Here’s a new way of looking at pre-construction condominiums, which continue to be shown in a negative light.
The best assets are those that are liquid, yet a pre-construction condo purchase is one of the most immovable assets there are…
The idea for this post was actually borne out of the discussion that took place in last week’s Friday Rant.
I was on a panel at a seminar where, among other things, we discussed pre-construction condos.
I’m pleased, in the self-satisfactory, sly-grin kind of way, to say that all of the panel members agreed that buying pre-construction condos in Toronto no longer makes any sense, however we did find one person in the crowd to argue with, and argue – we DID!
I kept hearing the word “Investment” thrown around, and that really bothered me.
I argued that purchasing a pre-construction condo was just about the furthest thing from an “investment,” and a few people didn’t quite catch on.
Let me explain…
An investment, by definition, is something or somewhere that you direct money or capital in order to generate a financial return.
In most cases, but not all, this investment is likely:
There are lifetime investments in which you never actually sell or dissolve the investment, for example, a security or insurance that pays out a regular income stream or dividend. But many, if not most investments are eventually sold.
That takes us to the notion of liquidity.
“Liquidity” is defined as “the ability or ease with which assets can be converted to cash.”
Are you liquid?
Are you flush with cash and do you have investments? Or do you lease your car and condo and live off your credit cards?
Somebody who is “liquid” is somebody who has cash and little to no debt.
An asset that is liquid, however, is one that is easily converted to cash.
Cash is the most liquid investment there is. It’s CASH!
I suppose bonds are very liquid, since they can be bought and sold with ease.
Stocks are liquid too, as they can be sold with the click of a computer button.
Commodities are liquid too. Once upon a time, if you owned 20,000 bushels of corn, rods of steel, or bricks of gold, they wouldn’t be liquid at all, since you’d have to store them, sell them, transport them, and finally collect your cash back. But technology has changed all that, and almost any investment you can make on Etrade, TD Waterhouse, or the like, could be liquidated very easily.
Rare coins? Stamps? Are these liquid? The market for these items is specialized, and it could take a while to sell them, but they’re not entirely illiquid.
What about your car? Sure, there are forums like Auto-Trader on which to liquidate that.
Your grandfather’s Rolex? No problem – you can pawn that in about five minutes in any one of the fine establishments on Church Street in between Shuter and Queen.
What about your house?
Well, your house is a huge asset – both in terms of its size and its value. It can’t be moved from place to place, and the market for this asset is highly specialized too. But at the end of the day, you could have it sold in a day if you really wanted to, and you could have it turned into cash in weeks.
So this brings me to the long-winded point I’m trying to make, which if, by now, is not completely clear, then I’m not doing a very good job…
Pre-construction condos are illiquid assets.
Are they not?
Consider what you’re buying for a moment. Try and picture it in your mind. Do you see it?
You’re buying NOTHING!
You’re buying the idea of a condo eventually being built on a parking lot or perhaps where the sales centre now stands.
Don’t tell me that you’re buying a future condo or some sort of “promissory note,” because you’re not. We all know that condominium projects do fall-through, and there is never a 100% guarantee that a condo is actually going to be built.
As a pre-construction condo buyer, you’re buying a massive ball of risk and uncertainty, and the best part is: you might not be able to sell it.
If you want to sell your car – you can do that today!
If you want to sell your stocks – you can do that in ten seconds!
But when you “buy” a pre-construction condo, and I put “buy” in quotations because you’ve really just given a $25,000 deposit and agreed to wait like a moron for 5 years of a 2 year project, you don’t really have anything to sell! Your asset is illiquid!
Let’s say you bought a pre-construction condo, er, put down a deposit on January 1st, 2012, and it’s scheduled to begin construction in November. What if by November, you want to sell it? Well, what have you got to sell? You have a contract, that’s all. You have a contract in which you have few rights, lots of uncertainty, and of course the obligation to pay $xxx on xx-date, or be in breach of contract.
How tough is it going to be to sell your contract when there are sales centres all over the city offering new contracts? Oh – pretty tough!
Where do you sell your contract? Well, you can probably list it on MLS, but if construction hasn’t begun, who is going to buy your “investment?”
But wait – there’s more!
Here is the best part – the part I loved telling the crowd from a few weeks ago where that one chicken-clucking-moron was hopping up-and-down in his seat at the thought of being “the first in line” at the next V-V-V-VIP launch party. Ready….
The developer might not let you assign your contract, which means that you might not be able to sell your ‘investment’ until after the condo has closed and the building has been registered.
Right! We almost forgot that part!
So…….we were talking about liquidity, right?
If you have an investment that you are NOT PERMITTED to sell, how the hell is this really considered an investment?
Ladies and gentlemen, pre-construction condos are illiquid assets, which in my mind, aren’t really an investment vehicle. If you can’t sell something, aren’t you taking on a massive, unimaginable risk?
If you own an existing, resale condominium, and the world economy imploded tomorrow – you can sell your condo and close in a few days if need be.
But if you own a piece of paper that details how your $25,000 deposit was accepted by the developer on xx-date and how you owe them $xxxx more money in the future otherwise you forfeit your deposit, how exactly are you going to sell that in a time crunch? And what if the developer won’t let you?
Yep – you’re stuck with it!
Great investment there, genius!
Remember the discussion we had last summer about pre-construction condos versus options trading? Remember the guest-post that one of my readers submitted? It was fantastic! And it showed that options traders would be utterly confused by the idea of pre-construction condo “investing,” since you’re making a bet on the future, but you can’t get out of the bet, and the cost of your bet is astronomical.
Imagine if an options trader was forced to follow through on every option? It would defeat the very purpose of the “option” in the first place.
Any true “investment” should have the ability to be bought and sold. Period. It’s that simple.
If you can’t sell your investment, then it’s not an investment – it’s an obligation, and a liability.
Is that what pre-construction condos in Toronto have come to? They’re now simply liabilities?
Well, don’t look now, but a new real estate brokerage in Toronto specializes ONLY in pre-construction condos, whereby their value is “getting you to the front of the line.”
Good God. What is the world coming to.
It’s like morons lining up to jump off a cliff, and somebody saying, “I can get you to the front faster.”
In the words of Jerry Seinfeld: “Good luck, with aaaaaaaaalllll THAT!”