Well gee whiz!  I’d hate to break up the party from the last few days about 2Gladstone, but it might be time to move on…

I wrote this post a few weeks ago and was waiting for the perfect time to post it.

With all this talk of rising pre-construction prices, now is the perfect time for this discussion…

As I prepare to invest in yet another pre-construction condominium, I ask myself why one does so.

Why do you invest in pre-construction as opposed to resale?

In my opinion, it’s for the inherent discounted price of the pre-construction price.

Let’s use a childish example.

You’re hungry, and you want an apple.

You approach a man standing next to the apple tree, and you ask him how much an apple costs.

He tells you that you can have the ripe, red apple that sits in his hand for $1.00, or you can wait for another apple to grow.

If you could pay $0.50 and wait for the apple to grow, it might make sense.  It depends on how hungry you are, and how long you are willing to wait.

But what if that man said that you could either buy the ripe, red apple in his hand for $1.00, or, you could pay him $1.00 and wait for another apple to grow?

Why would ANYBODY pay a dollar to wait for another apple to grow when they can pay the same dollar for an apple right now?

This is a perfect example of where pre-construction stopped providing an incentive to investors.  And I’m assuming that everybody who buys in pre-construction is, in fact, an investor, because if you buy with the intention of making this your primary residence, then don’t be disappointed when it takes anywhere from one day to five years longer than the developers promised…

If you are going to buy a pre-construction condo, the price MUST be lower than what you could pay for a current resale property.

Otherwise, where is the incentive?

Why would you buy at “ABC Condos” for $400 per square foot with the promise of delivery in June of 2012 when you can buy across the street at an existing two-year-old building for $400 per square foot (or sometimes less) and take possession in 60 days?

When Market Wharf and King East Lofts were charging $600 per square foot, and all the while buildings like King’s Court and Mozo had resale units available for less than $500 per square, I knew the market was out of whack.

But too many people had overheard strangers on the subway saying, “My friend Ariana – well her yoga teacher said that a friend of her naturopath made, like, a lot of money on pre-construction condos.  So, like, me and my boyfriend Grayson are, like, totally going to buy a condo in pre-construction.”

And that’s when developers stopped offering any inherent price discounts on their projects, because, why would they?  With people lined up to buy, why wouldn’t they charge more than is reasonable?

This brings me to my comparison of two buildings on Broadview Avenue.

Broadview Lofts was probably one of the top-five most popular buildings in Toronto back in 2007.  It remains today as an incredibly popular building, and is a gorgeous hard-loft conversion, but maybe the building has lost some of its original lustre.  After all, “Ariana” only wants the newest building with the coolest name that will make all her friends at Pravda, like, totally jealous…

The last four sales at 68 Broadview are as follows:

-$422,500 for 1080 square feet.  $391/sqft
-$420,000 for 981 square feet.  $428/sqft
-$460,000 for 1342 square feet.  $343/sqft
-$358,000 for 836 square feet.  $428/sqft

An average of $398 per square foot.

These units all had a parking space, and they represented a variety of different layouts within the building (ie. 1-bedroom to large 2-bedroom).

These sales are all within the past three months.

Just up the street from 68 Broadview is the future site of “The Ninety,” which is a completely unimaginative name for 90 Broadview Avenue.  In fact, it’s so unimaginative that I refuse to call it “The Ninety” for the purposes of this demonstration.  From now on, I’m going to call it….

…..ummm….

“Sugar Lips Lofts”

There are currently SIX properties offered for sale on the MLS system at Sugar Lips Lofts:

-$268,200 for 610 square feet.  $440/sqft
-$281,400 for 644 square feet.  $437/sqft
-$294,700 for 725 square feet.  $406/sqft
-$300,500 for 770 square feet.  $390/sqft
-$359,300 for 804 square feet.  $447/sqft
-$486,900 for 1170 square feet. $416/sqft

An average of $423 per square foot.

NONE of these prices includes parking and locker.

In fact, parking is $27,500 and lockers are $3,500.  If you were to add the $31,000 to the cost of each of these units, the average price per square foot would increase to an incredible $464 per square foot!

So WHY would you buy a pre-construction condominium at Sugar Lips Lofts that is scheduled to be completed in December of 2010 (or 2011 with expected delays…) when you can take possession of a unit at Broadview Lofts in sixty days?

I have no clue.  It was a rhetorical question…

I’m making an assumption here – that Sugar Lips Lofts and Broadview lofts are identical products.

They aren’t, but they’re close.

Maybe Sugar Lips Lofts will have slightly better upgrades, a better gym, or a better-smelling security guard downstairs.

But we’re not talking about luxury compared to that of living in a cardboard box.

We’re comparing two buildings that are on the same city block.

One is built, and one won’t be ready for years.

Yet the price of the units that won’t be ready for years actually exceeds that of the resale units!

It makes no sense!

Since when does 2 + 2 = 5?

I had a client ask me why 90 Broadview Avenue was actively selling in pre-construction for more than 68 Broadview, and I said “Because people are stupid.”  He laughed, and asked me to elaborate, and I told him, “Seriously – it makes no sense, and I wouldn’t sell you a unit at 90 Broadview so you could take possession in three years when you can get a unit at Broadview Lofts for less money, essentially tomorrow.”

What if there was a rooftop terrace at 90 Broadview Avenue that had huge swimming pool with a waterfall and a lagoon?  And what if the gym at 90 Broadview Avenue was larger than any gym in any condo in Toronto?  And while we’re at it, what if every unit had 12-foot ceilings and came with a framed painting worth $10,000?

Would you still pay $464 per square foot to take possession of your unit in three years over paying $398 per square foot to take possession tomorrow?

I wouldn’t.

And beside, those are a lot of “what if’s.”

It is my personal opinion, as I described above, that too many people purchase in pre-construction because they have absolutely no clue what they’re doing.  I suppose I take knowledge and experience for granted, since this happens to be my job.  I’d probably overpay a plumber to fix my sink since that’s not my field, as he and his plumber buddies have a laugh at my expense.

But when it comes to spending $400,000, why not do a little research?  Maybe hire a professional such as a Realtor rather than walking into a condominium sales centre and trusting a guy that looks like this:

Nice pocket square, bud…

I am of the opinion that the masses are always a few years behind when it comes to investing in real estate.  Why else would pre-construction condo prices have risen to become equal and eventually exceed that of resale?

It’s like an older agent in my office who described Liberty Village as “up and coming.”  Really, it is?  Because I thought it was up and coming like five years ago, when 2-bedroom’s were selling for $220,000, and now they’re over $400,000.

How behind the times can this person possibly be?

Likewise, the masses are investing in pre-construction even though doing so is soooooo “yesterday.”

People are paying MORE at 90 Broadview in pre-construction than they are at 68 Broadview for resale!  It’s almost like 68 Broadview is completely invisible to these people.

OR, maybe….just maybe, these people have no clue what they’re doing.

But the developers don’t care.

They just keep taking deposits, and laughing all the way to the bank…