Over the next several weeks, Brian Persaud will be contributing a series of guest columns to UrbanToronto. Brian is a Toronto-based real estate agent, investor, analyst, TV host, producer and author of the forthcoming book, Profitable Investing in Condominiums: Strategies, Tips and Expert Advice for the Canadian Real Estate Investor. He studies the Toronto condo market and a is a good friend to UrbanToronto.
In this series of posts, I will be writing about topics contained in my book, as well as other UrbanToronto-related themes. I'm seeking to answer the most common questions that are often asked in the UrbanToronto Forum; from how developers price units, to the ins and out of condo marketing and, finally, the age old question: What constitutes is a well-designed building?
If you're a potential investor, I hope you'll be able to proceed with full confidence, knowing that you are asking the right questions, doing the math, and assembling the right team of experts that will help you realize your investment goals. And if you're someone who simply has a keen interest in how the condo market works, I hope you'll gain a better understanding of the business.
A common theme in UrbanToronto threads is how and why developers price units. I’ve seen many posters ask questions like:
Why are certain units pricier?
Why do developers hold back certain units?
Why do certain units sell faster than others?
Why do the price per square foot vary from unit to unit?
When talking to experts who consult with builders to determine prices, we find pricing is more of an art than a science. A developer and its team can stare for hours at the suite mix to come up with a perfect price list.
Here are some rules of thumb that are used:
• The cost to build a particular suite that has the design, finishes and amenities demanded by the target customer. For example, the builder may have to add an extra bathroom, or upgraded hardware and fixtures. If a building is to have many small suites rather than larger ones, there will be more plumbing, electrical and HVAC systems in the building, making the whole development more costly to build.
• The expected demand for a particular floor plan over another (all things being equal, higher floor suites and smaller suites are in demand in most areas). Suites with poor views, lower-floor suites and some floor plans could be priced more reasonably in relation to pricing for high- demand units. If a particular floor plan is in high demand, the developer may hold back units of that particular model to ensure the building sells uniformly.
• Units closer to mechanical devices (elevator, garbage chutes), or with awkward floor plans, may be priced lower.
• Price of neighbouring competition. Developers generally try to keep their price per square foot similar to their competition. If condos are “new market,” the developer will consider the monthly cost to live in neighbouring existing properties that are comparable.
• The gaps in price between different units. Developers try to keep pricing gaps small: they don’t want to have someone miss out on a $250,000 unit and have the only other option a $350,000 unit.
• Maximizing the view for higher-priced units. If a building has an exceptional view in a particular direction, larger units will be given the superior view over smaller units. This will help the developer offset the high demand for smaller units, especially if the local municipality mandates larger units in a building.
• There will be a “floor premium” as you go higher in the building. This can range from $500 to $3,000 a floor.
• Builders generally say that the land should make up about 10% of the saleable square footage cost. For example, if a unit is priced around $500 square foot, the land cost in that price would be about $50 per square foot.
Stay tuned for the second column in this series, coming next week.