I can’t dumb it down any more.
I can’t possibly explain how there is no longer any money to be made in buying pre-construction condominiums than in the following video.
If you don’t see my point after watching this delicious video, then perhaps you never will…
I could have gone on and on, but I chose not to.
I could have taken the analogy to a whole other level: “You have to grease the cake pan! What if you drop the cake on the floor? What if the cake burns? What if the cake tastes worse than the one you could have bought in the store?”
For the record – the cake cost me $11.99 and the cake mix cost me $4.99.
Doesn’t that make sense?
So why is it than in the past 5-6 years, the prices of pre-construction condominiums have become level with that of resale?
Why are people paying the SAME price for a condo that doesn’t exist, won’t be done for 3-4 years, and will undoubtedly come with headaches, that they are for resale properties that are available today?
What ever happened to the price gap between pre-construction and resale?
The ship has sailed, my friends.
But it was a tasty ride!
moonbeam!
at 7:50 am
You convinced me!! great video Dave — hammered home your long-held message against buying pre-sale….
Punditzview
at 7:55 am
No money left on the table. I’ve noticed a similar trend in the fixer-up market. A well-finished house goes for $850k – but the comp down the street that needs a complete gut goes for $725-750k. No money left on the table – in fact the fixer-upper is likely to lose, unless the buyer is related to Mike Holmes.
Joe Q.
at 7:59 am
“Why are people paying the SAME price for a condo that doesn’t exist, won’t be done for 3-4 years, and will undoubtedly come with headaches, that they are for resale properties that are available today?”
A lot of people have a “thing” about living in a resale property. You’ve probably seen it more than me, but even in my limited circle I know a number of people who could never bring themselves to buy a condo or house that wasn’t brand new.
Graham
at 8:03 am
Your buddy doesn’t have a career as a camera operator, but you good sir, might be able to work in front of the camera. Set yourself up with a nice little show on HGTV.
David Fleming
at 8:22 am
@ Graham
You know something – I watched this video after “the first take” and despite the shaky hand of the camera operator and lack of overall cinematography, I decided to stick with it. Watching it again this morning, I’m thinking perhaps I could have spent five minutes doing a second take…
Smith
at 8:26 am
Nicely done.
You need a tripod and a remote control. 🙂
Smith
at 8:27 am
Get a $30 tripod, and instead have your buddy pan and tilt the camera on it. Your results will improve 200%. (It’ll be like cake! or something…)
David Fleming
at 8:40 am
@ Smith
It was St. Paddy’s Day. I think my camera operator was already drunk…
colin
at 10:30 am
If you are fixated on having the newest thing, or something that doesn’t even exist yet, I guess it is “worth” paying the same or more for pre-construction. All the sound and fury from the sales centre is probably enough to attract individuals who must have “new” as Joe Q said. I’ve heard too many individuals age 25-35, talk about not wanting a “used” home or condo like we were talking about underwear. I couldn’t really wrap my head around their understanding of this “used” concept.
Dan
at 10:48 am
Do you have anything in a chocolate cake + den?
Claire
at 10:59 am
I prefer Betty Crocker cake mixes ‘-) Regarding pre-construction prices, I can’t understand why anyone would pay the same price (or more) as one that is already built. Isn’t the advantage of buying pre-contruction prices, is to get it at a cheaper cost?
Clara
at 11:35 am
Lick the cake again!
George
at 1:14 pm
People are slow to adapt to changes. The belief with these buyers is that good investments over the past few years will remain good investments going forward. It’s the follow-the-trend thinking (as opposed to beat-the-trend thinking) that makes most people bad investors.
David Fleming
at 1:24 pm
@ George
Best comment yet. “People are slow to adapt to changes.” That basically sums up why the general public hangs on to this notion that idea that there is still money to be made…
Dwight Shrute
at 1:48 pm
The reason ppl keep buying is because the market keeps going up. Have you ever seen the market go down in the last fifteen years? Nope! So ppl keep buying preconstruction because the market keeps increasing. Shouldn’t you know this?
