A few weeks ago, I mentioned that I sold one of my investment properties at Rezen Condominiums.
I promised to provide full disclosure of my experience, so this week I’ll be detailing the entire process from start to finish in what will be a four-part series of posts.
Let’s start from the very beginning…
“Just sit right back and you’ll hear a tale, a tale of a….”
This could take a while…
Before I get started, I’d like to make something clear.
I’m detailing this story for several reasons, but notably to share my investment philosophies via en entire tale of my investment from start to finish, during which I will disclose personal financial information.
A week ago, a member of my family told me that my blog posts often have a “detectable note of arrogance to them.” Don’t worry – I’m not offended! 🙂
I’ve always maintained that in order for this blog to serve any purpose, my posts must be highly opinionated, often controversial to spark some commentary among my readers, and I must never hold back – even if it makes me look insensitive, arrogant, brash, immature, unreasonable, or often at times – dead wrong.
I can handle it if you can.
I’m not writing this post to brag about the money I’ve made.
I’m doing so because I think it will answer hundreds of questions people might have about what is involved in pre-construction condominiums, investment properties, or even the purchase and sale of a condominium at the basic level.
I welcome your questions and commentary.
Despite the fact that I live at 230 King Street East, I wasn’t really aware of Rezen Condominium until it was well underway. The developer didn’t do a very good job of marketing and promoting the building in the pre-construction phase, and it slipped completely below the radar.
In fact, it wasn’t until I actually saw the site when it occurred to me, “They’re building a condo on Frederick Street!”
About a year later, a client of mine who was looking for a somewhat non-existent price point in the Toronto real estate market ($225,000 with a parking space…) asked me about a listing that she had found online. It corresponded to an old listing for a pre-construction condo at Rezen when the project was first launched.
I went down to visit the sales centre with a colleague, and I was rather impressed with what I saw.
The building was only 138 units and fourteen stories, and the standard finishes and features were excellent considering the price points. There were plans for a fully-equipped exercise room which was more than anything I had ever seen for a building this small, and an adjacent yoga studio.
In addition, the artist’s renderings showed a large outdoor terrace on the ground level, a rooftop terrace with cabana beds and BBQ pits, and a home theatre and conference room on the main floor.
I refer to this in past tense because many of these features were never included in the finished product. But don’t get concerned – I’d be surprised to see even ONE builder in the city that has ever delivered an identical product to what was promised.
Unfortunately, there were no suitable units for my clients (price points were too high, units were too small) but on a personal level, I was rather enthralled with one of the handful of unsold units that the developer still had.
The unit was a small 1-bedroom of 549 square feet for $216,900. At $395 per square foot, I considered the price to be very fair considering the neighborhood (St. Lawrence Market), the building itself (small, boutique building with great amenities), and the prices of the surrounding pre-construction projects (upwards of $500/sqft).
But most importantly, this development had already started construction. They had already built up to the fourteenth level, and were starting the brick and glass on the exterior of the building. It looked like they would actually be ready on time, and scheduled possession was for August 28th, 2008.
I considered the notion of buying “pre-construction” for something that was essentially 6-7 months away from being completed. This eliminated most of the risks associated with pre-construction, ie. delays, delays, and more delays!
I left the sales centre that day in early February of 2008, and went home to mull over this project.
I had put down a deposit in late 2005 on the ill-fated West Side Lofts, which was scheduled to be completed in August 2008, but had yet to actually begin construction, so I was looking for something to occupy my time and wallet until this project actually got underway.
I liked the Rezen project because it was what I considered to be “short term” in comparison to West Side Lofts. In an bout of cruel irony, I could probably purchase the unit at Rezen, take occupancy, find a tenant and wait for the property to be registered, close the deal, and sell the property all before the unit at West Side Lofts was ever even ready!
I began to strongly consider purchasing this $216,900 unit at Rezen.
My thought process was this:
1) What can I rent this unit for?
2) What do I think I could sell this unit for, today?
3) What do I think I can sell this unit for one year after the building is registered?
1) I figured that the 549 square foot unit with no parking was probably “worth” about $1300, but I knew that I could find somebody to pay $1,450. That extra $150 per month doesn’t seem like much, but that makes my return on investment worthwhile.
2) In February of 2008, the market was very strong. A small unit like this would probably be listed around $239,900, and depending on the level of interest, it might fetch over-asking. We know now, in October of 2009, that you can’t get a 1-bedroom for $239,900, but I swear to you that in February of 2008, units were still being listed at $229,000 in some buildings and I figured that my unit would be “worth” $239,900.
3) I don’t have a crystal ball. I had no idea what the unit would be worth one year after the building would be registered. Probably somewhere between $215,000 if the market was in the tank, or $275,000 if the market was insanely hot.
It’s tough to make a purchase decision when you have a thought process like #3, but those are the inherent risks in real estate.
I calculated that this project would be cash-flow positive right from the onset.
It would be cash flow positive when I took possession of the unit, even with the outrageous 6.9% interest rate that the developer would be charging me on the balance owing in the form of an “occupancy fee.”
And when the building was registered and I was able to put a mortgage on the unit, my cash flow would increase! Not only would I be paying somewhere in the neighborhood of 4.5% interest, but part of my monthly mortgage payment would come back to me in the form of principal.
After a few days of weighing the pros and cons, I was sold.
The project was cash flow positive.
The location was prime.
The building would soon become a gem in the St. Lawrence Market neighborhood.
And of course, the price was right.
I had the $21,690 available for the deposit, and that’s all it would cost me to get my foot in the door for a building that was almost finished anyways.
Putting down 10% on this condo at Rezen would amount to a mere $21,690, payable in increments up to 120 days down the road. This meant that I wouldn’t be paid up until early May of 2008, and possession was scheduled for end of August!
But of course, the sales people were asking for 20%.
It makes no sense to put down any more than 10% in pre-construction, and if anybody tells you differently, they’re lying!
I’d be willing to spend $30,000 to tie up a $300,000 property, ie. 10%. If I make $300 per month of positive cash flow, then I’m making a 12% return on the year. But if I put down $60,000, ie. 20%, then my return shrinks to 6%.
By the same token, if I sell the property for $350,000 after one year and make $50K, then my return is 167% when I put down 10%, or 83% when I put down 20%.
The sales people at Rezen were not very pleased with me, since I had initially agreed to 15% after bargaining down from 20%, but after some brief arguments, the involvement of the manager, and a couple of calls to the developer, they agreed to allow me to put down 10% TOTAL.
I wrote them a check for $5,000 on the spot, and sailed through my 10-day rescission period without having a lawyer check through the disclosure statements – something that would cost me dearly in the end, but I’ll come back to that.
I gave them $5,845 in a month, and then another $10,845 in mid-May of 2008.
The project was moving along according to schedule, and I got a call in early August from the sales centre telling me that my tentative closing date would be August 28, 2008.
They booked my “Pre-Delivery Inspection” for August 14th, and I began to look for a tenant. But a few days later, the sales people called me back and told me that they would have to move back the PDI until August 27th – the very day before I was supposed to take possession!
I refused, and told them the idea of having one day to inspect the property, list the deficiencies, AND get them repaired was ludicrous.
They told me I didn’t have a choice.
And thus began the trend of headaches that came with taking possession of a pre-construction condominium….
(TO BE CONTINUED)