The Risks of Buying Pre-Construction Condos
September 25, 2022
If truth be told, I’m not a proponent of buying pre-construction condos. To me, there is a disconnect between selling a piece of paper and an actual unit; I prefer dealing with something tangible. Though something may look good on paper (and the model units are always beautiful), you may not find the reality lives up to your expectations.
That said, it’s not hard to see the appeal in something brand new. You can choose exactly how you want the space to look, you’re the first person who lives there, and there may be more amenities than what you’ll find in an older building. (Just be realistic about how often you’d actually use those amenities, but that’s a topic for another blog).
The main payoff with buying early on is that, by the time legal title to the property is registered in your name, you’ll have hopefully built up equity…. this is almost a guaranteed result in an UP market but markets change and you have to be comfortable with the risk.
One of the biggest risks when buying pre-construction is that the condo does not get built. A decade ago, this was rare, but the number of projects now being cancelled in Toronto is on the rise. When this happens, the only right a buyer has when a project is cancelled is the return of the deposit. Even with interest, your buying power will have diminished between today the day you put the deposit down because of the rate of inflation.
Keep in mind a developer normally needs to sell 70% of the units before they can get financing and break ground… and just like everything else, building costs are going up. The prices that the developer was charging when the project launched, now may not be enough to cover construction, or result in enough profit to make the project worthwhile.
What’s becoming more a reality in today’s new construction marketplace is that sometimes a developer will go back to the buyers and ask for more money. This can work if most people agree and are able to pay more. For those buyers that can’t, or won’t, pay more, the deal can be cancelled, the deposit returned and the developer can take the unit back and put it on the market for more money.
Even big projects like The One aren’t immune. The construction delays have resulted in multiple lawsuits against Mizrahi Developments, including one from Apple, which as supposed to have been the anchor tenant. It may not get built which would be a real shame because we don’t want to be left with a stump of a building anywhere let alone Yonge and Bloor.
Another big risk is having your financing fall through. If you put down a deposit in 2020, you also had to qualify for the mortgage – at 2020 interest rates. With rates continuing to increase, you may no longer qualify for that mortgage, which means you either have to come up with a bigger deposit or you have to release the unit and pay for whatever penalties there may be due to defaulting on the purchase agreement.
One reason I prefer resale is that you get more space for your dollar. According to Urbanation, the average price per square foot of a new build condo is $1,453 while the average cost per square foot of a re-sale condo is considerably lower. On average in the downtown core, resale condos have been selling in and around the $1000 per square foot range.
It’s also possible to negotiate on price with a resale. Although inventory levels are somewhat low right now, new units always come on the market because sometimes people have to sell. It could be due to a relocation, a divorce, or the loss of a job and they need to sell. You don’t want to take advantage of somebody’s misfortune, but you can oftentimes negotiate a very fair price. Developers won’t negotiate.
Another plus to buying resale is that you have a fixed closing date and an interest rate that is locked in, so there are no surprises when it comes time to secure financing for the purchase.
Here are links to other articles. One, from the CBC, discusses potential fines developers could face. The other, from the Toronto Star, gives the story of what’s happening and the price increases developers are asking for.
If you have any questions about Toronto’s real estate market, please get in touch.