Anonymous
at 1:50 pm
I think the thing is that some people believe that buying preconstruction is way for them to “lock in” to the current market prices, since all they have to do is put in a percentage of the total price of the unit, and do not have to carry a mortgage until the building is slated for occupancy.
Assuming that prices will keep on going up (a whole other discussion there), these people will be ahead assuming that the rate of appreciation is faster than the rate of saving.
Another thing that needs to be taken into consideration is that it appears that as we have seen in the last couple of years, the market is not “rational”. Even though the “new” condo building is comparable to the older one next door to it (the unit could possibly be even smaller), all of the unit owners will price them higher than the “older” building despite the above in order to make a profit. And guess what? They will sell as I have seen time and time again. It’s kinda a game of musical chairs until eventually prices start coming down if not crashing. But who knows, maybe that will never happen…
Julian
at 6:35 pm
Long time reader, first time commenter.
Your analogy doesn’t seem to take into account the timing of when the money needs to be paid.
When you’re buying pre-construction, you’re not spending the full $5.00 to buy cake mix when the exact same $5.00 would buy you an actual cake. Instead, you’re spending $1.00 to secure your chance to buy an arguably fancier cake three years down the road.
Ideally, three years down the road, that same fancier cake would cost $7.00, and you’ve saved yourself (or profited) $2.00.
According to your chart, even if the spread between pre-construction and resale was $0 in 2006, it still would have been worthwhile to buy pre-construction because you would have been able to take advantage of the price appreciation from 2006-2011 without putting out a large sum of money in 2006.
dogbiskit
at 6:55 pm
The Cake (mix) Is A Lie
meow
at 12:16 am
Sorry to go a bit off topic here, but I bought a condo in downtown toronto 9 months ago for only $361 per square foot. Are condos really selling for $550-600 per square foot?
David Fleming
at 1:26 am
@ Meow
Some of the numbers in these discussions are for demonstration purposes only, but I would say the average downtown condo is now $500/sqft or higher.
Older buildings command less, and newer buildings command more. Some of the Freed projects are $600 as are a few of the more popular buildings scattered throughout downtown, and “unique” units like those with premium views, large terraces, super-luxury finishes et al could push $600 as well.
What amazes me the most is that CityPlace is holding firm at over $500/sqft!
BillyO
at 9:21 am
Discussion of this video here:
http://www.buzzbuzzhome.com/Forum/default.aspx?g=posts&t=363
Granted, it’s a site dedicated to pre con so they seem a lot more optimistic than David.
meow
at 10:27 am
Thanks so much for your reply.
Could you maybe do a blog post about the plus and minuses of buying a newer condo opposed to a 10+ year old condo.
Cheers!
Kyle
at 12:46 pm
Back in 2006 the condo market was still in its “Fresh”stage in Toronto. People didn’t really warm up to the idea of buying a condo unit vs buying a house. People renting in apartments didn’t know why they needed to pay a few hundreds more to live in a condo. But after visiting their friends condo’s, reading more and more about condo’s it has become one of the hottest places to live in.
Builders know this plus finding good areas to build condo’s are becoming harder and harder thus the higher price per sq/f.
Also newer condo’s are designed more and more advanced than before that attracts people to buy them than stay at their older condo’s which are really no different than living just in another apartment.
WEB
at 1:19 pm
Entertaining and informative video!
I’d rather invest in the kind of company that owns brands like Duncan Hines right now than Toronto condos. For example, I bet that buying shares in Nestle (doesn’t own Duncan Hines) will outperform Toronto condos by a very wide margin.
By the way….in stock marketland….Nestle is as high quality as the St. Lawrence market location in condoland. Hmmmm….CityPlace = Enron???? I knew you’d like that one!
