Who calls me on the office line, really?
I swear, any time I’m paged overhead, “David Fleming, line 101 please,” I feel like I’m about to be pitched on elevator advertising or search engine optimization.
My phone rang the other day just as I was about to head out for coffee, so a colleague sat in my office and listened to the entire conversation.
A gentleman on the line said, “I’d like to sell my condo and I’d like you to be the one to do it,” so naturally, my interest was piqued and I got out my pen.
I said, “Where’s your condo?” and he paused, then chuckled, then said those famous words: “Well, here’s the thing…”
Ah, the thing!
There’s always a thing!
“The thing” is never a good thing. It’s always a segue to some sort of long-winded explanation, and it usually doesn’t end well.
“What I should have said,” the gent told me, “Is that I want you to sell my assignment,” he explained.
The fact that he knew the term “assignment” and that he voluntarily distinguished between “selling my condo” and “selling my assignment” tells me that he’s not the newbie dreamer that I always fear is calling in these situations, but I needed to dig a bit further.
“When did you purchase the assignment?” I asked him.
Now, before I tell you when, what do you think would be the worst possible answer?
Three years ago?
“February,” he told me. “I think it was the second or third week of February.”
I don’t know what would be worse: wanting to assign a pre-construction condo that you purchased two days ago, or wanting to sell a pre-construction condo that you bought in February at the market peak.
Before I got into the litany of issues, I decided to ask him a blunt question: “How did you find me?” I asked.
“Through your blog,” he told me. “I Googled ‘pre construction’ and ‘assignments’ and a few other words, and there were so many sponsored links and agent websites selling floor plans, but your old blog posts kept popping up a few links down,” he explained. “I read a bunch of your stuff and it seems like you know what you’re talking about.”
I asked him, “But did you read the posts? I’m not exactly complimentary of the pre-construction industry, or developers, or assignments,” I added.
He said that he knew all that, and explained, “That’s why I want you in my corner! I need somebody who can point out the problems and the pitfalls.”
Well, he asked for it, so I offered, “Alright, well the problem is: you have a zero-point-zero percent chance of selling this assignment.”
There was silence.
He then offered a forced laugh and said, “Well, I appreciate that insight, um, I guess. But let’s talk about options.”
I asked him, “How much money are you willing to lose in order to unload this?”
He then said, “Lose? Um, sorry. I don’t quite follow. Heh, I mean, I haven’t even told you where it is, or what I paid…”
Now, I know that the TRB readers want to know where this gentleman invested, in what, and for how much, but I don’t think it’s fair to disclose that, and I also think we can work around this.
Let’s say that he bought in Toronto in February and that he paid about $1,800 per square foot, no parking, no locker, so-so floor plan.
He provided $5,000 upon signing and the balance of 5% within 90 days, which was paid. He has about two weeks to pay the next 5% installment, which is due within 180 days of signing. Then he owes another 5% at 270 days, and another 5% at 360 days.
“I can assign this APS to another buyer by paying a $10,000 fee to the developer,” he told me.
I laughed, but only on the inside. I remember when that didn’t cost anything. Whichever developer came up with that idea has every other developer to thank.
“I’d rather not pay that fee if I can avoid it,” he told me. “I’m hoping we can build that into the sale.”
I asked him, “Can we just back up a bit?”
“You paid over $1,800 per square foot for a pre-construction condo in February. You are aware that the market has declined since then, right?”
He sort of agreed.
“Yeah, for sure, I mean, overall it has, but how much is the decline in the condo market relative to the overall averages?” he asked. “I mean, we’ve got like a half-million people coming into Toronto every year and they’re gonna need some place to live, so I just don’t see how a property like this could be worth less in 3-4 years when it’s built….”
Now he was selling me!
He had done some homework, that’s for sure. He was telling me that the decline in average condo prices was less than other market averages, and somewhere, he must have read about the net migration into Toronto. Maybe he read that in the TRB comments section?
I asked him, “Are you selling the condo in 3-4 years?”
He said, “No, I told you, I want to assign my agreement.”
I responded, “But you just told me that the condo will be worth more in 3-4 years, so what does that have to do with the value today?”
He explained, “Somebody buying this today for $1,850 or $1,900 a square is going to make money when they sell in 3-4 years. There’s no way this is worth less in 3-4 years.”
“You’ve made three mistakes there,” I explained, knowing that this was the point where the conversation was about to turn.
“First, you said ‘$1,850 or $1,900 a square’ as though you expected to make money on this assignment, which will never happen. Secondly, you made an assumption about where the market will be in 3-4 years, and that’s speculation at best, and wishful thinking at worst. But most importantly, you’re ignoring that a buyer today does not care what you paid for the condo in February. They care what it’s worth today. You can’t buy shares of Tesla for $900 and then when they drop to $800, try to sell them for $950 because you just know they’ll be worth $1,200 at some point down the line.”
