Cleaning Up The Pre-Construction Condo Industry!

Development | September 19, 2022


I have been perhaps the harshest critic of the pre-construction condominium industry in Ontario over the past two decades.

It’s an odd position for a real estate agent, of all people, to take.

But having obtained my license to sell real estate in 2004, it didn’t take long for me to start questioning how the pre-construction industry in Ontario works, why we allow it to work that way, and eventually, why people bothered purchasing pre-construction condos at all.

Don’t get me wrong; there was a time when it all made sense.  There was a time when you could, and this will sound naive, trust in the process and the partner.

But if you’re like my father, you believe in the saying, “all good things come to an end.”  As the real estate boom of the late-2000’s began, buyers flocked to pre-construction condos – many of them completely inexperienced and naive, and as a result, the industry, the process, and the prices began to change.

Some of you, reading this, have made money in pre-construction.  I have no doubt about that.

But I maintain that just like every type of investment, there are those that make money and those that don’t.  I have two clients who I would classify as “experts” in pre-construction investing, neither of whom purchase through me, since I have never sold a pre-construction condo.  But I have also watched countless people lose their time, money, energy, and sanity trying to navigate the wild west that has become the pre-construction industry in Toronto, and most of these people have themselves to blame.

While I believe in the concept of personal liability and responsibility, and I think that people should be held accountable for their decisions and actions, I’ve also watched the pre-construction industry evolve, watched developers gain power, and watched the government do absolutely nothing to intervene.

I’ve been writing about the perils of the pre-construction industry since the late-2000’s, so while I don’t want to regurgitate everything I’ve ever written or said, I do realize that there are a lot of newer readers on Toronto Realty Blog, many of whom have never even heard my opinions on this subject.

I think I grew so disenfranchised with writing about the perils of pre-con that I finally stopped.  I had said everything I’d wanted to say, and I realized that you can’t save people from themselves, especially when those people have a lead-pipe, can’t-miss, lock of a get-rich-quick opportunity.

Honestly, I felt as though I sounded like a broken record.  The same thing from David about pre-construction, over-and-over; he’s been saying this for years.

When a condominium project is cancelled, I often blog about it.  When the buyers cry foul, I’m not averse to posting “I Told You So.”

But in terms of the actual reasons why I don’t like, don’t sell, and don’t agree with pre-construction condo sales, it’s been a while.  I think I reached a point many years ago where I simply moved on.

I spent years saying, “The Condominiun Act needs to be completely re-written.  It’s out-dated.  Developers know all the loopholes.  The Act doesn’t need amendments; it needs to be re-written!”  Every few years, a politician would stand up on a soapbox and say something along the same lines, but after whatever election it was that necessitated a hollow promise of consumer protection, nothing ever changed.

Over the last few years, there have been attempts at consumer protection in real estate, but mandatory home inspections in B.C., banning “blind bidding” in Ontario, and providing tenants over-reaching rights that cause chaos in the rental industry aren’t the changes I was looking for.

Thankfully, there has been some good legislation in recent years, especially here in Toronto.  The “Housing Affordability Task Force” produced a report that I may have mocked in part here on TRB, but at least it showed there were efforts being made.  And the recent “New Home Construction Licensing Act” shows promise.

There are many things “wrong” with the way pre-construction condos are sold here in Ontario and as I said, I’ve been writing about them for eighteen years.  But the proverbial straw that broke the camel’s back and actually caused the government to intervene took so long to draw attention, it was like it happened in slow-motion.

I’ve you were paying attention last week, you know exactly where I’m going with this: condo cancellations.

But as I said at the onset, many of the readers here on Toronto Realty Blog are new, or newer, and thus those who haven’t been reading since 2007, 2011, or even 2015 might need a refresher.

Shall we?

Back in the mid-2000’s, I bought a pre-construction condo for $99,000 (it was a bachelor) with a 5% deposit.  That was it.  5%, total.  That was essentially $5,000 out of my pocket, and in three or four years, the condo would be completed.

Voila!

$5,000.  No-brainer.

But more important than the deposit was the fact that a comparable unit was selling at the building next door for $130,000.

