Construction collateral: navigating the deposit process for new-build home purchases

A deposit is the first financial hurdle a homebuyer needs to clear when buying a pre-construction home.

That deposit is generally five per cent of a home's total value for a purchase of less than $500,000, but it can be as high as 20 per cent for a $1-million-plus home. Those funds are a pre-construction commitment to the builder to take that condo or single-family home off the market. That money also gets put toward your eventual down payment.

"It's important for the consumer to understand the deposit is a normal part of purchasing a home and to understand that commitment," said Lori Topp, president and CEO of the Alberta New Home Warranty (ANHW) program.

Equally important, she says, is familiarity with the province's New Home Buyer Protection Act. Introduced in 2014, the act provides mandatory warranty protection, but it does not include mandatory deposit protection.

However, 92 per cent of ANHW's 600-plus builder members include its third-party pre-possession insurance (for single-family homes) and deposit insurance (for multi-family homes) in buyer contracts.

ANHW's pre-possession insurance combines deposit insurance and home completion insurance, protecting buyer investment from when they place their deposit right up until mandatory warranty protection takes effect. Meanwhile, deposit insurance covers a multi-family-unit purchaser's deposit of up to 20 per cent of the home's purchase price (maximum $50,000).

"It's important for the consumer to understand the deposit is a normal part of purchasing a home and to understand that commitment." - Lori Topp, president and CEO of the Alberta New Home Warranty (ANHW) program

The insurance protects the buyer if a builder fails to complete construction of the new home according to the purchase agreement, due to insolvency, bankruptcy, court order or other financial circumstances. "It provides peace of mind to buyers," said Topp.

Brookfield Residential is an ANHW member building both single- and multi-family homes, and the company includes deposit protection for both.

Brookfield sales manager Kirsten MacDonald says a five per cent deposit in bank draft form is the baseline, but the deposit payment plan can be stretched out over time, especially for a longer build like an estate home.

For a condo, Brookfield requires a $1,000 deposit to hold the unit, then the purchaser has a couple of days to reconsider or look at financing.

"There is a complete refund if the buyer does not move forward," said MacDonald.

Under Alberta's Condo Property Act, there is a 10-day period after purchase contract acceptance for either side to back out. After that period, the balance of the five per cent deposit is due.

If a buyer can't close on a home, the deposit is forfeited. However, MacDonald says, Brookfield has successfully remarketed homes and given the deposit back (minus expenses) in the past, depending on the circumstances.

Brookfield recently launched an online aid for customers (accessible at the company's sales centres) to clearly outline all their financing options.