homes and condos are also responsible for a large additional cost known as the developer fee (sometimes referred to as a “developer impact fee” or a “system development charge”). The development game is much like a bazaar; a lot of haggling goes on between developer and the city. Since many cities are too cash poor to pay for infrastructure, they make deals with developers. Cities will allow greater densities and/or variances in zoning in exchange for the developer helping to pay for the cost of building sewers, sidewalks and other servicing needs (in some extreme cases, the developer will build the local school). The costs incurred by the developer are passed down to you, the home-buyer, on closing. In new or rapidly growing communities, the development fee can be quite high given that the city is building infrastructure from scratch rather than extending existing lines in older communities. Thus, the cost savings of moving out into the suburbs are off-set somewhat by higher development fees.
The real catch is this- if you read your agreement of purchase and sale, additional costs are sometimes classified as “in addition” to and not part of the purchase price. Since mortgage companies loan you money based on a % of the purchase price, the additional costs have to be paid by you out of your own funds and not through the proceeds of the mortgages given that these costs are not part of your purchase price (in some cases, a friendly mortgage company will include additional costs into the purchase price). This means you may have to come up with another 1-2% of the purchase price to close your home (the 1-2% figure is derived from a friend of mine who had to pay 1.4% of the purchase price in development costs alone causing him to describe the process of buying a new home as “highway robbery by developers”).
The best way to fight these hidden costs is to negotiate a cap on additional costs when you are buying a new home/condo. Builders are always happy to throw in free upgrades to entice you to buy. Rather than take a marble counter-top and be stretched to come up with the funds to close, ask for less in upgrades in exchange for a cap on additional costs. You can always upgrade to a marble counter-top later but the upgrades mean nothing if you can’t close due to lack of funds or you spent so much money on closing that you can’t afford to buy a toaster to put on that new counter top.
How can you tell if your development costs (and, correspondingly, your additional costs) will be high or not? Use your eyes. A development being created out of farm land is going to require more infrastructure and servicing costs than an in-fill project. Larger developments which stretch city blocks are also going to have higher development fees than smaller projects. I would suggest that you speak with a real estate agent- a good one should have some sense of the development charges. If you are using a mortgage broker, they may also be able to help you calculate closing costs quite accurately.
Have a great weekend.
June 29th, 2007 at 9:41 am
Thanks for the link!
We’re in the process of building now and let me tell you, there are a LOT of extra costs that we didnt’ account for. For example, the front door included in our price was for a basic door, we had to pay an extra $400 just for a decent looking door! I can only imagine the extras as time goes on.
FT
June 29th, 2007 at 12:04 pm
We got our new home from Mattamy recently (we moved in this march) and the process was pretty smooth actually. The “development costs” were included in the price. The driveway, boulevard tree etc. were included in the price as well. We got a cap on any possible levies (they are making a school & there is a GO station nearby), but in the end there were no extra levies. The workmanship is also very satisfactory.
The advantage of getting a new house was that we booked it by depositing $20,000 and then we had around 18 months before closing. We used this time to save for the downpayment. We had enough time to workout the First time home buyer plan through RRSPs, which proved to be great. At the closing we were able to save enough for the 25% deposit. Today the house is valued at around $290,000 where as the total cost (purchase price and all the upgrades and closing costs) is around $277,000. Was not a bad expreience.
June 29th, 2007 at 1:07 pm
Glad to hear of such a great experience! You do raise a good point- it depends on who the developer is. Some are more purchaser friendly and others have no issues downloading everything to the purchaser. Your story is a good reason why people should also do their due diligence on builders. Thanks for sharing.
July 2nd, 2007 at 1:51 am
Buying a new home is distracting. There are so many decisions to make regarding flooring, paint colours, upgrades, brick colour. It’s even worse if you’re having the entire house custom made. The whole process can be draining and time consuming. There’s the stress (especially if you’re selling an existing property). Will your new home be ready on time? What if you need to leave your old place and possession of your new place is delayed? Can you really visualize the end result?
If you avoid the distractions, you can focus on your career instead. Thomas J Stanley gives similar advice in The Millionaire Next Door (I think that’s the title). His example is about two lawyers.
When buying a resale property, there are fewer decisions to make. You see what you’re getting. It’s easier to negotiate with a seller than a builder. You can get more value for your dollar buy buying used, as with a car.
We’ve always bought resale properties (and during down markets when sellers are more motivated to negotiate). Having seen what new home buyers go through, we’re thankful to have skipped the ordeal. It’s a delight to move to an established neighbourhood. No construction trucks/noise/dust. Better quality construction. Established schools (an important factor in selecting the area). Mature trees.
July 13th, 2007 at 6:55 pm
I’ve had the experience of buying a new condo in the past. Specifically in a 32 story apartment building with close to 300 units. Some negatives include 1) Things are “being finished” for about a year after you move in. 2) GST! You only pay half when you are a first time buyer, but that can be a big hit.