The $99,000 price, in my opinion, factored in the risk.

I was buying a $130,000 asset for $99,000, knowing that the project could be canceled, or delayed, or materially changed, and all the while, if the market tanked, I would be holding onto an illiquid asset that I couldn’t sell.

Risk.

It simply needed to be adjusted for.  And I felt that, given the price of resale condos next door, I was being compensated for my risk.

But soon thereafter, the deposits required for similar pre-construction condos increased.

One day, I heard you needed 10% down.  It would be something like $3,500 at signing, the balance of 5% within 30 days, and then another 5% within 90 days.

Months or years later, it was 15%.  Mind you, this was when you could still purchase any resale property at any price with a 5% down payment, so the idea of needing 15% on a pre-construction was a bit tough to swallow when you compared it to resale.

Soon after, developers started to insist on a 20% deposit, of course structured in payments over 180 days or more, but they still needed 20%, and this was four times as much as when I started in the business.

I said above, “More important than the deposit,” and noted that comparable units were selling for more than pre-construction.  So on that note, as the deposits began to increase, guess what else began to happen?  Prices of pre-construction condos, relative to resale, began to increase as well!

That “gap” that I spoke of?  That gap that made perfect sense, on account of the risk involved, that was building in your profit for taking on such a risk – that gap began to shrink.

Eventually, the $300,000 pre-construction condo was next door to a resale condo that you could buy for $300,000.

So why bother buying it?

I was never sure.

When pre-construction prices rose above that of comparable resale, I simply couldn’t understand it.

And when I tried to explain to people why this was insane, and people wouldn’t listen, I finally decided to dumb it down to the most basic level.

In 2011, I filmed what is known in the industry as my “Cake versus Cake Mix” video, where I used the analogy of buying cake-mix instead of an already-baked and iced cake, to compare buying a pre-construction condo instead of a resale condo:

 

 

I know what you’re thinking: I haven’t changed a bit!

But seriously, why was this filmed like it was the Blair Witch Project?  Were tripods not invented when this was recorded?  Was a 99-year-old with cataracts behind the lens?

Oh, technology!

But the point in that video was absorbed.  Not by everybody out there, especially those with their minds made up about the get-rich-quick virtues of buying risk-free, can’t-miss investments, but by enough that people took notice of the video and the contents therein.

As bad quality as that 11-year-old video is, I enjoyed making it.  I loved speaking out, I really liked being creative, and I was always happy to share.

Over the years, I wrote countless articles about the perils of pre-construction, and while I made sure to specify that many people can and did make money, there’s just a lot more that you need to beware of compared to that of resale.

I’m not naive.  Any time there is money that can be made, money will be made.  But by few, and by those who are truly experts.  In the case of pre-construction condo buying in the early-2010’s, a lot of people made money, but a lot of people made LESS money than they could have made by purchasing resale.  Mostly everybody was hit with surprises, and the pitfalls I spoke of always seemed to pop up.

So here we go, the most noteable issues with the pre-construction condo projects in Toronto:

 

-The project can be delayed in perpetuity

-There is an “occupancy” period whereby you’re given the keys to the condo, yet you don’t own, it, and you pay the equivalent of rent for upwards of two years

-Material defects are discretionary, and the builder doesn’t fix them – you complain to TARION

-Material changes are also discretionary, and the builder decides what is material and when you can/can’t get out of your agreement

-The common elements can be changed or completely eliminated, ie. you bought thinking there was a pool, but the developer decided not to build one

-The project can be cancelled and/or “re-launched” so you’re being sold your own condo back, at a higher price.

 

How do we explain the above?

Well, I could do that with words, or, I could show you a video!

Here’s the infamous sketch I did back in 2014 comparing pre-construction condos to pre-construction jeans:

 

 

Yes, those t-shirts are all mine.  And they are all Banana Republic.  I never said I was interesting…

The “target completion date” of any pre-construction condominium is meaningless.  A builder can launch today and say they’ll be done in the spring of 2023, but it doesn’t matter.  The language they use in their contracts is iron-clad and they can delay, delay, delay, and delay.