I honestly couldn’t understand his logic.
He knew that the market had declined but he wanted more for the “property” than he paid. And I use quotes there because this isn’t a property. It might never be a property. It’s an option at best and a liability at worst.
Let’s say that concert tickets to Justin Bieber are $200 a piece.
You buy two tickets on the resale market for $350 apiece.
If that concert is canceled, do you get your $700 back?
You get face value back.
I explained to the gentleman, “There’s a high-percentage chance that this project is canceled,”
He immediately interjected, “Oh no, no way. Not this developer, they’re solid. They’re rock solid.”
He was starting to scramble and get defensive, which told me that I was starting to get through to him.
“Developers are putting projects on pause, but they might not be advertising it,” I explained. And for what it’s worth, I have this on good authority. Any developer who has yet to break ground on a project is likely sitting in a board room right now trying to decide if they build, when they’ll consider starting, and how long they can delay for – counting in years.
I told him, “You owe these guys another fifty grand a few weeks, and if you don’t pay them, you’ll risk losing the fifty grand you already put down. So how much money are you willing to put up in order to avoid losing that first fifty grand?”
He said, “Well, that’s exactly why I want to assign it. I just don’t want to make any more deposits.”
“Okay,” I replied, “But you told me you want $1,850 or $1,900 per square, so you’re looking to profit from this.”
“I have to pay that $10,000 assignment fee somehow,” he explained. “And honestly, I think I’m owed a little something for my troubles.”
And there it was, folks! A little something called entitlement.
Investors are “owned” a return in the Toronto real estate market, even if they pay a stupid price for a pre-construction project that probably won’t be built, and decide to jump ship after only six months.
The truth is: this person stands to lose more than just his initial $50K deposit if he tries to take this the distance. He’s looking at paying an additional $150,000 in the next six months, and that money is going to sit, and sit, and sit. This project will definitely be delayed, it could be canceled, or it will be a case of the developer canceling it and then re-selling it in a few years at higher prices.
But what will the condo actually be worth when it’s finished?
And what will the closing costs look like?
Some of you might have read this article last month:
Don’t say I haven’t been warning you for fifteen years!
I summed up the phone call by asking what I thought was a very simple question.
I asked the gentleman, “Who do you expect to buy your assignment?”
“An investor,” he told me.
“What kind of investor?” I asked.
“A real estate investor,” he answered, as though it was obvious.
I asked him, “No, hang on, I mean think about it for a moment, and tell me who is going to buy this. What type of investor? Who is going to pay almost $1,800 per square foot, in this market, after interest rates have increased four times, and the TRREB average home price is down 20% since February? Who is going to buy this?”
Do you know what he answered?
“The average TRREB price might be down 20% since February, but the 416 condo market is only down 10%, and downtown condos are probably down a lot less.”
He wasn’t getting it. He seemed to think he could debate his way out of this problem.
I told him, “I’m sorry, but I can’t help you,” and that was that.
Do you want to know what an assignment sale looks like?
That’s a 1-bedroom condo.
It’s also only 577 square feet.
That list price represents $1,872 per square foot, and the initial list price of $1,120,000 represented $1,941 per square foot.
This condo is scheduled for completion in 2024. That means 2025.
As an aside, I clearly don’t understand “marketing” in 2022 for overpriced condos. The listing notes, “Union Station, TIFF Building, Billy Bishop Airport, St. Andrew Station, U of T, Ryerson, George Brown, All CLose By. ACC, Rogers Centre, Eaton Centre.”
We’re now just naming places in the downtown core in an attempt to market any real estate located downtown? I can find other condos, ones $800/sqft less, that are just as close to all of these downtown landmarks.
I don’t understand. I really don’t.
Who in the world is going to buy this place?
$1,872 per square foot, no parking, no locker, no outdoor space of any type, maintenance fees already at $0.83/sqft plus utilities, and the building isn’t even finished, so that will be over a buck-a-square by the time they run their first budget in 2026 or 2027.
Why would anybody look at this?
You want a 577 square foot condo?
That’s 580 square feet.
It’s priced at $599,000 and has been on the market for 47 days, so go get this for $560K. Or less.
It’s an awesome location in the heart of the St. Lawrence Market, a ten-minute walk to Yonge Street, TTC streetcar at your door, and the area is upscale and quaint.
Oh – and it’s more than a half-million dollars less than the assignment above, which comes with delays, deficiencies, an indefinite occupancy period, closing cost surprises, and God knows what else.
Folks, the assignment market is dead for the foreseeable future. Unless assignors are looking to take net losses, they need not bother listing. Or inquiring.
Happy Friday, y’all!