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The Profits And Pitfalls Of Buying Pre-Construction Condos

Apr 6, 2008
Toy Factory Lofts: one of Toronto's few true loft conversions. The developer took the old Irwin Toy Factory building and converted it into work/live condo units. We bought two pre-construction units, over 3 years ago, but not before we did a ton of research.

We put our limited cash resources into this project because we had the opportunity to buy the units at a slight discount before they went on sale to the public , the builder/developer involved in the project has a very strong reputation, the King West Liberty Village area of Toronto was clearly an up and coming area at the time with a very close proximity to the downtown core (a planned community that has converted a huge industrial plot of land into a massive young professionals haven), and the price gave us the strong, positive numbers we needed for us to take on the risk.

The one thing we didn't foresee was having our money tied up for so many years because of the countless construction delays. But, the value has continued to appreciate at higher than average Toronto rates, giving us a very nice return on our 15% down payment. When we finally get occupancy, we will rent out the 2 units for an amount which will cover all of our costs (mortgage payments, taxes, condo fees, insurance, management). Our renters will pay down the mortgage for us, Liberty Village will continue to grow and appreciate (at least we hope and expect it too!), and we'll build equity, for the most part, effortlessly. Nice!

With strong results based on this project, I know I am always on the lookout for a new pre-construction opportunity. If you aren't afraid of a pretty risky scenario, there is an appetizing profit potential in buying pre-construction condo's. Buy today, at today's prices, for a small portion of the down payment (usually 5% to 15%). Then all you have to do is sit back and watch the value go up and up and up, right? Well, not necessarily.
As you can imagine there is a lot more risk in purchasing pre-construction condos in Canada than if you buy a resale property, or at least one that is finished construction. Some things to consider before you walk into the next condo sales office and buy that pre-construction property:

* One of the most important factors to consider: reputation of the builder/developer (not sure how to find out about the reputation check the local homebuilders websites like the Greater Toronto Homebuilders Site, called BILD, or check out the latest JD Power and Associates Builder Survey;

* What will the area be like 1, 2, 3 years from now once it's built;

* How many other units, condos, pre-builds are in the area;

* What will YOUR financial situation be upon completion - will you qualify for a mortgage;

* What is your objective in buying pre-built: rent, assignment, move-in;

* If you intend to rent it out, what are average rents in the area (check rent-o-meter as a quick tool) and how many units are being bought for the same purpose as yours;

* What might interest rates be doing years from now.

There are several large advantages to buying pre-construction condos:

* The power of leverage, you buy today with little down and the building (theoretically) appreciates on your minimal down payment;

* Your financial situation may not be great today, but by the time it's ready for financing, you should be in good shape;

* You get a brand new home!

* Buy at today's prices for future value;

* If you buy early in the sales process, you get a wide selection of floorplans to choose from; and

* You can often make changes to your unit which improve and differentiate it from the others and these changes are usually much less expensive during construction than doing reno's after.

From the above considerations, it's easy to see that there are a lot of
factors at play and most of them require a working crystal ball to answer them
correctly. In addition to the unknown elements you are dealing with, there are
also some things to watch out for, including:

* Buying new means paying the government GST, so even though it's down to 5% now (and you often get a 2-3% rebate), you still have to pay the piper on the New Home -OUCH!;

* Your money could be tied up in this project for more than three years; compare your likely return to that of the other options out there. Your money might be safer and better to sit in a high interest savings account like ING offers;

* Floor models, detailed floorplans, and great marketing can never truly represent the final product you are buying. What view are you REALLY going to have when it's done?;

* Will it be ready in 1 year, 18 months, 2 years? Be ready for delays, it seems that they are NEVER ready when they say they will be;

* If your intention is to assign (sell the contract to another purchaser) your property, not only do you need the builders permission, there is often an assignment fee IN ADDITION TO regular sales agents commissions;

* Further to above, even if you assign your contract, if the assignee is unable to close (get financing), you are still responsible for getting the mortgage;

* Be careful if you plan to rent it out. If you have that tenant lined up with a signed lease for your brand new unit a week after your scheduled "move in" date, you will be responsible for providing them with a place to live if that occupancy date gets pushed out;

* If you intend to rent the unit, you may want to find out how many other "investors" have bought in the complex. Too many units for rent will decrease the rent and saturate the market; and

* Deficiencies, deficiencies, deficiencies! "The toilet, tub, and dishwasher don't work", you say. "Oh, we'll get those fixed soon" says the builder as they work on their next project. Any reputable builder will eventually fix them, but on their own schedule. Their schedule may not make a tenant (nor you) very happy.

Buying pre-construction condos is not for the faint of heart. In our experience, if you do your research, know your objectives, and have some luck, your purchase should turn out strongly for you. Ensure you complete your due diligence by considering all of the items I noted above and luck should be on your side (as "The Donald" was quoted as saying recently "the harder I work the more luck I have").
About the Author
Dave is a commercial mortgage broker and has been investing in real estate with his wife Julie for 8 years. Together they've built a multi-million dollar portfolio of residential properties and share their advice and stories for free at http://www.revnyou.com Click here to sign up for their free monthly newsletter or read some of their pas
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