They can start digging in 2028 if they want to.

The “occupancy period” has always been a wild one to me.  When your unit is finished, they hand you the keys.  It doesn’t matter if they’re still jackhammering in the unit above you, because guess what?  Your condo is finished!  So you start paying “occupancy fees,” and the hallways could be unfinished, the lobby could be under construction, and there’s a 0.00% chance that the amenities are finished.

The occupancy period can be four weeks or three years, and since you don’t own the condo until the building is registered, you can’t sell it.  You’re stuck paying those fees, and there’s no way around them.

The developer defines “material changes” so you’re S.O.L.  Imagine that you purchased a pre-construction condo in a “soft loft” building that had loft-like features, such as the 11-foot ceilings that your unit was going to feature.  Except, one day, the phone rings and somebody from the developer’s office reads off a screen in a monotone voice:

“Hello, it’s Lucy calling from ABC Developer with respect to your purchase of Unit #123 at XYZ Lofts, agreement of purchase and sale dated July 8th, 2009.  I’m calling to inform you that there have been some changes to the floor plate of the building and your ceilings are now 8-feet instead of 11-feet.  However, we do not consider this a material change, as defined by TARION, and therefore there will be no changes to the agreement of purchase and sale.  You do not need to take any action at this time, as this phone call is simply a courtesty.

Going from soaring, 11-feet ceilings to 8-feet ceilings is a material change, but it the developer doesn’t define it as such, then too bad!

This has happened before.  Think of a developer who has approval for a tower at a height of 88 feet.  The developer draws up plans for an 8-storey tower with 11-foot ceilings on every floor.  Years later, after the building is long sold-out, the developer decides that the condo will now feature 11-storeys with 8-foot ceilings on each floor.  Why?  Because the developer just created three new floors of condos that he can sell and profit from!

When you do your Pre Delivery Inspection (PDI) and look for those “material defects,” you’re not making a list for the developer to fix next week.  You’re making a list to submit to TARION, and lord only knows if and when those items will be addressed.  It doesn’t matter if a tradesperson put subway tile on backwards and upside down, you’re the owner of that condo, so contgrats!

As for those “common elements” being changed, here’s my favourite example of all time:

April 27th, 2014: “North York Condo Developer Faces $30 Million Lawsuit”

The developer sold a condo with underground subway access and then just, POOF, decided not to build it.  But guess what?  They can do that!  When you buy pre-construction, you’re buying your unit, and you have a right to your unit, but not to a whole lot else.  If you saw a rendering or a scale model with a rooftop pool, there’s no guarantee that it’s going to be included in the finished product.

In 2017, I sat down and filmed a video where I went through the builder’s “standard forms” and highlighted the pitfalls for buyers:

 

 

If you’ve watched all three videos that I posted today, then bravo, and thank you.

But for the other 99% of you, you’ll just have to trust me on this – especially with the last video.

I don’t believe that any buyers of pre-construction condos actually read the standard agreement; you know the one – the one that’s been poured over by lawyers, over and over, to strengthen, tighten, and make the agreements iron-clad in favour of the builders?  Yeah, those ones!

In that video, I went through the most egregious parts of the agreement and demonstrated what developers can get away with and how.

But it’s the last point that I wanted to talk about today, with respect to the “big news” I mentioned from the last few weeks.

It’s “cancellations” that, despite the preceding issues, ended up being the biggest problem in the pre-construction condominium industry.  Despite the deposit structures, ridiculous prices, delays, occupancy periods and costs, deficiencies, material changes, and lack of any guarantee with respect to the common elements, the cancellations were what finally got the government involved.

(to be continued)

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16 Comments

  1. Francesca

    at 8:09 am

    We bought a pre construction stacked condo townhouse in the fall of 2004 with expected occupancy of fall 2005. It got delayed twice and we finally moved in summer 2006. Luckily we didn’t have an occupancy period as all the units were finished being a townhouse complex instead of a high rise condo. We had to deal with numerous deficiencies with the builder and Tation. We sold it in spring of 2009 and broke even, not a dollar to be made in profit cause the market was down then. After all the headaches we went through waiting we vowed never to buy pre construction again. Also not to mention we had to borrow money from my parents for the various down payments we owed the builder during construction phase as you can’t get a mortgage for something you do not own yet. Now pre Construction is so much more than resale so why would anyone bother especially with the uncertainty of if or when it will be built. At least back then pre construction cost less or equal to resale property so the risk was less high than it is now of losing money .

