A Quick Guide to Buying Pre-Construction Condos

 

There are generally two reasons to buy a pre-construction condo: 1) Appreciation potential, as an investment, and 2) the pleasure of owning and living in a brand new condo. Condos are an affordable alternative to purchasing a traditional house.

 

Toronto has the strongest condominium market in North America, Deciding which preconstruction condo to buy can be a daunting task, considering the numerous projects constantly coming onto the Toronto Market.

 

Some things to consider:

 

Even if you are buying the condo as an investment, you should like the area, the building, etc. You should see it’s appreciation potential ahead of the pack. Buying in an already hot area can be a risky investment, if condo values stagnate, or as happens sometimes, go down in price.

 

If you are a first time buyer, or if you believe that there could be a downturn or collapse in the real estate market in the near future , buy small, and go with the sure bets. The cheapest condos in the building- think small condos on lower floors-hold well in their value in real estate market downturns, because 1) of the increase in rental interest in them-nobody has money to buy, they all want to rent a small pad; and 2) because they are less likely to be overpriced in the first place.

 

When debating between buying a pre construction or a resale condo keep in mind that present day price comparison is not that straightforward. For example, a pre construction condo finishing in the next 2 years may be costing you $400,000, but in the same area, a similar resale condo in a building constructed 5 years ago might be going for $350,000. Resale condos are cheaper because their future value will not appreciate as much as a pre construction condo. When you want to sell these two condos in 4 years from today, the pre construction condo will only be 2 years old, and the original resale condo will be 7 years old. Obviously, you have to consider risks like developer reliability, etc-more on that in Tarion Warranty later.

 

Parking nowadays is not a necessary thing to buy in condos. Many people in Downtown Toronto do not own cars these days-with good public transportation, and hourly car rentals springing up everywhere. A parking space in downtown Toronto costs about $40,000 when you buy it preconstruction, and investment wise, the appreciation potential is not that great. You are better off buying a larger condo or a condo on a higher floor, for example.

 

Once you are at the builder’s office with your checkbook in hand and are ready to buy your dream condo, remember that everyone who buys a new condo has a 10-day period during which they can cancel the deal and walk away without penalties. This is the law in Ontario. You can use this period to get your agreement of purchase and sale reviewed by a real estate lawyer, and to get a mortgage approval (you can change the mortgage agent later if you find a lower interest rate/a better offer; but the first mortgage approval is necessary from the builder’s requirements point of view, to satisfy your credit-worthiness. The builder will normally require this within 30 days of the Agreement of Purchase and Sale).

 

Closing costs are a concern in buying condos. These can include the following (figures in parentheses are approximate amounts): - Development and educational levies ($2000) [School boards in Ontario charge a levy on each new condo built for new schools required as a result of new developments. The City of Toronto will also charge a levy on each new Toronto Condo unit built for new parks, public works, etc) -Tarion Warranty enrolment fee ($1000. As the regulator of Ontario's new home building industry, Tarion enrolls new homes for warranty coverage, investigates illegal building practices, resolves warranty disputes, and promotes high standards of construction among Ontario's new home builders. Thanks to Tarion, builders can no longer put off scheduled occupancy for months on end. Tarion stipulates fixed rules governing delays, and when the buyer can simply walk away from the deal if those deadlines are not met.)-Utility (water, gas and hydro) and sewer hook-up fees ($1500). Also utility security deposits, if any. -Assignment fees (if you sell before closing) ($3000) -Occupancy fees (period between possession of the unit (occupancy) and title transfer date (final closing) when your mortgage kicks in, and you become the legal owner) -Tree planting charges -Upgrades -Provincial Sales Tax -City of Toronto Transit Pass (The City of Toronto requires builders to include a Metro Toronto Transit Pass for one year to every buyer of a new Toronto Condo unit) -All commitments by the builder which are to be shared by the condo owners.

 

Legal fees

The good news is that we can put a cap on closing costs at the time of signing to buy your condo-caps are normally around 2 to 3% of your purchase price. Once you have an idea what these costs are, you can have your buyer’s agent like me to go back to the builder/developer and put a cap on these costs, allowing you to at plan ahead and budget for them.

 

There is substantial variation, +-20%, in the price of same size condominiums even within the same building, depending on many factors-which floor, unit's orientation etc. For example, a building may have an average 2 Bedroom condo for $400,000; however, the cheapest 2 Bedroom might be $320,000, and the most expensive 2 Bedroom might be $480,000. Because of this, I encourage you to see the model condo and condo building plan at the developer's sales center, decide on the exact condo unit you like, and get a final price quote for that unit. The floor/level the unit is on, and the exposure/view affect this greatly.

 

When buying pre-construction condos, one must consider the cash flow of rent in their investment calculation in addition to the capital appreciation potential. This is why a pre-construction condo which will be ready in 1 year from now is worth more than something which will be ready 4 years from now, in the 3 years between the two condos, the first condo will give you a neat cash flow (rent-expenses-taxes). If you are looking for cash flow in the next few years, it makes sense to buy a condo which is closer to completion, and not in the first opening event of the building.

 

Example (this example explains why condos which are closer to completion cost more than condos which will be completed later): A pre-construction condo ready in 1 year from today (first condo) costs $400,000. Another similar option which will be ready in 4 years costs $370,000 (second condo). Assuming expenses of $400 per month, tax of $400 per month, and a rent of $1800 per month (these are typical numbers in downtown Toronto core today), you will have a neat cash flow of $1000 per month, or $12000 per year for the first condo after it is ready. At the end of the 4th year, when the second condo is ready, you will have $36000 of cash flow accumulated from the first condo-which accounts for the difference in their price today. You must also take into account that after both condos are ready (after the 4th year) the second condo will be slightly more valuable than the first condo, because it will be newer.

 

So, call me today at 416-450-4503 to talk about your next investment, or, fill out the form below to get more info!

 

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