I’ve heard people refer to a University degree as “an eighty-thousand-dollar piece of paper.”

I’d like to think the experience I gained at McMaster could represent more than just that…

But when it comes to buying a condominium during the months leading up to registration, the buyer IS essentially purchasing a $300,000 piece of paper.  Let’s examine the pros and cons…

For those that are unfamiliar with the difference between “occupancy” and “possession” of a condo, perhaps a short refresher course is needed.

When you purchase a condo in pre-construction, you can’t put a mortgage on the property or transfer title to the property until that building is registered as a corporation.  All buildings are eventually registered as Metro Toronto Condominium Corporation XXX, with the x’s in this example representing an assigned number referring to that particular building.

But the developer doesn’t wait until the building is registered as a corporation to hand over the keys to the buyer and start collecting maintenance fees!

In fact, there is usually a 5-6 month lag between when the buyer receives the keys and when the building is registered.

We call this period the “occupancy phase.”

During this time, the buyer doesn’t legally own the condominium unit.  The buyer is essentially a guest, paying rent in the form of an “occupancy fee” which is equal to the the maintenance fees, would-be property taxes, and would-be mortgage on the balance owed on the property (at much higher interest rates!).

For the investors that purchased in pre-construction to make money by flipping the unit, time is of the essence and ultimately they’d like to sell the unit as soon as possible.

But since they don’t legally own the unit, despite having occupancy, they can’t legally sell the unit either.

This is where “selling your $300,000 piece of paper” comes into play.

The buyer can list the property for sale and sell his Agreement of Purchase & Sale which had been negotiated between buyer and developer.  The sale of the existing agreement would need to be approved by the developer, but ultimately the developer could care less who ends up with the unit so long as he gets paid.

So what does this mean for the buyer?

What need he or she consider when contemplating purchasing a condo that has yet to be registered?

I encountered this situation last weekend with my client, Janie.

Janie and I had been looking at Rezen on Frederick Street as a very real option for her first condo, and we found a unit we liked with a great floorplan, upgraded finishes, and of course it doesn’t hurt that the building itself is gorgeous.

But the building won’t be registered until late February, and it raises a few issues.

The unit we were looking at is priced at $335,000, and has been dropped in price from $358,990.  It’s a great unit, but I think we can do better on the price.

Consider first of all that since the unit is vacant (and the owner is paying $2000/month in occupancy fees for nothing!), it is owned by an investor.  The investor wants to get every single penny out of the sale of the condo, and an argument could be made that he is being very unreasonable on the price.  Afterall, the unit has been listed for sale since initial occupancy was given back in October.

Two major issues come to my mind when looking at the potential purchase of this unit:

1) Land Transfer Tax.  Whoever is left holding the hot potato is going to be responsible for paying the Provincial and City governments their hard-earned tax dollars.  If the owner/investor hasn’t sold the property (assigned the Agreement of Purchase & Sale) by the time the building is registered, he is responsible for paying the taxes.  So selling the Agreement of Purchase & Sale would save him thousands of dollars in closing costs.  However, this also means that Janie would be responsible for this cost, and she would have to include this figure with her overall purchase price. 

Let’s assume that the owner/investor initially paid $280,000 for this condominium.  He would pay the LTT on that figure, and not on the sale price, ie. $335,000.  And even if Janie purchased the condo for $335,000, she wouldn’t pay LTT on that; she would own the Agreement of Purchase & Sale from the builder at $280,000, and pay tax on that figure accordingly.

Also consider that if Janie is a first-time buyer, and the owner/investor is not, then Janie would not have to pay LTT to the City of Toronto whereas the owner/investor would.  Perhaps this situation could be taken advantage of?  Perhaps Janie and the owner/investor could work together to save a few thousand dollars?

2) Competition.  In most cases, the developer charges a fee (say $4,000) for the right to sell the Agreement of Purchase & Sale before registration of the condominium.  For this reason, many owner/investors wait until registration to put their condos on the market.  There are other reasons as well (such as the building being 100% completed, whereas common areas are never finished when initial occupancy is given), and thus a registration of the building will bring a whole flood of units onto the market.

I heard through the grapevine that Verveat 120 Homewood Avenue (Wellesley/Sherbourne) saw 58 units go up for sale the day after the building was registered.  Think about that: fifty-eight units!  That’s insane!

So think about what this does for the competitive balance between buyers and sellers!  I told Janie that while this unit priced at $335,000 could perhaps be purchased right now for $325,000, she’ll have to pay $3,350 in Ontario Land Transfer Tax (she is exempt from Toronto LTT as a first time buyer) which will make the true total $328,350.

However, if she waits until the building is registered, we might see 10-15 units listed for sale and all of a sudden the owner/investor of that unit listed at $335,000 has a ton of competition.  The increase in supply might push the price down even further, and perhaps Janie could get this 776 square foot unit for $315,000.  And, she won’t have to pay a penny of Land Transfer Tax.

That is the plan for now.

Tom Petty said, “The waiting is the hardest part.”

How true is that when you’re waiting to buy your first home?

I think it’s in Janie’s best interest to wait until the building is registered not only to avoid paying the closing costs and Land Transfer Tax that the original owner/investor should pay, but also because an increase in supply will undoubtedly push prices down.  And in the process, she may find a new listing that she much prefers to the unit we’re contemplating at the moment, priced at $335,000.

So having said, “Let’s examine the pros and cons,” do I actually see any pros to buying before registration?

No, not really.

Unless you find an owner/investor who has serious tax or credit problems and to avoid registering another property in his name will let the condo go for substantially less than fair market value, I don’t know of any advantages to buying before final registration of the building.

I for one, won’t be listing my condo at Rezen with the masses when the building is registered in February.  In fact, I’ve recently decided to keep this property for the long haul.

And I’m highly recommending Rezen at 205 Frederick Street as a fantastic location for my own clients to call “home.”