  2. TLM

    at 8:42 am

    I agree with parts of this post, but the part about a developer deciding what constitutes a material change isn’t really correct. Within 10 days of finding out about the change (whether the developer calls it material or not), a purchaser can rescind their agreement and demand that the developer return their deposits. If the developer disagrees and wants to keep the deal alive, they have to go to court within 10 days of receiving notice from the purchaser, and the court will decide whether the change is material or not.

  3. Appraiser

    at 8:45 am

    On the flip-side. Pre-construction single-family dwellings purchased as a principal residence have been an absolute, though never discussed, financial windfall for Canadians over the past 25 years. Especially if one had a house to sell to start with.

    How do I know? Because we did it four times over the past three decades. Each time that we sold the house where we lived, we were delighted to learn that it had increased in value before the closing date on the new build, sometimes substantially. The extra money was used to increase the down payment each time (and not on Crypto).

    We are not alone. I would venture to speculate that there are hundreds of thousands of Canadians rowing the same boat. Just lucky I guess.

  4. Stephane

    at 9:13 am

    Agree with all of this. We bought in 2011 and would never do it again nor recommend anybody do it. We made mistakes for sure. We had no agent and bought through the sales centre. We didn’t read the contract but it’s like hundred pages. Our building was delayed three times and then cancelled and sold back to us for more money and we bought in because we felt like we had no choice. Time came to pick our finishes and that cost us more money. Then when closing came along we had a massive bill for closing costs that we didn’t see coming. We could barely afford to close. Worst experience of my life and it kept us both up at night. We never even moved in to the condo. It sat empty because we broke up and then we sold at a net loss.

  5. CREinvestor

    at 10:46 am

    In today’s market, I think it makes sense that precons are priced higher than existing inventory. Investors are buying condos for capital appreciation, not rental yield – rents often barely cover the carrying cost of a unit. With a precon, you can capture appreciation without dealing with the hassle of renting.

    With that being said, I think the precon premium has gone way too high – many units require 5-10% annual market price growth to break even upon completion

  6. David

    at 11:28 am

    I think it is so ironic that builders can cancel a project if it is no longer financially viable; however, if the market falls, the purchaser has to complete the purchase or lose their deposit and potentially be sued.

  7. Ace Goodheart

    at 1:22 pm

    Pre con’s are interesting.

    Most salient thing to note about them is, there is usually no actual money involved during the promotion and sales process, and through to the building and final occupation process.

    When folks move in (or start Air B&Bing the units) that is when equity starts to appear (because people are paying down their mortgages at that point and have some equity in their units).

    The process is usually as follows:

    1. Find initial investors for a syndicate. They will be syndicated mortgage holders, and the mortgagee will then use their money to promote the condo. At this point they often don’t even own the land they plan to build on. They put together a syndicate, and when they have enough mortgage holders, they will start promoting. When they have enough pre sales, they buy the land.

    The above means that when you go to a promotion for a new condo, you are eating and drinking the money of the syndicated mortgage holders, who are the early investors in the project.

    2. Once you have enough momentum, purchase the land. They do this by registering a bunch of mortgages on it. Often, the mortgages vastly exceed the actual value of the land (you can see this when a project blows up and you have the syndicated mortgage holders going to court to get maybe 10 cents on their dollar, because the land is worth 10 mil and there are 200 mil in mortgages on it).

    3. Once you have enough pre sales, borrow more money and start to build the condo building.

    At the point in step three, the condo builders usually have no idea how much the final project will actually cost. What is happening right now with the wave of cancellations is that costs are way up (inflation) and people who bought pre sale are not completing their agreements (not paying their deposits and going into default, and not being able to secure financing).

