Special Considerations - New
Construction
General:
The purchase of a home to be
built is not
nearly as
"standard" as the purchase of an existing home. There
are more scenarios possible and more
variables as a result.
A greater degree
of alertness is required by all parties concerned to make sure things
stay on
the right course.
Ownership:
There are two
possibilities.
A purchaser may hire a
Builder to build a
house on property which the purchaser already owns or intends to
acquire.
Or, the purchaser may make a
"package
deal" with the Builder whereby the Builder sells both land and building
to
the purchaser.
If you already own
the land, the legal
work
and land
title charges associated with acquiring title to the property will
already have
been incurred previously.
If you do not
yet own the land, all the normal legal work to ensure good title will
be
required.
Also, the land titles charges
and particularly the land transfer tax will have to be paid. The
land transfer tax is based on the value
of the land and all buildings and improvements on it at the time of the
transfer of title.
Less transfer tax is
payable if title is transferred while the land is still vacant than
when a
house has been built on it.
Payment of Moneys:
Most building contracts
require payment of a
deposit
and then several "progress payments" during construction and a final
payment on possession.
Uncertainty
arises as to who the payments should be made through.
Often, the deposit is paid
directly by the purchaser to the
Builder or to a real estate broker representing the Builder. After
that, the most normal and prudent
course of action is for monies to be paid through our office. If
monies are coming from financing arranged
through a lender, the lender will usually channel the monies through
our office
so that we can ensure certain protections on it's behalf as well as
yours.
Financing:
Considerable confusion can arise on matters of financing, and particular attention is required here. Generally, a purchaser will pay for the new house by taking out a mortgage and by applying his own money in the form of savings and / or equity from an existing home. As usual, the money which is coming from equity in the existing home probably will not be available when it is needed for the new home, so you will arrange interim financing for it. So far so good. But what about the funds that are coming from mortgage proceeds? Mortgage monies can only be released after a mortgage is registered on title, and a mortgage can be registered only when title transfers to you. If the Builder is transferring title upon possession, this may create the catch-22 situation where monies coming from mortgage proceeds may be required in progress payments before possession, but the money is not available until after possession. To get around this problem, a second kind of interim financing may be required. This second form of interim loan is call interim financing of the mortgage. Interim financing of the mortgage is often desirable even in those cases where the purchaser has title and the mortgage can be registered. This is because there is less formality involved in obtaining funds under the interim financing loan than under the mortgage itself, and therefore funds are available more quickly and with less legal costs. Eventually, when the mortgage proceeds are advanced, they are used to pay off the interim loan.
Builder's Liens:
Under Builder's Liens legislation, a Builder
or any
other supplier of goods or services to a property has 40 days to file a
lien
for non-payment of monies owing. A
common example when liens are filed is when a Builder runs into
financial
problems and leaves sub-trades or suppliers unpaid.
A purchaser may protect
himself from liens by making holdbacks
as
specified in the Builder's Liens Act.
The usual way for such
holdbacks to be made is by paying the
money
through the purchaser's lawyer rather than directly to the Builder. Most
building contracts specify this method
of payment and make allowance for holdbacks to be made.
Pre-Occupancy Inspection /
Unfinished Work:
It is unusual for all work to be completed
before
possession.
Further, there may be
deficiencies
that need to be resolved.
These are
determined by a pre-occupancy inspection (this is one advantage of
buying a new
home - no such inspection is typically provided for with existing
homes).
The inspection is done by the
Builder and by
the purchaser who jointly make a list of unfinished work and
deficiencies.
If the building contract
allows for unfinished
work holdbacks (a different kind
of holdback than Builder's liens
holdbacks), then a valuation is made for each unfinished item or
deficiency. The
final payment to the
Builder is made
subject to a holdback for the agreed upon value of the unfinished work
or
deficiencies, and the holdback is held by the Builder's lawyer.
Possession:
To get possession
of a new home, you
must do
the
pre-occupancy inspection, then follow the same procedures as for an
existing
home (i.e. arrange insurance, sign documents, bring in funds). However,
there are a couple of things which
may make possession a bit more of a "scramble". First,
unlike with an existing home where
the documents you sign are independent
of the vendor, with a new
home, some of the documents you sign
are
prepared by and sent over by the Builder's lawyer.
We must wait for these to
arrive before you can sign all final
paperwork, and sometimes these documents arrive at the last minute. Also,
we can give you a final total of how
much money to remit only when we have received it from the Builder's
lawyer.
Again, this can be at the
last
minute because the Builder hasn't yet given his lawyer the final total
of any
extras or credits, or some other problem has come up.
Some Builders prefer to give keys to the
purchaser
directly, others prefer to do it through their lawyer.
As always, you will get keys
only after
monies are paid, documents signed and insurance confirmed.
Builder's Warranty:
New homes are covered by a warranty if the
Builder
is a member of the Warranty Program.
Not all items are covered
under the warranty.
Certain rules and procedures
must be followed to make claims
under the warranty.
To avoid
disappointment, you should carefully read the stipulations contained in
the
warranty.
From the desk of Timothy A. Martin