Yes, and cake!
This was one of my first Youtube videos, and one that’s been referred to and quoted by industry pundits, both bullish and bearish.
In 2011, frustrated by the people who still didn’t understand the backwards pricing involved with pre-construction condominiums, I decided to dumb things down, and simply compare the purchases to that of cake versus cake mix.
The camera work, the audio, the graphics, and my chocolate-brown suit, all scream “seven years ago.”
Seriously though, the camera work….just, wow…
Enjoy!
Agnese
at 8:23 am
The eye wink at the end though, amazing.
lui
at 2:44 pm
You cannot deny those who bought a one bedroom condo in 2012 is making a tidy profit right now.
Sarah
at 4:52 pm
That is not the point though…
BillyO
at 9:48 pm
David I’ve been a long time reader of your blog but you missed the mark with this one. Pre con has been an incredible wealth generator for me after this video was made, right up until my last buy in late 2016. I still love you through and when I eventually unload all my condos in the resale market, I’m hire you as my listing agent 🙂
Not Harold
at 7:40 pm
Billy –
I’m sure you have done well buying precon. There are advantages – $3k now, balance of 5% in 30, 5% in 90, 5% in 180, and 5% on occupancy. Which has substantial cash flow advantages and gets you additional leverage – you don’t need to get a mortgage until the building registers.
The challenge is that this is a massive bet on a continued strong real estate market. Most of the benefits accrue to investors buying multiple units and then selling them on a year or two after delivery. These types of people have the most secure access to financing and benefit from the difference in cash flow from buying an existing unit vs a future unit.
You saw lots of this behaviour in the US in mid 2000s – there was a terrifying Fortune cover in the Summer of 05 examining investor in houses in Las Vegas and Phoenix. We all know how it ended and The Big Short has Ryan Gosling, Steve Carrel and others highlighting the mechanics of what happens when the music stops.
In most financial markets when you promise to buy a commodity at a certain point in the future you get paid for this. It’s called “selling a put” – you agree to buy 100 shares of Google (or 1000 pork bellies) for $55 until Aug 31 and you get paid for this, since you MUST accept the items and pay the agreed price. Pre-construction condos used to have a discount, as David highlighted, which was similar to other markets. The discount was substantial because you were taking on this risk for a rather long time and the date wasn’t certain – exposing you to market risk, interest rate risk, as well as quality risk (the column that is in your new unit that wasn’t on the #$%### plans, for example).
When current inventory is selling for the same or less as future inventory, you have a VERY screwed up market. Small investors are taking on substantial risk and aren’t being compensated for it. They only don’t go broke if we continue to have a very strong real estate market, good economy, and continued low interest rates.
You can make money in situations like this. The derogatory aphorism is “picking up pennies in front of a steamroller” while the people involved deride naysayers as unsophisticated rubes who don’t understand how to make money in today’s economy. Joe Cassano ran a desk for AIG in London and he sold Credit Default Swaps (he got paid a small amount of money for promising to pay a large amount of money if someone like Goldman Sachs or JP Morgan defaulted on a loan.. see Big Short again for a description). He was the biggest seller and bragged that he’d found a new way to make money that was very low risk and he had the whole market to himself. He was a GENIUS!!! Other people just didn’t understand his business and were superstitious rubes.
Joe Cassano almost single handedly destroyed the global financial system as his buying activity was the key linkage between apparently separate firms, markets, and industries. Banks, insurers, hedge funds, and other players had reduced the risk of their market activity by buying insurance (aka CDS) on their counterparties, on the products they were trading, etc. Unfortunately EVERYONE bought it all from Joe, and Joe didn’t have the half a trillion in cash on hand to pay everyone out should they need it. September 15 ’08, EVERYONE needed to cash in their insurance, some on Lehman defaulted paper, some on slightly impaired paper but they needed the cash to shore up their balance sheet. Lehman ALONE defaulted on $600B in debt. AIG got a bailout (and then got broken up for parts) to save everyone else.
If you are buying precon without a SUBSTANTIAL discount to current resale you are picking up pennies in front of a steamroller. You can make money at this (Joe made more than $300 million in his career and wasn’t fined or jailed after AIG collapsed) but it is VERY high risk and most of the people who do it tend to, like Joe and yourself, believe that they’re actually doing something incredibly safe.
So be happy with the past success of your investments but for the sake of all of us, talk to a very sophisticated financial advisor. Someone from the private wealth management practices of the big 5 banks or the private client service of the big 4 accounting firms would be a good idea. Yes they’re expensive and exclusive ($5 to $10 million minimum in assets) but they are the only people with enough sophistication to help you and understand your current situation.
Tommy
at 5:17 pm
You got lucky due to the unprecedented ramp up in prices from 2015 – present. Buying pre-construction moving forward is betting on the wrong horse. Pre-construction prices in the core are even worse than what’s presented in the video since they’re often more expensive than resale condos.
What the video doesn’t consider is that newer condos probably have better resale value than existing stock. They’re brand new, after all.
Frances
at 5:00 pm
I think Jack is spamming you.