    The whole construction process is done using borrowed money. Other people’s money. Your money. Money from investors in the syndicate. The developer is paying themselves using money from investors, mostly. They make money on the sale of the condo units, and also from the syndicate.

    The building is promoted using borrowed money and the process just continues until hopefully a condo appears.

    This is why you have to pay rent (often for years) before you move in. The developer has expenses, which you have to pay.

    This is why the developer cannot tell you with any certainty what the condo will look like, how much it will cost, or what amenities it may have. They may have promoted it with a number of amenities that they could never actually afford to build, but they didn’t know that at the time.

    This is also why sometimes projects lose key items promised in the promotion (like subway access). They may have promoted it before they got the permits. So it turned out that you could not put a rooftop pool on it like they wanted, as that required permitting costs that they could not fund.

    The saddest thing for me in all of this is the loss of Toronto’s historical structures, to condo projects that never end up getting built. The first flurry of activity is usually to destroy all the old buildings on the site. Then you have a piece of vacant land, that often does not end up becoming a condo, and just becomes another mud packed parking lot while the original investors try to sell it to someone.

    1. Sirgruper

      at 12:17 am

      Ace.

      Not even close. You can’t mortgage land you don’t own. Maybe your example is based on Fortress that went bust and the principals charged. This is not remotely the way Tridel, Menkes, Madison, Concert, Plaza, Daniels, Remington, Great Gulf, Freed etc. work. All own but may JV with the original owner or the owner takes back a vtb. Or smaller developers do JVs with investors with preferred interest in the waterfall. Some may put on a second but the interest gets expensive using Lenders and syndicators that specialize in the field. The developer puts up all the cash for the architects, planning, environmental, shadow studies, geo, traffic studies, architectural, legal, sales centres and so much more.

      I could go on and on but being a developer sounds easy but it is actually really hard and lots lose money or make modest returns. The lift in land values and the last sales are the gravy to a developer. You need to sell around 70% to get you construction financing (linked to prime rate) and you have not locked in all your construction costs and the contractors can eat you alive if you are not very careful and very strong yourself.

      David, you are bang on but don’t forget the reason people invest. If it takes 5 years to build and condo prices rise 10% per year compounded but you put 20% down, you still do ok. But like everything you need to know what you are doing and even them, timing is everything, precon or resale. And agreed, it used to make way move sense.

      Why not have an actual interview with a developer to hear how it all works from their side. Might be interesting.

      1. Nobody

        at 2:06 pm

        The most risky you could get would be if you had an option on land. This would typically be pending some financing or permitting issues. Promoting a project you didn’t already have some interest in would just be crazy because the owners of the land would then want a much higher price once you had successfully sold off units!

        Toronto has gone well past any landowner being willing to write you an option for a fixed sale price at some point in the future. You bring cash by the pallet or get lost.

        But options to sell pending zoning are a thing. The Aspen Skiing Company sold a piece of land to some local Aspen developers for $10 million in July 2021 based on a long-term option after the development proposal was finally approved in a local referendum after a VERY long process. These developers then flipped that piece of land in January 2022 for $75 million.

        This is why nobody in Toronto will sell you an option! Aspen’s development rules are so crazy and arbitrary (approval was based on one of the developers being part of a famous long term Aspen resident family) that developable land is worth effectively nothing without legally enforceable development rights. Toronto property with absolutely no rights to development is worth a huge amount of money as overcoming existing rules (that violate provincial law in so many ways) is a known process with reasonably predictable outcomes and costs. High costs, granted, but they are predictable and can be budgeted for on a large enough project.

      2. Ace Goodheart

        at 11:32 am

        This is true regarding not being able to mortgage land you don’t own.

        However, if you start out with a syndicate of investors, you don’t actually have to own anything. The idea is, the investors put up money, and then at some point, the builder purchases the land, and the syndicate then become mortgage holders.

        What usually happens is the syndicated investors are the third or fourth mortgagor to appear on title, going on last after everyone else. They are added to title after the land is purchased, after the first mortgagor is put on title (usually a large bank or investment firm), and after anyone else with a debt interest gets added on.

