Buying an Unfinished Home: Understanding the Process

Purchasing real estate is a process that looks different for everyone. Some people have their sights set on a pre-construction, new-build, or custom home, while others opt for resale homes. In between all these real estate types, you’ll find unfinished homes. As the name suggests, these are properties partially completed when they’re put up for sale.

There are many reasons a home might be put up for sale midway through construction. Lack of funds and life events such as marital separation, illness, injury, or death, are some of the reasons why a homeowner may not be able to finish building their property. These half-constructed properties can give people the opportunity to create their dream homes without having to start completely from scratch.

Still, it’s important to be realistic with your expectations. Not all unfinished homes are equal. Some already have a good structure in place, including all the framing, drywall, and roof. Other homes may still require a significant amount of work, permits and planning, so it’s important to determine if you’re willing to make the financial and time commitment.

1. Work with a REALTOR® 

While unfinished homes may seem like a mystery to some people, acquiring them isn’t too different from purchasing a resale home. However, there are some additional elements to consider. According to both Awgu and Ruiter, working with a REALTOR® is crucial as they’ll not only guide you through a typically complicated process, they’ll also make sure you’re protected on all fronts.

“We put the appropriate clauses in the agreement and held it as conditional until all inspections by required contractors were completed,” says Awgu.

The buyer can get the home inspected for any of the permitted work done-to-date to make sure the structure is safe and it hasn’t failed any inspections.

However, every transaction is different when it comes to conditional offers. In Ruiter’s case, their property was a hot commodity and adding too many conditions could mean they could have lost out on the sale. But they didn’t want to buy the home without an inspection. So, Ruiter and her partner visited the half-finished home with contractors and inspectors who were able to check the house, giving them peace of mind before submitting an offer.

“Our REALTOR® made the process of finding our new home so much easier,” recalls Ruiter. “We were able to make decisions about the property very quickly. She gave us advice on the area, how much to offer, whether or not to put conditions, and more. We received the listing for the property on a Thursday and by Saturday we were the new owners.”

We spoke with Lisa Awgu, a REALTOR® and salesperson with RE/MAX Hallmark Realty Group in Ontario, who has helped clients buy unfinished homes, to get expert insights into the process. We also connected with Tanya Ruiter, who recently purchased an unfinished home in Smiths Falls, Ontario, with her partner. She gave us a glimpse into the overall experience from the buyer’s perspective.

2. Explore your funding options

Cost savings is one of the biggest pros of purchasing an unfinished home. But regardless of whether you’re a first-time home buyer or an experienced real estate owner, the requirements for buying an unfinished home are similar. You’ll still need to have a good credit score, proof of stable income, low debt and the required down payment. But there are some major differences.

“The big difference is unfinished homes don’t qualify for a normal mortgage,” explains Awgu. “The nature of the property means you’ll need a construction loan instead. The lender will usually give you the funds in stages, according to your build stages.”

This funding option gives you the ability to finance the remainder of the build. When the construction ends, the loan becomes a standard mortgage.

For Ruiter, who already owned another home, she was able to secure a home equity line of credit to help pay for the construction (this is similar to when a homeowner takes out an equity loan to upgrade their property or finance renovations). But since Ruiter’s new property sits on 136 acres of rural land, the bank needed to use different criteria to evaluate her eligibility for a loan to complete the construction.

“We were lucky to have equity from our previous property and the support of family,” Ruiter explains. “This is one of the biggest financial decisions you’ll make, so be sure to look for a lender who understands your existing financial situation and construction needs. Dealing with mortgage experts who knew what they were talking about made all the difference. They answered all my questions and made it all seem a little less scary.”

Once you’ve got the loan, you should map out the budget you’ll need for various components of the structural build, design, and related fees to avoid any unwelcome surprises when the project is underway.

3. Secure the permits and plans

Confirm the seller has the original architectural plans, permits, and any other relevant documentation. Make sure these are all transferred to you as the new owner before any work begins….

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