Pre-Construction As A Primary Residence


4 minute read

December 22, 2009

I’ve written a lot about pre-construction condominiums in the past few months, and I do so under the assumption that it’s always for investment.

But the reality is – many buyers actually purchase pre-construction condominiums to live in as a primary residence!

I wouldn’t advise it, and here’s why…

Where do I even begin…

How about with a story?

Remember the girl I talked about last March who had about $2,500 in life-savings but only wanted to live in a prestigious condo in Yorkville?  At 26-years-old, she was far more concerned with the supposed allure and prestige of a Yorkville-address than trying not to live month-to-month.  You can read all about “Katelyn” here.

Well, her new boyfriend was looking to buy a condo during the last few months and I knew exactly what was going to happen.

Katelyn’s boyfriend, Mark, was working with a colleague of mine to find a $275,000 condo in the downtown core.

He wanted a 1-bedroom-plus-den with parking, ample outdoor space, granite counters, upgraded kitchen, bla bla….bla.  He wanted it all, and it wasn’t available at his price point.

He also wanted to move in January, but that wasn’t going to happen either.

So he asked my colleague, “What about pre-construction?”

Rightfully so, she answered, “I thought you want to move as soon as possible?”

He then explained that he had been doing some “research,” and he heard that a King Street East development was slated for completion in late 2010, and he figured he could hold on and rent for another year, even though he wasn’t putting much money aside each month.

So here’s the rub: that project hasn’t broken ground yet, and as I’ve pointed out repeatedly in the last few weeks, I have serious concerns about how developers always quote fictitious possession dates that are nowhere near accurate.

But that didn’t phase Mark at all!  He was so excited looking at the granite samples in the sales centre that he never even considered that the project could and undoubtedly would be late.

When my colleague challenged Katelyn by saying, “You know….Mark is going to be waiting quite a while for that condo to be finished,” Katelyn said, “No he won’t.”

Katelyn is one of those people that thinks if you want something to be true, just think really hard….and it will come true.

“The developer said it’s going to be done in December of 2010,” said Katelyn.

My colleague replied, “Yeah but most developments are late, and…”

Katelyn cut her off and asked, “Oh really?  And how many condominiums have YOU built?  Who knows better – you or the person building it?  Gaaawd!”

Katelyn never ceases to amaze me.

I doubt if she’ll even be with this guy by the time the condo is finished, but I digress…

My problem with buying a pre-construction condominium as a principal residence is exactly what I’ve described above: it won’t be finished on time, the buyer will be waiting, and a lot of money is wasted on rent in the interim.

I am a very organized, obsessive, and well-routined type of guy.  I can’t imagine putting my future living situation in the hands of somebody else, and just gritting my teeth and hoping that things work out okay.

Mark is going to be waiting, and waiting, and waiting for this development to be finished, and I would guess that it will be ready in early 2012.

By 2012, maybe he’ll have moved overseas for a job opportunity!  Or maybe he’ll be married (not to Katelyn…) with a kid and be in need of a house.

A lot can change in 2-3 years, and in some cases these condominiums take 4-5 years.

Imagine the person you are at 26-years-old and the person you will be at 30 or 31.

Think about how much can change during that time!  I just can’t imagine buying a condominium in pre-construction in 2009 and planning to move into it in 2013.

What’s wrong with buying resale?  Move in tomorrow!

Or do both, if you have the money.  If you like the project, then put down your 10% and keep it as an investment while buying something to move into during the next 3-4 years.

Mark’s problem is that he refuses to listen to reason, be rational, or demonstrate any common sense while he assumes that this condo really is only going to take a year to be built.

But I can’t understand why other renters decide to buy in pre-construction and continue to pay rent for 48 months while waiting for their condo to be built from scratch.

Why leave things up to chance?  If you think the condo will be done in two years, what if it takes three?  What if it takes four?  Are you really content to just sit back and let the chips fall where they may?

If you plan to move in 2011, what if takes until 2013?  Are you really okay with that?

I only like pre-construction as an investment, and nothing else.

Buying as an investment gives you flexibility in case the project is delayed, or even worse – cancelled.

So what if you put your deposit down for your “new home” and after 18 months the development falls through?  Do you take your money and go dump it into another project, and agree to wait yet another two years after that?

The concept makes no sense!

What is wrong with resale?

Once upon a time, there was a serious discount for pre-construction properties.

When the resale was selling for $400/sqft and the same property across the street was $275/sqft in pre-construction, then it made perfect sense to buy as a primary residence!

You could say, “Well I’d love to buy that $400,000 condo today, but I can’t afford it.  So I’ll buy essentially the same one across the street for $275,000 and I’ll have to just wait two years for it to be finished.”

That make sense.

But pre-construction prices have climbed in the last three years and are now equal with resale, so other than buying for investment (assuming the market climbs, the area takes off, or if there are no other resale condos in the area such as Queen/Gladstone), I see no point in being involved.

Tell that to Mark, and to Katelyn for that matter.

She’s already planning the housewarming…just about two years too soon…

Written By David Fleming

David Fleming is the author of Toronto Realty Blog, founded in 2007. He combined his passion for writing and real estate to create a space for honest information and two-way communication in a complex and dynamic market. David is a licensed Broker and the Broker of Record for Bosley – Toronto Realty Group

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  1. ivan

    at 9:42 am

    why are you keep saying 10% as deposit for pre construction when reality is buyers have to pay at least 15% or normal 20% as downpayment?

    I’ve heard 10% as down, even 5% from time to time, but that was just a promo, the regular more like 15%-20% and probably will stay like that.

  2. David Fleming

    at 1:26 pm

    @ Ivan

    Proves my point even further.

    I’ve only ever put down 10% in pre-construction, but you’re right – developers want 15% now.

    Since many buyers purchase resale with 5%, 10%, or 15% down, I ask again – WHY purchase pre-construction as a primary residence?

  3. Meh

    at 2:49 pm

    The same can be said for investment properties though (when resale vs. pre construction prices are the same).
    Why do a hugely leveraged investment that you can’t sell or even get a profit from for 2 years.
    You can get the same thing today, and rent it out (or do whatever else you want with it)

    I guess the theory is the 2 years gives it time to appreciate without having to pay for it, but since it’s already at market value, you are leaving yourself with no wiggle room. A person that buys pre-construction back to back WILL eventually run into a down market (if they are always buying at market price). And if the investment is largely leveraged, then they may not be able to wait out the market until it picks back up (much the same as an over leveraged stock investor can get margin called when his stock is down and lose the ability to wait for it to regain it’s value).

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