New Construction, Advertised Sale Price
It will not come as a surprise to most individuals that developers will advertise the lowest possible price in order to get you through the door. One-bedroom homes may start at $249,000 and yet the Developer may only have 1 unit at that price, but now reserve the right to advertise at this starting point. The jump in price to the next one-bedroom condo could be very significant, and then you need to consider how many units they have at that price.
Some developers will advertise “Over 50 homes under $300,000” which is a much more honest way of approaching their actual price range, however do keep in mind this could include a large number of bachelor suites or very small one-bedrooms, and will include the least desirable of the selection. The above may seem obvious, and perhaps it will not present an issue for many home buyers. However, another factor that I hear from many homeowners is the issue with sales tax when it comes time to sell their home. Sales tax applies to the purchase of new homes, and 5% on a $300,000 or a $700,000 is not an insignificant amount of money. Presently, there also exists a 2% transition tax to take into consideration as well, and if you’re spending more than $425,000 or you’re not a first-time home buyer you’re eligible to pay Property Transfer Tax on top of sales tax.
On a home with a sale price of $500,000 you’re looking at approximately $35,000 in sales tax. Now, when it comes to selling your home the new buyer has to pay Property Transfer Tax as well, so that does not present an issue. However, they are not responsible for any form of sales tax and this is where it can become problematic.
If you pay $540,000 for your home with all taxes included, on a home with a market value of $500,000 – in Real Estate terms you’re now out $35,000 as there is no way to recuperate the added expenses until the market value of the home increases above that threshold. The Developer however, will gleefully continue to advertise the sale price of the other units at $500,000 and if you list your home at $535,000 you’ll be far behind the competition.
So, unless you’re prepared to take a loss ahead of time by paying the associated sales tax, if you’re going up against the Developer you’re at a disadvantage right from the get-go. Then take into consideration their marketing budget and commission payout, and it’s an uphill battle. The point of this article is not to deter buyers from purchasing new developments, it's simply to help make you aware of a number of factors that many may not consider when entering the marketplace.