It’s a simple question, but there are so many answers.
But everybody keeps asking me; buyers and my colleagues.
WHY have I completely disregarded the pre-construction condominium industry?
My Dad told me this story when I was a kid; the kind of story that a Dad would tell to his naive child; probably shaped from an urban legend.
He said he was in a philosophy class in high school, and the final exam was only one page.
In fact, the exam was one question:
The question read: “WHY?”
He said that students were crying, pulling out their hair, and freaking out! They had studied for weeks and were confused beyond reason by this final exam question!
My dad took out his HB pencil and wrote in “Why not?”
He got an A+.
Yeah….that’s gotta be an urban legend…
Every time a buyer or a colleague asks me about the “newest, greatest, flashiest” pre-construction project, I sigh.
“Ughhh…..”
Then I trail off.
I have completely stopped paying attention to “new developments” in Toronto.
That’s what I tell people: “Ugh….I dunno. I don’t care. I don’t pay attention to pre-construction anymore and I wouldn’t advise it.”
The reaction is always the same: they pause, tilt their heads, furrow their brows, and then say, “WHY?”
Then, I sigh again. The response is so long…
Oh, I’m aware of the projects, and I keep track of their sales. But do I put in the same amount of work and investigation that I did three years ago? Not a chance.
And for this, my colleagues and my buyer-clients always ask me, “Why?”
I’ve written countless posts about pre-construction condominiums both from the investment side and the avenue of buying the property to actually live there. If you look back to some of my older posts in 2007, I actively championed some of these projects as good ways to make money or great places to live down the road.
That time has passed.
I had three clients go to the launch of “The Berczy” over the weekend, and all three left disappointed.
They cited gimmicks, false advertising, misleading information, and of course, snotty salespeople as the reasons.
My thoughts on the subject could spill into a week’s worth of posts, but allow me to summarize the main issues:
There are just so many red flags in the pre-construction condominium industry right now, and too many risks.
When people ask me, “Why don’t you advise pre-construction?” I should respond, “Why do you advise pre-construction?”
Here is a summary of the major reasons we’ve discussed over the last year.
Delays
There has never been a project finished on-time in the history of….well, ever.
The possession dates quoted by developers are picked out of thin air, and mean absolutely nothing. Consider that if the project is actually started by the time that it was supposed to be finished, you should consider yourself lucky.
The optimists say, “Possession is only two years away! I can handle that!” Give your head a shake! You’re looking at double whatever is quoted.
Re-Launches and Re-Designs
How many times has Giraffe Condominiums been re-launched and/or re-designed?
A friend of a friend of mine was among the first to plunk down his deposit, and every six months he gets a notice in the mail about the condominium’s “exciting” new facelift! He’s coming up to two years now.
What this means, in actual fact, is that the developer couldn’t make money the first time around, so he’s re-configured the project to make it more profitable.
Most of the time, the buyers are called in to pick a different suite/floor-plan from the “new” list, and the prices often change as well…
Terminations
Is there anything worse than being given your deposit back after 2 1/2 years of waiting?
Projects do fall through in this city; probably more than people think. Maybe the developer elects not to re-launch the project, and instead just cancels it outright. Maybe this only happens with one project out of thirty, but it can make or break your financial future if you were counting on a six-figure profit and suddenly you’re given back your deposit with 1.75% interest.
Unknown Developers
I’m pretty sure my grandmother could launch a condominium project and people would still line up to put down a deposit!
The city is flooded with developers that we’ve never heard of before, or developers who have completed 1-2 projects.
Then there are the developers who are “HUGELY known…..in Richmond Hill,” and they’re building their first condo in “the city.”
And finally, we get the developers with “TERRIFIC track records…..in Vancouver.”
Concord & Tridel might get a bad rep because they build quantity over quality (not always, but often), however at least you’ve heard of them and they’ve built half the city!
200-Page Disclosure Statements
Don’t forget that no “standard” set of documents exists for the purchase of pre-construction condos in Ontario.
Every set of disclosure statements is different, and even the most experienced lawyer might not find the “special” clause in Sub-Section 27(a) on page 217.
Some time ago, I completed a conditional sale at pre-construction condo, and my lawyer reviewed the disclosure statement and found what he called “vague verbiage.” There were clauses that read “…the repairs shall be completed before the first full year of operations,” but it didn’t say WHO would complete the repairs! Is it the developer, as it should be? Or will it be completed by the poor saps who bought in this project via their reserve fund?
Many developers are now sneaking in a clause where the onus falls on the buyer to seek reimbursement for GST! It has always been the developer’s job to cover the GST, then seek reimbursement on their own.
I don’t trust the creative, crafty lawyers who are drafting these disclosure statements, nor do I trust the developers urge them to do so.
Registration
I hate when salespeople tell us that the building will likely be registered in three months. Show me the last condo to be registered in three months in Toronto! It’s taking longer and longer for buildings to be registered, and I would say the average has become about seven months.
