When you read Investing in
Condominiums (following), you will have a good understanding of the upside to purchasing a
presale condo in the early stages of marketing as an Investment and the unique three
dimensional benefits that hedge this investment alternative.
The choice of purchasing an existing condominium or a presale starts with your physical
situation. If you are looking to move in right away then presales are not your best choice
as it takes a couple of years from launch of the sales site to delivery of the building.
I am frequently approached by first time buyers who are anxious to get into the real
estate market but they lack the financial position necessary to purchase something in the
downtown core. Starting prices for quality resale condos (you will find some under the
average prices shown but they will take you to scary areas) are $175,000 for a small one
bedroom. You will be lucky to get a parking space included in this price. Rental parking
is usually available in most developments with monthly rates running from about $150 to
$250 depending on the location.
When you are buying into a presale development you are buying at today dollars a product
that will be valued at future dollars (based on the then market). Today, for example, you
can purchase a small (553 square foot) one bedroom condo unit in The Hudson (King St. and
Spadina to be delivered in 2006) for $164,900. This price will physically not buy you
anything in the city (core) today! You are required to put 5% down with incremental
installments bridging over the next 18 months to carry you to 20% down.
This is where the real money in condominiums is made. I have recently been purchasing
small condo units (under 700 square feet) in Cityplace at Front St. and Peter Street at
the Skydome in the $200,000 range. These units are brand new having never been lived in
and presold about two and a half years ago in the $145,000 range, delivering those
purchasers a tidy return on their investment in excess of 200%! (they bought at $145,000
with 15% down which equals approximately $20,000 over two years and netted a $60,000
profit which equals almost 300%)! At no other time will this real estate see this type of
appreciation so, buying smart and early does pay.
Another upside of buying presale is that you get to select your own colour schemes from
builder samples and move into a brand new, never lived in space. Most middle market
developments deliver “Standard” appointments with the ability to
“Upgrade” (eg. limestone from ceramics, hardwood from carpet, etc.) providing
you are prepared to pay the additional. Alternatively, some developers today are offering
fully upgraded suites in their standard offer. A little research can go a long way and
when you become my client you automatically get the benefit of the most thorough and
comprehensive research available on the market today FREE.
There are some downsides to purchasing presale in that you don’t get to see what it
is you are getting and thus, the ability to read floorplans (a unique language all by
itself) comes into play. Again, having me represent you brings you this skill as I pretty
well wrote the book on this language starting in the business back in the 1980’s.
There is a heightened dependency on having a good lawyer when purchasing presale as the
documents that you are required to sign are prepared by the developer’s lawyer and
thus are skewed totally to the benefit of the developer. The developers will dump
absolutely every cost, tariff and/or levy that may crop up along the way unless your
lawyer “caps” these fees. Such ridiculous charges as having the purchaser pay
the developer’s lawyer fees are not uncommon! These additional costs represent a
major concern when purchasing an “Assignment” as you are becoming responsible
for the initial purchaser’s handling of the legal aspects of the purchase and many
times these initial purchasers are speculators who don’t use a lawyer resulting in
these open-ended costs being dumped onto you. |
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The other key
element of concern when purchasing a presale is the “Occupancy Period” and
“Occupancy Fees”. Condominiums uniquely have two “Closings”, the first
is more categorically correct being called the “Interim Closing” which really
means only that the owner can occupy the unit. The developer, when applying to the city to
build the development, was required to submit a site plan which the municipality
“Registered” forming the “Registered Site Plan”. Once the developer
has substantially completed the development sufficient to be granted an “Occupancy
Permit” from the municipality this Interim Closing takes place, frequently calling an
additional advance of deposit carrying the purchaser to their conventional 25% mortgage
arrangement. High ratio purchasers are usually required to advance these deposits and when
the building gains its final closing, their banks/mortgage company reimburses them for the
deposits over their 5% or 10% “High Ratio Mortgage”.
During the time that it takes the municipality and developer to survey the building and
confirm that all aspects of the plan were adhered to and meet all requirements (a time
period of four to six months historically) purchasers are required to pay an Occupancy Fee
that basically is designed to offset the interest on the overall mortgage on the property.
This Occupancy Fee does not accrue against the principal of the purchaser’s mortgage
and consists of the interest portion against the principal amount of the unit plus the
monthly maintenance fee plus taxes. Prior to purchasing from a developer it is wise to
have your agent attest to the reputation of the developer with respect to their track
record of registering their developments.
With a resale product you get the benefit of seeing exactly what you are buying. What you
see is what you get. Many times in presales what you get isn’t always what you
understood you were getting and delivery delays, less than great workmanship, and a host
of other inconveniences somewhat take the shine off of the experience. Again, that is why
you will want to use a thoroughly familiar agent (some people get cousin Jenny who just
got a license and could use the income but the perils are so great that you would be
better advised to just give her some money and leave the purchasing of your quarter a
million dollar or better condo up to an experienced professional).
A similar initial strategy exists for both. Take your map of the city and draw circles as
to where you work, where you play, where you frequently visit, where you entertain (others
and yourself), where you go for recreation and any other significant activity that you
feel important. Draw a circle around each of these locations about the size of the top of
a drinking glass. Once you’ve drawn a circle for each activity see how many of these
circle either overlap or come close to overlapping. The assumption being that the overlap
shows primary areas to consider finding your condo in.
The new or resale question is reflected mostly by your physical situation. Once you know
your occupancy schedule you will be able to identify what category of property you are
looking for. Buying for an immediate move in does not necessarily leave you only with old
buildings. Assignments are quite common place today where you purchase the original
owner’s position with respect to the purchase of a condo unit in a presale
development that is not almost ready for occupancy.
You will find that the majority of developments will have an investment pool of
approximately 25% (or more) speculators who buy in the initial launch phase of a presale
and then sell themselves out of the development before they have to close the transaction.
You will be paying them a profit for having purchased the unit a couple years back but
what you get is a brand new, never lived in space at today's market value (the original
buyer purchased it on 2 years ago market value = profit).
Assignments require more attention than do conventional sales. Be sure your agent is
familiar with assignments if you want to move into something new right away. |
