As real estate professionals, your role is not limited to showing properties and negotiating deals. It’s essential to guide clients through the complexities of real estate transactions, including understanding mortgages, pre-construction costs, and additional fees. This involves explaining mortgage options, outlining potential pre-construction expenses, and clarifying ongoing costs and risks associated with property transactions. A solid grasp of these factors means your clients are well-prepared and informed.

One particularly complex area of real estate is pre-construction properties. It’s especially important to make sure your clients are well-informed and well-prepared for everything involved with these transactions.

Interim Occupancy Period

This phase, which occurs between possession and the official closing date, is critical for both buyers and real estate professionals to understand thoroughly. It’s the timeframe between when a buyer takes possession of a pre-construction condo unit and the actual closing date when the property title is officially transferred. In Ontario, this period often occurs because pre-construction projects are completed in stages. Buyers can occupy or rent out the unit once it’s ready, but they do not own it until the building is fully registered, which can take several months or even years.

During this interim period, buyers are required to pay “occupancy fees.” These fees cover the developer’s costs until final registration but do not reduce the principal balance on the mortgage. These fees typically include:

Interest on the Unpaid Balance: Occupancy fees include interest on the outstanding balance of the purchase price. If a deposit has been made, the unpaid balance is the remaining portion of the total purchase price. This interest is calculated based on the prevailing interest rates and can significantly impact the overall cost.
Estimated Maintenance Fees: These fees cover the estimated cost of maintaining the building, including amenities, security, and repairs. Since actual costs may not be known until the building is fully operational, it’s important to clarify that these are estimates only.
Property Taxes: Even though the unit is not officially owned, buyers are still responsible for property taxes from the time they take occupancy. These taxes are based on an estimated value, which might differ from the final assessed value after registration.

Many investors, especially less experienced ones, may be unaware of some or all of these extra costs, which can lead to unpleasant surprises and unhappy clients.

An additional challenge for investors is that these interim costs do not contribute to building equity. This means that while they are paying for the privilege of occupying the space, they are not reducing their mortgage balance. For investors, this can be particularly costly if rental income during this phase does not cover the fees. Create a breakdown for your clients, assessing costs and estimated rental income, to make them aware if rental income may not fully cover the expenses during this interim period, and how much of a shortfall they may have. This will help them prepare ahead for a smooth transition. Furthermore, you can provide guidance on potential strategies to manage this cash flow situation.

Closing Costs

Once the building is registered and the title is transferred to the buyer, closing costs come into play. These costs include:

Land Transfer Tax: In Ontario, this tax is based on the purchase price of the property. Buyers in Toronto will also need to account for an additional municipal land transfer tax.
Development Levies and Tarion Warranty Fees: Developers often pass on the cost of municipal development charges and the Tarion Warranty Program, which insures the unit against structural defects.
Legal Fees and Title Insurance: Legal fees are required to finalize the transaction, and title insurance protects against potential ownership disputes or other claims against the property.

Closing costs can range from 1.5% to 4% of the purchase price, so clients should prepare for at least these amounts for closing.

Impact of Interest Rates

Interest rates play a crucial role in determining the financial burden of both occupancy and closing costs. During the occupancy phase, the interest portion of the occupancy fee is based on prevailing rates. Rising interest rates can increase these costs, affecting the profitability of the investment. Guide your clients on potential changes in interest rates, and clarify how much of a financial impact these changes would have for your client, both good or bad.