Paying a “phantom mortgage” or occupancy fee on your condo takes away a bit of the lustre of home ownership. Just imagine doing that for sixteen months as the residents of a certain west-end condominium did two years ago…
Pre-Delivery Inspection
The PDI is absolutely worthless, in my opinion.
You go through the unit with one of the perma-grin salespeople, and spot “deficiencies” in your unit that have to be repaired within 30 days of occupancy. Most of these “deficiencies” are minor issues like a poor paint job, or a scratch in the flooring. Sometimes these issues are rectified, and sometimes they aren’t. You basically have to be a thorn in the developer’s side to ensure that your deficiencies are repaired.
But anything more than a “minor” issue won’t be found until you’re living in the unit! By then, however, the 30-day window for repairs is closed, and every deficiency goes through TARION.
Good luck with that…
Ongoing Construction
This is the one that really gets me!
The only real prerequisites to give occupancy of a “completed” condo are running water and electricity! The developer picks that date of occupancy, no matter how the building itself looks. So long as your unit is completed, guess what? You’re moving in!
The common areas won’t be finished for a year, and the lobby is full of soot, dust, drywall, and garbage.
Construction workers yell and holler down the hallways at 7AM with no regard for the quiet enjoyment of your “home.”
You basically live in a war-zone for 3-4 months, and you get excited when it looks like the work is nearing completion! But your excitement hides that fact that all this should have been taken care of before you moved in!
PRICE!!
I’ve left this one for last.
Prices at “The Berczy” are $600 per square foot, but you can purchase a resale condo down at London on The Esplanade for $550/sqft, or in a prime St. Lawrence Market building like 39 Jarvis for $450 – $500.
Why the hell would anybody pay MORE for a condo that will be ready in 4-5 years than one that they could purchase for LESS and move within sixty days?
It makes no sense!
The pre-construction industry has pulled the wool over your collective eyes and you all refuse to acknowledge it!
Egad!
That’s my list….for now.
I could probably drum up another 5-6 points, but that would likely lead to 5-6 more, and perhaps more after that.
These are my major issues, and hopefully they explain WHY I’m fed up with pre-construction. There are too many risks and I don’t see any upside. You could buy into an eight-month-old building tomorrow and take possession in sixty days with none of the issues I mentioned above.
Looking at the flip side, if somebody asked me why you should buy resale right now, I’d simply ask, “Why not?”
Roger Dodger
at 10:32 am
I went to the launch for Berczy on the weekend and you’re absolutely right about the false advertising. How can a building with 200 units launch only 50 at a time and then claim to be “sold out” when they sell those fifty? It’s like layers to an onion: you just keep peeling back to find more of the same! This project is far from sold out, they’re just hiding more units in their pocket. Pathetic.
LC
at 12:01 pm
This new system of brokers selling to themselves first and then throwing the crumbs to the public afterwards is going to kill consumer interest in new launches. Let them sell overpriced condos to eachother during these broker events, and then watch them try to get rid of them for years as assignments before finally not being able to close on them at occupancy. I’ve seen it too many times.
Barry
at 12:04 pm
David, I’m a long time reader and first time responder. Like yourself, I have been investing in pre-con in Toronto for many years. I too agree that the game is long over. But that doesn’t mean that you can’t find projects elsewhere. Laugh if you may, but I started looking in Mimico, Etobicoke, and Mississauga a couple years ago and I found great value. Since then, I’ve turned my attention to Oakville, Burlington, and Niagara Falls. Waterfront properties are very sought after and the prices have yet to spiral out of control as they have in Toronto. We’re still seeing pre-con prices at less than two-thirds of what resale costs – the way it should be, according to you, correct? My email is attached above. I welcome your correspondance.
Aguduser
at 12:08 pm
David,
The main reason that you (and I) have stopped looking at pre-construction for a while is one that is simple: there seems to be no good deals any more!
Your whole long list is nothing new, they are ancient! And they are not the reasons that you’ve stopped looking! They are the risks that you need to assess when buying pre-construction. And there were times when you ignored these risks, and jump in with both feet when you saw a great deal! Even the PRICE factor, calling a price high is relative, if people are paying $800/sqft for a project, and you can get a unit for $600/sqft, I bet you’ll want to jump in, even though the resales in the area are around $550/sqft! You’d tell yourself that it would come up to $800/sqft when the building is completed!
So why is there no good deal in pre-construction anymore? I think there are two reasons:
(1) We’ve got a little ahead of ourselves, in both the resale and pre-construction markets’ pricing, the heated market has pushed the prices a little too fast, and we are now slowing down to wait for the real value to catch up. I’m not talking about a bubble here. I’m just saying that we’re a little ahead of ourselves, and builders have based their prices on our own hype. They may reconsider it when we slow down. And the market signs is showing that we actually ARE slowing down quickly!
