Pre-Construction Comes To Fruition!


4 minute read

July 28, 2008

For all the complaining I do about pre-construction; the delays, the lies, the failures—I thought it would be nice to talk about something that actually DID work out.

But decisions must be made, and be made post haste!

Let’s explore my options for when I take possession of my condo at Rezen


Talk about impulse buys!

I always read those trashy celebrity-gossip magazines at the supermarket check-out, but I never buy them, or any other of those impulse items such as gum, candy bars, or batteries.

But strangely enough, my last impulse buy cost me over $200K!

In February of this year, I bought a small one-bedroom unit at Rezen Condominiums at King/Frederick, even though I was only in their sales centre to help a new agent at my company get her bearings with the downtown core.

I couldn’t resist the price: $216,900 for a 550-sqft unit, which was reduced to just over $210,000 after my commission.

But what was even more irresistible was the fact that this building was scheduled for completion only six months away!

Now here we are, almost into August, and the building is actually on-time!

I take possession on August 28th, 2008.  So……what do I do with it?

I have to options:
1) Sell it
2) Don’t sell it

Simple enough, right?  Well with option #2, I have two further options:
a) Rent it
b) Don’t rent it

Have I confused you?  Good, because this isn’t as simple as it sounds.

Every issue comes down to this problem: The condominium is not registered.

If I sell the condo, I am essentially selling my piece of paper that says that I, David Fleming, am buying the unit.  The deal can’t close until the condo is registered as a condominium corporation.

Likewise, I can’t place a mortgage on my condominium unit until the building is registered.

When you take possession of your pre-construction unit, it is the developer that finances everybody’s deals until they can place a mortgage on their own unit; until the condo is registered.

So in essence, I pay about $1200 to the developer each month until the building becomes registered and I can get a mortgage.  But unlike mortgage payments, this $1200 payment to the developer contains no “principal” portion that I get back in the form of equity.

So, back to my options.  If I sell the condo, I will be paying this $1200 to the developer for 3-4 months until I can change title when the building is registered.

The other option is to keep the condominium and find a tenant!

If I put a tenant in there for September 1st, I become a landlord, and that is a pain in the butt.  However, since I’ll be losing $1200/month in payments to the developer, I might as well recoup my costs, no?

I think I can get about $1400/month for this unit since it is brand new and next to George Brown College and in the trendy King East area.  So the rental income will cover my financing payments and my maintenance fees, and then my mortgage fees once the building is registered.

Also consider that on August 28th when I take possession, my unit may be ready but the rest of the building won’t be.  The gym, rooftop terrace, BBQ pits, party room, lobby, concierge, elevators—all of these features won’t exist!  This means for any potential buyer of my unit, there is less incentive to purchase; less “sexy” selling features about the building!

So let’s assume I get a tenant, and next September, 2009 comes around.  THEN it’s time to sell, right?

Well, consider that selling a unit that is tenanted is never easy.  You have to provide 24 hours notice for all showings, and many agents neglect to do this and thus the number of showings on your property is much lower than a non-tenanted unit.  Not only that, tenants can be messy, and since they don’t own the unit, they might not take the same amount of pride in it that you would.

So next September, perhaps it’s in my best interest to list the property after the tenant leaves, right?

If I start cleaning the condo and stage it in the first week of September, and assuming a very quick sale, I could close the deal on the 1st of November.  This means that I am out that $1400 of rent for both September and October, and my idea to “clean & stage” the unit will cost me $2800. 

Is it worth it?

Would I be guaranteed to make an extra $2800 on the sale of my condo if I wait until the tenant is gone to clean and stage the unit rather than trying to sell the unit next August when the tenant is still living there?

Decisions, decisions!

Here is a list of Pro’s and Con’s of LEASING the unit:

-Can replace the 3-4 months of developer financing with rental income, thus saving $4800 – $6000
-In September 2009 the building will be 100% completed (amenities), and sale price will undoubtedly be higher
-One full year of appreciation on the Toronto market place, whatever that % will be

-Idea for “get-rich-quick” scheme takes a year longer than expected
-Must deal with tenants and become a de facto Landlord
-Overextend myself with yet another condo and the assumption of debt
-Tax ramifications of owning an “investment property”

That’s a lot to think about.

Thankfully, I have until August 28th to figure this out.  Oh wait, I don’t…..I have to find a tenant today!

I’ve placed ads on Craigslist, Kijiji, and of course I’ve listed the unit on MLS.

If I can find a suitable tenant to move in on September 1st, 2008, then I’ll for sure go the leasing route and reap the rewards of holding on to this investment in the Fall of 2009.

But if I don’t have a tenant in place soon, I’ll list the property for sale as well.  And if I don’t have a tenant in place by September, and we drag into October, my goal will become selling the unit and just eating the developer financing charges.

I think holding on to this unit for a year will be a huge pain, and something I could easily do without, but I think I’ll make more money in the end.

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

Find Out More About David Read More Posts

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1 Comment

  1. Krupo

    at 11:13 pm

    You know what impressed me most about this post? It’s actually an excellent little example of a real-life example of a UFE (CA Exam) case.

    The only difference between an academic case and your reality (other than the whole “reality” thing), is that a case would be a bit longer, and the first half would present your scenario, while the second half would present your pros/cons and conclusion.

    I’m going to have to link to this to show it off to CA students. 🙂

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