Noob question on Pre Construction / Projects

[shyne07]

Hi everyone,
I am new to this board. I actually browsed around few times
and finally I decided to ask questions..

I have decided to purchase a condominium to invest,
I already have a place that I am living in and I am interested in purely investments.

So I met up with one of the realtors I knew before and told him my situation.
I have about $150k to spend right now. He told me, if I am not going to need this money for a while
he wants me to purchase 2 condo projects.

He said, it will definitely give me capital gains in few years and it would be better than just buying a condominium
and renting it out for next 3~4 years. (less hassle, what not.....)

Anyways, he told me that I should buy one which will be built in next 3 years and another one which will be maybe 4~5 years.
so that I have a term between the two.

He said, the first one is not going to be so profitable because it's going to be something that's already in the market selling
but he promised he will get a VIP sales for the second one so it will give higher chance and amount of capital gains at the end
when i sell them in 4~5years.. so he explained his theory and experiences....

What he said was soon he will find the first project and we will discuss about it, but the second one, I will have to just trust him and as soon as he calls I have to run to him and sign everything because VIP sales don't last. that there will be no time to explain everything but that i have to trust him because delay means it will be sold out!

Now, I only know him vaguely, and I am worried. After speaking to him, he sounds intelligent and seems like he knows his stuff. I just wanted to ask you guys if he's right and if it's right for me to buy these pre sale condominiums and what I should be aware of.

I am so new to this and his theory sounds really good and convincing..
Advise me on my decision. Should I trust him and do what he say or should I be researching much more?
I have been searching on the internet but couldnt find much valuable information.

Thank you and hope you guys got what I am trying to say.

 

[jonathanyu]

Have you considered deflation in the housing market? What happens if that were to happen, are u willing to hold your property more than 5 years for it to gain back value (if it does lose value from the date of purchase to it being built).
I think you should be more diversified, and perhaps invest in one condo and put the rest of the money in equities. This is so that u won't be hurt bad if the housing market dips and in no way does the stock market and the housing market run together. So there is a disconnect there that will save you a lot of trouble (if u were to be in one).

Buying well into the 4-5 years is very speculative, what happens when all that speculation leaves the city? You are going to get bit. I would advise you to buy the 3 year pre-contruction project, so that at least you can rent it out sooner if you came out of it losing.

 

[NikoS]

From my experiences, friends, and what I have heard...

What you invest in really should depend on how much risk you want to take on because the reality is there is no sure thing. You need to be realistic with the net returns you expect to gain with pre-con condos. With precon you will need to factor in all the costs especially closing and the costs of selling the unit - before you estimate net. In the city you are not usually getting positive monthly returns on single units, but trying to break even (the unit won't always be occupied so thats also something to consider)... Note: when you buy a pre-con at VIP you are looking at least 4-5 years with delays and locking yourself and your money into contracts.

Ensuring you have tenants every month can also be a pain...

Also with the amount of money you have available you may consider buying a multi-unit residence that may return a positive monthly cash flow.

On the equities note, if you still want exposure to real estate, you can always open up a self-directed TFSA and purchase some exempt REITs that return 8-10% such as dundee or riocan... the distributions are tax free.

Personally
- I wouldn't sign a contract without being fully informed
- I would get second opinions from other real estate agents
- "He said, the first one is not going to be so profitable because it's going to be something that's already in the market selling" this statement makes no sense to me

 

[shyne07]

Thanks guys, first of all,

Nikos/
"He said, the first one is not going to be so profitable because it's going to be something that's already in the market selling" this statement makes no sense to me"
what i meant here is that, he said it will not be a VIP sale so i would not be able to buy it at a very low price, meaning it wouldn't be as profitable.

Listening to you two it seems like it's not such a good idea to buy two pre cons.
maybe i should just buy one proper one and invest the rest of the money on something else.
I know there is a chance but do you guys think the real estate market will crash in toronto in next few years?
I have no idea at all..

Also just to confirm,
do i have to pay agent fee when i buy pre con?
and what are other expenses i have to think of when i buy pre con?

thank you

 

[NikoS]

I am not really an expert I guess... but I think you have to value each investment individually and keep in mind what your money could be doing in alternatives.... If you have 150k in cash just sitting around then you should probably look at making it work for you.
I wouldn't say no to a good investment and I don't think that the toronto market is going to crash. The market was very heated at one point, where the demand for quality units in certain areas was in excess of supply - thus bidding wars. To expect that the level of price increases we have seen in the past to be maintained I think would be incorrect. I would lean towards conservative estimates.