(2) After a year of heated market (came after the short recession time), suddenly the mass caught on with the pre-construction market, while the resale market is coming to a halt, in anticipation for a supposedly coming soon rate hike (as well as misperceptions of the effect of HST). Like Brian Persaud said on TV yesterday, it seems that “everyone and their mom is buying pre-construction, no wonder we can’t get good deals anymore!” Everyone saw how others made their money during the past year in new-built condos – selling assignments, or selling just a short time after closing – and suddenly everyone with some extra money wants to invest in pre-construction. That’s created fierce competitions. That’s created long line-ups that you saw more and more. Not to mention that agents, who are not so busy with the resale market anymore, are directing their forces into selling pre-construction. And that’s given builders the position to be jerks!
Well, I can only say that: when the mass catches onto something, you better jump out of it. The mass always come too late.
For me, personally, I’m content (and confident) with what I’ve got in pre-construction, and I will just lay low for a while.
Aguduser
at 12:13 pm
And, yeah, while the resale market is coming to a halt, WHY NOT start looking into buying resale?
David Fleming
at 12:30 pm
@ Aguduser
A client of mine went to “Market Wharf” and inquired about the pricing.
The sales rep told him that “future appreciation has been built into the price.”
Wow.
Aguduser
at 12:37 pm
@ David,
“future appreciation has been built into the price.”
Of course! They’ve all been doing that for a long while now, no?
Were you really surprised at that??
David Fleming
at 2:31 pm
No, I was jus surprised that they freely admitted it!
Imagine going out to a steakhouse and when the waiter brings your prime rib and says, “Hey, enjoy this steak that you paid $38 for…..it only cost us $3.00 because we buy in bulk. Bon apetit!”
Aguduser
at 2:41 pm
@ David,
Actually, I don’t blame them for doing that! If they have a future product that they think its value will go up, say 30 % in 4 years from now, and there are 10 buyers who believe them, they can certainly sell it at a higher price than its current value. Remember, the “right” price is what the market is willing to pay for a product.
When the builders price their future product too high, the market will adjust itself, like you and me, people will stop looking at these products. The builders will realize then, and adjust their prices accordingly.
But it could take a while before the mass gets over this new-found enthusiasm over investing in pre-construction. Until then, the builders can continue being jerks.
Krupo
at 12:26 am
Dude, read his response more carefully. It’s not they’re doing it, it’s that they’re CANDIDLY SAYING IT OUT LOUD.
Kyle
at 5:46 pm
Being an avid real estate observer/junky. I would have to agree with you, that pre-construction makes no sense. I would even add another point to your long list of Why Not’s – the new product is just plain crappier in every way. Prime locations are rarer and rarer, so new builds give you a choice of being in and “up and coming” hood, beside the Gardiner Expressway, a brown field, or miles from a subway line. New units are smaller, have thinner walls, and useless juliette balconies. Take away all the marketing glitz and fancy finishes and most new condos are smaller, cheaper built and worse located than your typical high rise apartment. So why do people love them so much? Here is my totally over-generalized and probably quite offensive theory – typical new condo buyers just aren’t very sophisticated. I imagine most of them grew up in the safe shelter of their parents suburban home. Never having to do so much, as change a light bulb or plunge a toilet, let alone know anything about home ownership. Most i imagine were chauffeured around by their parents until they finally got their own license. Then their only experience with Toronto was weekend trips to clubs and bars. They grew up with 800 cable channels, cell phones and gaming systems for Christmas, and all the other things the marketers have made them believe they “need”. It is no wonder that they are such easy prey for condo marketers, just show them the granite counters or the stainless steel appliances and they’re ready to line up for those wrist bands, for the privilege of over-paying for something that might get built in 5 years.
David Fleming
at 7:33 pm
@ Kyle
Amazing. I couldn’t have said it better myself!
Kyle
at 9:08 am
David, i’ve got to say that I admire the fact that you don’t just pander to the new condo fantasy. And that you honestly state your views, even the unpopular ones. I’m sure it would be easier and less controversial to use your site as a new project propaganda tool to try to pick up more business, like 99.99% of other real estate agents’ sites. Instead you actually present solid counterpoints against buying new projects and analyze deeper than the smoke and mirrors to see what the real value is. In the end, i think what you’re doing is a far more valuable service to your clients.
David Fleming
at 12:28 pm
Thanks, Kyle.
I consider myself a consumer advocate, and an outspoken Realtor who makes his opinions felt.
This often leads to controversy, but that’s just part of my shtick.
There are hundreds of ways to get business as a Realtor, and this is the route I’ve chosen. I started this blog as a hobby, since I love to write, but it’s grown into my #1 source of business.
There are no shortage of people who disagree with things that I write, or even dislike me as a person, having never met me. On the contrary, there are people that love my open, frank way of discussing real estate, and I have completed hundreds of real estate transactions with people who found me on this blog.
There are 100,000 transactions in the GTA each year, meaning 200,000 ends for Realtors. I can’t do ALL of those, so I refuse to sit on the fence and be impartial as many Realtors do, for fear of alienating one particular person, building, neighbourhood, etc. I let my thoughts and opinions flow, and I’m quite pleased with the response.
Thanks again for your readership and support, whether you agree with things I say, or not.