INVESTORS,
WHAT YOU HAVE TO KNOW WHEN YOU ARE BUYING INTO AN INVESTMENT CONDO
December 1st, 2005
With the recent successful launch of Maple Leaf Square (November 2005) reflected by sales
that can only be described as “astounding” (over 60% sold during the Priority
Broker’s Event - a private pre-launch event where myself and a small group of
prominent local Realtors are invited in to select units before they are offered to the
public), it may surprise many of you to learn that using a Realtor is the ONLY way to buy
investment condos.
Frankly, if you are waiting for “Grand Openings” at sales sites and attending
them, you are at a disadvantage as an investor/buyer. In this article I’ll share with
you some insider perspective that can materially affect your investment portfolio.
The best analogy reflecting how condos are sold is best articulated as a ladder with five
rungs. Normally the ladder has more than five but the objective here is to give you a
picture that enables you to grasp how condo pricing works.
Our five rung ladder in this example represents a five tiered pricing structure for our
development. As a developer we have gone to our bean counters and undertaken a thorough
analysis of our costs (land acquisition, legal, marketing, sales, construction, design,
etc. - the list is lengthy) and our ideal profit margin to come up with a “mean”
pricing.
For the sake of this example lets say that our formula reflects a $400 per square foot
selling price to meet our goals. Now developers are dependent upon mortgage lenders to
finance the development. Money advanced by purchasers goes into “trust” with the
Developer’s lawyers and are protected under the Tarion Warranty Program in Ontario
(used to be called Ontario New Home Warranty Program).
To get his/her financing, the developer has to convince his/her bank that there is a great
demand for this type of product in this location, etc. thus they frequently
“discount” their per square foot rate. In our scenario let’s assume they
drop to $380 ($20/sq.ft. off of our “mean“ price) representing the first rung of
our ladder.
Developers usually have a cluster of investors that move along with them and they offer
the initial phase of sales to these “insiders” and to the public at large
through a network of Priority Realtors to generate immediate sales (and demand) to take to
their bank to insure financing. Immediately upon getting enough sales to satisfy the bank,
you can expect price increases.
The second rung represents $390 ($10 off of our “mean” price) and once the
developer has convinced the bank of the “great demand for this product” the
developer steps up a rung on the ladder, moving closer to the “mean” price point
initially set out for the development. Don’t worry, the developer will make up these
discounts at the two rungs above the middle rung (“mean” price).
Again, as soon as sales projections are met, the developer will again increase his/her
pricing grid to reflect the true “mean” price thereby stabilizing the revenue
stream while keeping prices highly competitive. |
|
|
The
second phase of selling is frequently through the general Realtor community (who is not
told about the first party held for the Priority Realtors) who represent one of the top
“buyer pools” for investment condos. This second event consists of Realtors
invited through the real estate board (19,000+ on Toronto Real Estate Board) and their
clients) so you can see that buying is already at the second step on our ladder and
selection of suites will be materially compromised by the time the public get in to buy.
If you haven’t read my article “Who Buys
The Dog Suites” it may be a good time to have a read now.
By the time the consumer gets to visit the sales site on their own, there have been two
such private events with massive buying. At Maple Leaf Square these two
events sold out all of the small units! I was there yesterday trying to buy two different
one bedroom suites with clients and they were sold out and we had to buy studios with a
provision to move to any one bedroom units that come back (buyers in Ontario get a 10 Day
“Rescission Period” or cooling off period where they can return any suite that
they have bought for any/no reason without cost or penalty).
The next two rungs on our ladder represent “Payback” for the developer. On these
two rungs the developer will recoup all of the discounts extended (first two rungs) to get
the project going PLUS supplemental Profit! Do you see why it is important to know of
which rung you are looking at buying into. Don’t for a minute think that you can find
out all of this on your own! You can’t.
That’s why you sign up with me
because I’m in the market seven days a week fifty two weeks of the year. The only way
you can conceivably know where this unique “niche market” in real estate is
going is to know where it’s been and where it is today!
Not all Realtors are alike. I specialize in condos and lofts and townhouses and am
frequently asked about commercial property purchases and as lucrative and attractive this
area of real estate is, I would not represent clients myself in this area as specialized
expertise is always required. I know condos and refer clients to a couple commercial
specialists that bring the same level of expertise within that discipline as I do within
the condo world. A real estate license is not what you are looking for in a Realtor.
Knowledge and expertise is why so many buyers turn to me. I’d love to say it is
because I’m such an interesting fellow but in reality they want and expect only my
expertise or they could do it themselves.
Maple Leaf Square will be launching the second tower next year and once again, I’ll
come out of the woodwork and buy a bunch of suites (I represented 15 buyers in tower one
but probably won’t be back for more because prices will have increased and I only get
my clients in on ground floor pricing).
So if you are contemplating buying a condo in Toronto for investment purposes be sure to Register with me today so I can get
you into the next Priority Broker’s Event (Glas is coming up next week - see “Glas is Breaking on Charlotte Street”).
Until next time, I’m Charles Hanes |
