Condos – Is Buying Pre-Construction from Plans a Good Investment?

January 3, 2020

Clients looking for a condo to buy almost always ask about new construction as they believe it is a good investment. It used to be but there are so many new condos now, unless the location is unique, I feel it will be at least 6 months once the building has been completed and registered before a profit will be realized. Below are my reasons for this statement.

1. When a developer wants to build a new condo tower, he must sell two thirds of the units from plans before he will be given funds for construction and can get permission to break ground. At the end of the 80’s, when the world market collapsed, many investors lost their money when the developers declared bankruptcy. Selling two thirds of the condos from plans guarantees sufficient money to complete the project. Recently, however, some builders have claimed that it has taken too long to acquire approvals and costs have risen too much so they have cancelled projects. So far, deposits have been returned, but some first-time buyers trying to get into the market have suffered as the condo prices have risen to a point where they can no longer afford to buy a Toronto property.

2. To compete with other builders also selling condos from plans, the delivery / completion date is kept artificially short and the maintenance fee kept artificially low so that the required number of units will be bought and construction can start.
3. If you choose to buy a condo from plans, you will have a 10-day cooling off period allowing you to show the contract to your lawyer for approval. You must tell the builder within the 10-day limit if you have changed your mind and want to be released from this purchase and have your full deposit returned.

4. The contract with a builder is many pages long and in there will be clauses that allow him to extend the completion date with no penalty to him. Beware, do not sell your current home or give notice to your landlord until you have a possession date guaranteed from the developer.

5. The contract will also have clauses allowing them to charge an extra fee for utility connections/installation; hydro, sewers, cable, telephone etc. These charges may amount to tens of thousands of dollars in extra charges by the time the building is finally completed. Read the contract carefully and have a lawyer examine it before your 10-day cooling off period ends. Some, not all, builders will allow a cap for these fees. I would suggest $5,000 as a maximum to consider paying, but $10,000 might be the concession to buy the unit.

6. Sometimes the plans are changed during construction and the size and or shape of the finished condo will differ from the original plan provided.

7. Once the building is up, the suites will be finished first before the common areas. As soon as the units are ready for occupancy, you will have to pay an occupancy fee to the developer, essentially rent, whether or not you move into the unit. You cannot yet take out a mortgage on the property as it will not yet be registered with the city’s Property Registry. They can be rented at this time, but if you cannot afford the extra cost on top of your other monthly fees and you have difficulty renting it, you will have to move into the unit and sell or stop paying rent in your current home. Hallways and lobby will still be construction zones and there will be no access to the unfinished common elements; gym, pool, party room etc. The occupancy fee can be leveraged for one or two years before the building is registered and your mortgage can be granted. That is alot of ‘rent’ to pay to the developer.

8. ASSIGNMENTS: Not all developers allow unfinished condos to be sold or assigned to a new investor before registration. Essentially the contract is being sold or assigned in this case. Most do not allow assignment listings to be put on MLS as that provides a public valuation of the units as the builder will still have stock to sell as well. These are called assignment sales and some investors have had a difficult time with the delay in completion.

9. REGISTRATION: Once the building is registered and you have the deed to the condo, it is yours to keep, sell or rent as you choose. However, there will be several investors wanting to sell and/or rent their units at the same time which will make the price a buyer is willing to pay softer. It will be the investor who has lost a job, had a death in the family or been divorced who will be the most anxious to get his/her money out and will lower their asking price to make sure their condo is the one sold. This determines the resale value of all the condos in the building.

10. Once there’s at least 4 – 6 months of sales in a newly registered condo building, it is easier to track the true resale value. But neighbouring buildings also under construction that are registered at or close to the same time as each other will further soften the resale value until most of the available units have been rented or sold.

Call / message me for market proof and to discuss further.
Margaret Winter, Sales Representative
Re/Max Unique, Brokerage, Independently Owned and Operated.