        I agree fully that the pre construction condo business is a cut throat business indeed. When prices are going up, and interest rates are going down, it is a nice place to be and people make out like bandits after a successful hold up.

        But when you are in a situation like now, when the tide is going out, rates are on an unstoppable trip upwards, and the economy is headed into a recession, things are different.

        They say about government “if it moves, they tax it, if it stops moving, they regulate it, if it dies, they subsidize it”.

        We are at the point where the pre construction condo industry has stopped moving, and will soon be regulated.

  8. EastYorker

    at 1:43 pm

    I’m curious what film 8,16, 35mm, ektachrome (?) was used ?

    “In 2017, I sat down and filmed a video”

    1. Graham

      at 2:05 pm

      It’s clearly 70 mm IMAX. Get your cheeks down to the Scotiabank Theatre and see it on the big screen.

  9. cyber

    at 8:52 pm

    I’ve been a TRB reader for many years and well-aware of David’s advice regarding pre-con when I bought pre-con in 2018, at probably ~10% higher price than comparable units were selling at the time 🙂

    Some reasons for why it made sense:

    1/ At the time, thought of buying a starter detached both to live and for long-term capital appreciation (“they don’t build any more land n Toronto”), but didn’t like the idea of paying more than 2x in cash per month on a place to live, while moving away from a super sweet condo rental downtown to a more “inner suburbs” area at best. Used extra savings to start building equity, without paying some of the lifestyle costs immediately, when I didn’t really need a bigger space.

    2/ Was toying with idea of moving to US for work, and all detached within my budget would have been quite cash flow negative as rentals (and still are in general…), perhaps with exception of some with decent basement apartment. But regardless a bigger headache to manage remotely.

    3/ Came across a VERY specific opportunity for one of the remaining larger units by a very reputable developer that had a lot to lose if project was cancelled or re-sold, balance sheet to cover any cost overruns, and in an area with lots of upside even beyond downtown Toronto standards (i.e. new subway stop, mid-rise with massive multi-use new developments within walking distance).

    4/ Did not care about project delays, in fact was hoping for at least some (1-2 years beyond the marketed occupancy date), in order to give me greater planning optionality (i.e. sell vs keep) with opportunity for market price for resale and rentals to go even higher than I need them to by the time close comes around.

    TL;DR: It was a specific set of circumstances that made pre-con make sense for me personally, however it really truly does not in most cases – both for personal use or investment properties.

    1. Nobody

      at 1:26 pm

      Excellent – some people do have unique situations opportunities that make what’s generally a bad deal a great deal for them.

      Another item is that people may not be able to get a mortgage/reasonably service the mortgage they “technically” qualify for so 20% down in 180 days and then only close in 3-6 years can make sense. A brand new accountant at PWC or a lawyer at Osler that have good and quickly increasing salaries but neither the credit, balance sheet, nor employment history to get a mortgage. If their parents can’t get a mortgage on a condo/house but can help fund the deposit it could be a good idea asssuming the condo gets built, they keep their job, and the market doesn’t collapse.

      If you can actually buy and close today pre-con was absurd in 2011 and is beyond insane now.

  10. Anonymous Realtor

    at 7:43 am

    David, I got into the business in 2014 right when you published that “jeans vs pre condos” video. It was like my first day at the brokerage and agents were huddled around somebody’s laptop watching that video. Most agents were howling but a few were really peeved. They were obviously the agents who sold precon and they got really defensive. Then our broker played that video at a meeting to ask if it was “good marketing” or not and I think he was on the fence since they clearly made money from agents selling pre con. Frickin classic man!

  11. Kyle

    at 1:58 pm

    I’ve never bought pre-con, but i do think of it as a way (sometimes the only way) to get in on the ground floor of a newly developing area. If you’re choosing an already established neighbourhood, resale is probably the better option, but in the early days of Cityplace, Canary District, Liberty Village, Regent Park resale wasn’t an option, and the risk of betting on a burgeoning neighbourhood was reflected in the price. And those that got in early did really well as the neighbourhood developed around them

    In some of the newly developing districts and TOCs, this opportunity might still be found.

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