When purchasing a place the buyer does not directly pay for the real estate fees, the seller does (but keep in mind it is in the price... if you can strike a deal with an agent representing the buyer and seller you can try and get the price lower to reflect lower commissions .. but thats a different story). With precons you would be responsible for, at least - at closing:
Lawyers Fees
Provincial Land transfer taxes
Toronto land transfer taxes
Levies in the contract (get them - as many as possible - capped)
additional minor fees...

Before closing you would have the interim occupancy fee, during which you are not 'allowed' to rent out the unit... the fee is calculated based on the monthly interest due on the outstanding balance and the condo fees...

I currently have 2 pre-cons on the go and think its too much for me. But thats just me... I am expecting closing for each to cost me around 20K....
Do you know the location of any of the units?
How did you meet the agent?

 

[nhincompoop]

do i have to pay agent fee when i buy pre con?
and what are other expenses i have to think of when i buy pre con?

1. No, the builder pays the agent.
2. There will be closing costs, development levies, and phantom mortgage to consider off the top. Your agent should be telling you about these.

Your questions make me think you are really, really new at this and makes me nervous that you'd be so willing to put a lot of money into something that won't see a return for at least 3 years, on the advice of someone who has a financial incentive to sell you not one, but two units.

There is a LOT discussed in the Baby, we got a bubble!?thread, and it does tend to suggest a less than stellar outlook for the condo market over the next few years. However, it is important to educate yourself and reach your own conclusion. At minimum, talk to other people, even other realtors - and get a second, third opinion.

 

[shyne07]

I know I should be doing moire research,
but i have been looking into buying a place for about a year now
but still not so firm with my decisions..

Asking too many people, getting too much information just makes me confused..
afterall no one really knows anything for sure, just better estimates and experiences.

It's my first time and that's why i am so cautious and kinda worried
but maybe once i seal the deal and wait things will be better off.

I read many threads and posts..
And from reading the worst case scenarios such as prices dropping by 10~20%,
it makes me hesitate.. I guess i need to talk to the realtor and ask him about preparation for the worst case scenario.
but then again I will be purchasing the pre cons at a lower prices so even if the market crash,
I won't be as heavily affected as buying an $400,000 resale place. "i think.."

And at the end of the day I am worrying about the worst worst case scenario..
how can I make anything if I am not risk averse..

I justed wanted to get second opinions from everyone here
and thanks for sharing your opinions and advising me.
but I do admit, I am still confused

* i knew seller has to pay the agent but i wasn't sure with the pre constructions.. just wanted to make sure

 

[shyne07]

Do you know the location of any of the units?
How did you meet the agent?

I contacted my agent through internet first and later met up with him, looks like he has many years of experiences
and has lots of clients but not sure if he just wants to make money off me..

also I asked him what kind of location are we looking at and he said only the ones close to subways and probably
downtown toronto or north york area. we are meeting in few days for details.. but as I mentioned he did say for the
VIP sale prices, he won't have time to discuss or explain but I would have to just trust him and quickly sign the papers. (when the time comes)

 

[NikoS]

The first time is definitely the scariest. Once you sign you will still have the recision period to make a final decision. Ask him lots of questions.... Keep in mind some agents are better connected than others...

 

[shyne07]

that is one thing i am worried about,
would he be well connected? would he be reading as much news and information about
the economy and real estate world as some realtors do?

I would never know this..
He is part of Century21 and I believe it's one of the big ones
so hopefully that would benefit him with VIP sales.. (just my guess)

 

[nhincompoop]

but as I mentioned he did say for the VIP sale prices, he won't have time to discuss or explain but I would have to just trust him and quickly sign the papers. (when the time comes)

This sounds shady. He's either unable or unwilling to fully disclose the details, yet wants you to hand over a substantial amount of money and commit to a legal agreement.

Think of it this way - if I told you I had a really hot stock tip, but couldn't get into how I know the stock will go up, just trust me and buy, would you?

