Why purchase pre-construction condos at inflated price?

[steve_toronto]

Why purchase pre-construction condos at inflated prices?

I am just wondering why people purchase pre-construction condos at inflated prices?

Take Tridel's 300 Front Street as an example. The current price for 2C+D with 988 Sqft is $646,500. The price includes neither parking nor floor premium. Furthermore, the closing cost is additional 5% of the price tag.

On the other hand, the following two samples from the MLS seem a much better deal.

(1) #2605 -- 761 Bay St (College Park II) with 990 Sqft, two bedrooms + den, two bathrooms with locker, asking price $579,000 (MLS# C1748459).

(2) #217 -- 20 Blue Jays Way with 1115 sqft, two bedrooms + den, two bathrooms with parking and locker, asking price $529,900 (MSL# C1730006).

 

[Epi]

You're comparing apples to oranges.

When that Tridel building is built, those 2 other units will be >5 years old. As well the quality of construction in City Place and College Park is questionable. Anyone who's been in these buildings and taken a look at units would probably agree. Meanwhile, Tridel is a known quality developer. The location of the units is also very different as well.

 

[steve_toronto]

20 Blue Jay is also a Tridel project

You're comparing apples to oranges.

When that Tridel building is built, those 2 other units will be >5 years old. As well the quality of construction in City Place and College Park is questionable. Anyone who's been in these buildings and taken a look at units would probably agree. Meanwhile, Tridel is a known quality developer. The location of the units is also very different as well.

Please note that 20 Blue Jays Way is also a Tridel project, and it is located next to the 300 Front Street project. Further, it is hard to convince people that the 300 Front St is more attractive than the college park.

 

[simuls]

Why purchase pre-construction condos at inflated prices?

You have pointed out exactly why I've left the pre-construction purchasing biz. The prices are completely out of whack with current value and they're assigning a fictional number that they HOPE will happen. People who buy pre-construction in this market will undoubted lose money. While there has always been a premium for pre-construction, it has usually been within 10% of current value - nowadays, the premium is closer to 25-40% and any possible gains to be had by the purchaser have been eaten by the developer. It's simply too risky a market to be in - especially considering rents are dropping and will drop even more within the next year.

 

[Epi]

Please note that 20 Blue Jays Way is also a Tridel project, and it is located next to the 300 Front Street project. Further, it is hard to convince people that the 300 Front St is more attractive than the college park.

Oooh i just realized that's Element. I always get it confused with the City Place buildings across the way. Some of the units at Element are priced lower because they are facing west (where Fly will be), although I'm not sure about 217.

Either way, I agree that some pre-construction buildings are vastly overpriced now. I looked at 300 Front myself and decided it just wasn't worth it. Probably explains why it's been on sale for so long, especially when Tridel usually has a good track record of getting things sold.

College Park though are really not nice buildings. It's full of renters (go there anytime and you'll see endless UofT students), the layouts are horrible, the interiors are super dated, and the common areas are already starting to wear pretty badly. The only thing it has going for it is the good location if you're a student or work in the hospitals.

 

[BMyers]

When you purchase a pre-construction condo, you are investing in a condo apartment "future". You put down a deposit for the right to purchase this unit at registration, in most cases that current value of your unit is higher than the agreed upon sales price.

People are also willing to pay a premium for the following reasons:

1) You have the greater choice of suites: by floor, view. You do not have this with a resale.

2) You generally have much nicer, newer finishes than a lot of resales and you get to choose your flooring colours, countertops, cabinets, etc. There will be no holes in the wall, no scratches on the floor, no weird smells, no dust behind the refrigerator!

3) People pay more to have something new and never lived in.

4) Condo fees are always the lowest during the first few years after registration

5) You get a builder warranty if something goes wrong and Tarion warrantly. Your brand new appliances are under warranty. You likely have a individually controlled meter so you can control your energy costs. You likely have a more efficient and possibly green building, which controls costs.


People were saying the same thing about Maple Leaf Square, that $450 psf was outrageous, compared to resales of $350 to $375 psf Downtown in early 2006. Now $450 psf looks pretty good compared to the $650 psf at ICE - Phase 2, but still good compared to resales at 18 Yonge, Infinity, Pinnacle Centre at $470 to $500 psf.