Alyssa
at 7:04 am
Hi David,
I love your blog! I definatley see your point with this video. I actually bought into the Thompson Residences a few months ago. The deal seemed attractive to me, I got 10K of purchase price for being a Realtor and a streached out deposit. I have always wanted to buy a condo and thought downtown Toronto was a better choice than the suburbs. It will be ready in late 2012 and I am thinking of just keeping it as a rental. The idea of a hotel inspired building appealed to me. Do you think it was a bad investment?
Ryan
at 10:34 am
Where can I get that cake for $5?
McBloggert
at 2:32 pm
Alyssa the realtor, sounds more like a first time home buyer, than a realtor! “I have always wanted to buy a condo” and “I thought downtown Toronto was a better choice than the suburbs” – thought? Yikes!
It seams as though in the past, pre-constructions was a fool proof way to park some money and get a decent return – for those with foresight. I definitely get the impression that more uninformed people are buying into pre-construction, based on past performance as opposed to fundamentals.
That being said, I believe that a great building, in a great area, in a city like Toronto has huge potential. We’re experiencing a building renaissance and some of these condos will be landmarks that people will covet for generations and others will be looked at as eye-sores.
It may just come down to investment horizons, who knows what market Alyssa will find herself in 2 or so years down the road when the building is finished – she may make out fantastic or the investment my not be profitable for years.
Speaking for myself, my outlook is too conservative to assume the risk that pre-construction, in the present, comes with.
Amanjeet
at 4:16 pm
Hi David, love the blog.
I’ve been looking into condos downtown and have ruled out pre-construction, so that’s one decision down.
Last year I lived at Cityplace for a year, to see what downtown living was like compared to a life spent in the suburbs and hated the construction quality.
So I looked at some older buildings but their maintenance fees don’t make financial sense to me. And then there are the hotel/condo buildings, like 1 King West, the Cosmopolitan, the SOHO and their prices vs maintenance fees. (I work in the core, so any of these buildings would be convenient.)
It now seems that purchasing a Cityplace condo will be the only way I can afford a 1+1.
Curious on your take re: higher maintenance fees for older buildings (ie $600+) and what will happen to the units and those buildings?
Patrick
at 11:22 pm
@ Julian
You make a valid point that the true analogy is paying for a portion of the cake-mix today, and locking in the balance, thus locking in the price of what you’ll pay in total for the cake….
However you also say “…an arguably fancier cake three years down the road”.
“Arguably” = Uncertainty = RISK.
Let me add to this analogy (and be somewhat comical at the same time). Buying pre-construction is like buying cake mix, mixing it up, putting it in the oven, and taking a long winter’s nap on the couch… without setting the timer to wake you up.
When you wake up, the cake may very well be BURNT!
When your pre-construction is “finished” it may very well be a total disaster (and often is in Toronto).
It’s hard enough as it is to ensure you’re buying a quality product when you buy an EXISTING home. People deal with leaking rooves, appliances breaking down, basement leaking, etc, etc after the fact. Now think about buying pre-construction, which is nothing more than “an idea” when you buy it… and all the disasters that have befallen buyers when they finally open the door — and have to deal with defects and greasy developers.
To pay the same amount today for pre-construction as existing is absolutely absurd and foolish. “Baking” in appreciation is not without risk, and this risk must be reflected in the upfront price. Otherwise it is a terrible way to make an investment.
Lui
at 9:24 am
The cake mixed is good comparison,but if you dont know how to mix the ingredients properly or you dont follow the timing of the mix your in big trouble OR if you do a terrific job with the mix and your neighbors are willing to pay more than the total amount of ingredients you put in then you made a profit.I think unless the pre construction is amazingly unique it is better off buying a condo in the same area that is complete,you can rent it out immediately,pay down your mortgage,watch your investment hopefully appreciate in value…hell if the pre construction is selling for more three years down the line your unit would also go up in value.
NN
at 10:53 am
What if there is no adequate comparison to the preconstruction. Like the Treviso condos, there arent any more condos around there (Dufferin and Lawrence). So would it be correct to say that it will be a trendsetting place and we expect to see more condos in the area in 3-4 years, hence climbing prices?