Pre-Construction vs. Resale. The Good, the Bad and the Ugly (Part 1) - CondoSavvy

One of the first questions to consider when investing in Toronto’s fast paced condo market is Pre-Construction or Resale? There are definite pros and cons to each, so the best choice is really more about your personal situation and goals..

As experts, it’s our job to help guide you through your real estate purchase and equip you with the tools and knowledge you’ll need to make informed (and dare we say “savvy”) decisions. In this blog series, we get real about the good, the bad and the ugly for both pre-construction and resale condos. 

Since there’s a lot of ground to cover, we’ve split it up into two posts. This week, we focus on pre-construction. 

PRE-CONSTRUCTION


Pros:



1. The next best thing to a custom home!

When you buy a pre-con unit from a builder, you have a lot of options. At the time of purchase, you get to select your floorplan, exposure and floor. Later you will get to sit down with a designer at builder’s decor centre and go over every last detail of your new condo to ensure that the final product is just how you like it. In a few years, you’ll have the keys to a brand new property that has been completely customized to your tastes. 

When it comes to resale, you only get to choose from what’s available on the market. You might absolutely love a unit in a building, but wish it was on a higher floor, facing a different direction or had subway tile in the bathroom.  Unfortunately, if a unit like that isn’t available, you’ll have to settle for a lower floor and do the renovations yourself.

2. Lock in today’s pricing

When you purchase a pre-construction condo, you’re locking in a price today on the assumption that the property will be worth more when completed. Five years ago, condos were selling around $600/sqft in the downtown core, and now are re-selling at close to $1000/sqft. If you purchased a unit then, you’ve already gained $400/sqft (or 67%!) compared to someone who is purchasing today.

Interestingly, resale buyers are often curious about the seller’s original purchase price. Although that price has no bearing on the current market, there are inevitably moans and groans from the buyer who can’t believe what a steal the property was. The reality, however, is that when that seller initially purchased from the builder several years back, they would have likely have bought at the “top” of that market. Contrary to popular belief, pre-con is generally sold at full or even slightly above current resale values! They may have had to take out a line of credit to make the deposit payments and there were likely more than a couple of nervous conversations and late nights. But five years later, they seem very lucky indeed!

3. Low maintenance investment

Pre-construction investment is actually pretty easy with the right guidance. You sign your contract, pay your deposits, pick your finishes and then basically forget about it until occupancy. No tenant drama. No maintenance fees. No wear and tear on the unit. No repairs. A few years later, you walk into your the hottest condo on the block with a modern new vibe, the latest designer finishes and, most importantly,  three to five years of appreciation equity.

4. Leverage, beautiful leverage!

Unlike many other condo markets where you are required to pay 50-100% up front when you buy a new condo (!!!), Ontario developers typically only require 15-20% deposit of the total price to lock in your purchase. That money is generally collected in 5% installments over the first year or two and, assuming you bought wisely, your condo will hopefully be worth quite a bit more than what you paid for. So the idea is, you get the benefit of full appreciation based on putting up a 15-20% stake when the project started.

To illustrate let’s use an example. Emily purchases a condo for $500K with 20% ($100K) deposit. When the condo is completed four years later, let’s assume the market value of her unit is now $700K which represents is a 40% increase or about 10% a year, which is not too shabby!

But this is where the leverage comes in. Remember, Emily only put down 20% of the initial purchase price as a deposit. So, looking at the gross return on her actual investment (ROI), her $100K deposit has actually grown by 200% which is 50% a year before she even paid the balance! Let’s see you do that at the bank!

5. More time to save

Another huge benefit of buying pre-construction is the staggered deposit structure. Instead of having to come up with a full downpayment up front, you are usually looking at smaller payments of 5% each over the course of a year or two, sometimes even longer! This gives you more time to save, gives you the chance to invest remaining capital elsewhere, making it an ideal option for people who are not ready to move yet but don’t want the market to get away from them in the meantime, such as students or soon-to-be empty nesters.

6. New home warranty

Most new builds in Ontario come with a standard Tarion Warranty (which you pay for, mind you) that ensures the developer can’t just ride off into the sunset once title has been handed over. The warranty applies to your unit as well as common elements and covers various components for one to seven years from the time of occupancy. The province is in the process of changing the program from Tarion to a new governing body but new homes will continue to be protected in a similar fashion.


Cons:



1. It’s a waiting game

The general rule of thumb in pre-con is the earlier in the project you buy, the more money yo stand to make. At CondoSavvy, thanks to longstanding relationships we have built within the industry, we pride ourselves in getting our clients into Toronto’s top condo launches Day One, long before they are released to the public or the average Realtor. This is when builders have the lowest prices, the best incentives and have the most inventory to choose from. 

That said, the flip side of being the first to buy is that you now have the longest wait for the end product, generally three to five years and in some cases even longer. Even the developer doesn’t actually get paid until closing as all the deposit money is held in trust so that they generally want the condo to close as much as you do, but delays can (and do!) happen.

In other words, if you’re looking to move into your condo in the immediate future, pre-construction is probably not the best option for you.

2. Buying Sight Unseen – Caveat Emptor!

In a pre-construction purchase, you will generally have access to  beautiful artist renderings of the building, floor plans and site maps, a scale model of the building, samples of the condo finishes and (if you’re very lucky) a model suite  – but you will not see the final product until your PDI (Pre-Delivery Inspection) years later. Although builders do their very best to depict their vision, at the end of the day you will be leaving the sales office with a sales brochure, a two-dimensional floorplan and a written description of the finishes all tucked into a very long contract.

It takes imagination and trust to do this, and it’s important that your Realtor is knowledgeable in pre-construction agreements as well as on the developer’s reputation and past projects to ensure you are making a wise choice. But if you know you are someone who needs to physically see a space to understand it, especially as an end user, this might be a bit too much of a leap.

3. Extra closing costs.

In addition to the typical closing costs such as legal fees and land transfer taxes you expect in a resale condo purchase, pre-construction properties are subject to a myriad of additional charges such as government levies, HST, TARION enrolment, occupancy fees, meter installations and many other possible adjustments that can add up quickly.

It is imperative that you make sure these extra costs are itemized and capped WITHIN YOUR 10 DAYS!! A competent pre-construction specialist will always make sure these fees are capped and/or minimized as well as to make sure you have a few extra protective amendments added to your agreement but even so, closing preconstruction is expensive and it is advised to budget an extra 5% to ensure there are no nasty surprises at final closing. 

4. Lack of liquidity. 

By Ontario law, you have a 10-day rescission or “cooling off” period when you purchase a condo from the builder. During this time, it is important to have your agreement reviewed by an experienced real estate lawyer and to ensure you can get financing for the property once completed (a standard requirement for builders).

If something doesn’t work out within this window, you can legally cancel the agreement without penalty, and with no questions asked. After this time period, however, you are pretty much in it for the long haul.

The Right to Assign (assignment) clause allows you to sell your interest in the property prior to financial closing and any broker worth their salt will ensure you have one in your agreement. However, tax implications and developer limitations tend to make this process cumbersome and financially unattractive, so it’s better used as a fail-safe provision rather than an exit strategy.

5. Growing Pains

Initial occupancy in a brand new condo can be rough. Hallways and common spaces may be unfinished and elevators are extra slow because of ongoing trade activity and constant move-in traffic. For the first few weeks or even months, you’ll need to be patient as the building works out its kinks and finds its stride.

 



To be continued…


Check back next week for Part Two where we dive into the world of resale and analyze the benefits and downfalls of this property type.

If you have questions about this post or want to learn more about buying a pre-con home, leave a note in the comments section below or email milan@condosavvy.ca

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