The pitfalls of buying pre-construction real estate

Real estate analysts and experts are on the same page for the future of home prices in Canada this year—they’re going down. That’s bringing attention to some of the financial pitfalls of buying pre-construction real estate.

Catch up: “Buying pre-construction” involves putting down a small deposit and signing an agreement that you will buy a property in the future. 

  • To own the property, you need to close on it, but you can’t close on it until you secure the right financing. 

  • If you walk away from the contract, you’ll (at least) lose your deposit, and developers can sue you for the difference between what you agreed to pay and what they end up selling the property for. 

The problem: Some pre-construction purchasers cannot close on properties they bought during the real estate boom of 2021 and early 2022 when prices hit their peak. 

  • Falling home prices, higher interest rates and harder-to-pass stress tests for mortgages are the primary factors driving pre-con buyers’ inability to close.

  • Another big issue is fraudulent pre-approval mortgage documents used to prove to developers that they can secure financing for the home, per the Toronto Star.

Why it matters: The problems people are having with pre-construction real estate purchases is a reminder that housing prices don’t always go up, and speculating as if they do is an extremely risky financial move.

Bottom line: While purchasing pre-construction properties has advantages like no bidding wars, having a brand new space and sometimes getting a lower price than a re-sale home, buyers should be aware of all the risks associated with them as well.