 

[cdr108]

pre-construction also pays the realtor the most for the least effort.
developers typically offer the R/E agent 4% of the price (no sharing), while resale is 5% split between buyer and seller agents.

He said, the first one is not going to be so profitable because it's going to be something that's already in the market selling
but he promised he will get a VIP sales for the second one so it will give higher chance and amount of capital gains at the end
when i sell them in 4~5years.. so he explained his theory and experiences....

how long has he been a realtor? anyone who's only been in R/E for the last 15 years or so know nothing but an upward market so that skews one's view and really has limited 'experience'.

pre-con used to be sold at a discount to re-sale until 5 years ago, now it's being sold at a premium that varies from 20 to 50% higher.
keep in mind that some will always like 'brand new' vs. 'newer'; however that's a large differential which will limit the pool of potential buyers when value for money is a big factor.

I have decided to purchase a condominium to invest,
I already have a place that I am living in and I am interested in purely investments.

i'm confused by some of your statements.
you state it's your first time buying, yet you already have a place to live?
are you renting, or do you mean it's your first time for investment purchase?

if you buy a condo and YOU don't live in it before 'flipping' it, you will be subject to TAXABLE capital gains vs. TAX-FREE capital gains for primary residence.

transaction costs for selling a property will vary between 7.5% - 10% of the SELLING price when one adds R/E commission (biggest chunk), assignment fee to developer (assuming they will even allow you to 'sell the contract' prior to registration), lawyer fees, staging, occupancy fees, etc.
that means you will have to make AT LEAST 10% to just break even before making any money for all your effort and RISK.

So I met up with one of the realtors I knew before and told him my situation.
I have about $150k to spend right now. He told me, if I am not going to need this money for a while
he wants me to purchase 2 condo projects.

He said, it will definitely give me capital gains in few years and it would be better than just buying a condominium
and renting it out for next 3~4 years. (less hassle, what not.....)

I read many threads and posts..
And from reading the worst case scenarios such as prices dropping by 10~20%,
it makes me hesitate.. I guess i need to talk to the realtor and ask him about preparation for the worst case scenario.
but then again I will be purchasing the pre cons at a lower prices so even if the market crash,
I won't be as heavily affected as buying an $400,000 resale place. "i think.."

he wants you to buy 2 x $400K condos with your $150K ?!?
let's split the funds evenly, so $75K deposit for each $400K condo ... that's 18.75% down payment for each, meaning CMHC insurance fees applicable to both. if done $80K / $70K, then only one will have CMHC fees assuming the rules aren't changed for speculative purchases again (perhaps back up to minimum of 25% DP required ???).

but for ease of explanation, let's say you put $75K/$75K down.
if there is a 'worst' case scenario of 20% drop (which i believe is an under-estimation because bubbles can go to extremes both ways up and down), you just lost all your investment and will require 100% funding from the bank for the remaining $650K!

if you qualify for $650K and able to get financing, then you're lucky.
if not, then what ??? you've signed 2 agreements to purchase condos ... these are legal binding contracts.

also I asked him what kind of location are we looking at and he said only the ones close to subways and probably
downtown toronto or north york area.

i agree with the realtor there.
stay within the downtown core of C01, C02, C08, C09; or along the subway line if going further north and into NY.

----

have you run the numbers to see if the rental unit will have positive cashflow in case you can't flip it?

if you must buy, i would recommend no more than 1 unit

 

[shyne07]

wow, so much risk.

By the way i think the realtor wanted me to purchase
something small for the first one maybe around 250k and maybe 400k for the
second one, but maybe I should just buy one and keep my money.

he wanted one to finish in 3 years and the other one to take longer so we have time to
flip it in between...

i am meeting him tomorrow to hear more, but now i AM worried about he situation.
so I would have to make at least 10% to break even... that's not nice..

so this guy is going to make 4% from sales and in 3~4 years time another 5% for selling my property
and if I dont make more than 10% out of this, I am just going to be losing money.

cdr108 are you a realtor?
*by the way my company is paying for my rent and it's secure job

nhincompoop/
i think we got cooling off period so i could do the research after signing, am I right?

 

[AKS]

I think for 250k, you're not going to get more than 450 sq ft which is a bachelor.

 

[nhincompoop]

nhincompoop/
i think we got cooling off period so i could do the research after signing, am I right?

Yes, you get 10 days.