 

[archetype]

I'm moving into a brand new building, but may have to go out of town for a month for work. There is a prospective tenant who wants my place for a few months, and is willing to pay up front. If I officially moved in, but had this tenant essentially pay my occupancy fee while I was away, provided he obeyed condo rules, would I be in breach of my agreement of purchase and sale? Should the developer care either way?

 

[simuls]

There is probably a clause stating definitively if you can or cannot rent your unit out upon occupancy. That being said, when a building is new there are many people coming and going and no one is going to know if you do rent it out. I rented out my first condo for the 8 months of occupancy, before registration, and after, but nobody knew anything. Most builders don't care as long as they receive their cheque. You should be aware though that if it says no renters, you're breaking the rules, taking a risk and they can void your purchase and sale contract.

 

[RedRaptor]

I believe you can indeed rent your unit out during occupancy phase. However, it might be only through the builder's rental agency.

 

[X2 Buyer]

I have so far seen at least couple of standard purchase agreements having the specific clause that you cannot rent out during the occupancy period.

 

[zeeden]

My agreement has a clause that states that I am able to rent out during occupancy as long as I pay an administrative fee which is $500.00

 

[TorontoMike$$]

You have pointed out exactly why I've left the pre-construction purchasing biz. The prices are completely out of whack with current value and they're assigning a fictional number that they HOPE will happen. People who buy pre-construction in this market will undoubted lose money. While there has always been a premium for pre-construction, it has usually been within 10% of current value - nowadays, the premium is closer to 25-40% and any possible gains to be had by the purchaser have been eaten by the developer. It's simply too risky a market to be in - especially considering rents are dropping and will drop even more within the next year.

Sorry to hear that you have left the biz.
You will miss some serious gains in 2010-11.

 

[GraceCondos]

...especially considering rents are dropping and will drop even more within the next year.

It was my belief that vacancy would begin to decrease later this year... With the eventual rise of interest rates, the gap between rent and mortgage repayment will increase and I think some people will choose to continue renting for a while... So with supply & demand, if you have more people looking to rent, it will help rental rates.

What are your thoughts on rent dropping?

 

[simuls]

Sorry to hear that you have left the biz.
You will miss some serious gains in 2010-11.

Any condos purchased in the core past mid-2009 (new construction) won't see any capital gain appreciation until maybe 2015 in which case because of the magic of inflation, it will have dropped 8% or more in real value. People are foolish if they think $700/ft is the new norm for downtown Toronto - it'll take at least 5-8 years of stagnation for us to catch up to that number. Not income, immigration (the population of the city of Toronto only increased by 100 000 over the past decade), rent or economic growth will sustain those prices. There are simply no sets of numbers to justify it and there's a reason that RE historically only goes up 2% above inflation each year - because it's all our society can afford.

As for rents, they'll drop because there are a massive number of investment condos coming on the market starting in the 2nd half of 2010 and into 2011 (think 7000+). The vacancy rate has already climbed 50% since last year (from 2.1 to 3.2%) and rents are dropping with incentives being added - ask almost any rental management company - keeping in mind that from building to building there will always be exceptions. From an investment standpoint, a $350 000 1 bed condo+Parking can only rent for around 14-1500/month. That would mean that in order to have positive cash flow, that investor could carry a maximum $150 000 mortgage on that property, meaning that a $200 000 investment is paying less than a 2% return a year - that's not good. When these investors realize this and have trouble renting, they'll flood the market. It is possible that the demand scenario you envision could come true however. If interest rates climb even 2%, it will have a corresponding effect on prices/sales and most of the 1 bed condos will be out of reach of purchase for first timers, thus throwing them into the rental pool. The market will always figure itself out, but the next 5 years will be a wild ride.

 

[GraceCondos]

As for rents, they'll drop because there are a massive number of investment condos coming on the market starting in the 2nd half of 2010 and into 2011 (think 7000+). The vacancy rate has already climbed 50% since last year (from 2.1 to 3.2%) and rents are dropping with incentives being added - ask almost any rental management company - keeping in mind that from building to building there will always be exceptions. From an investment standpoint, a $350 000 1 bed condo+Parking can only rent for around 14-1500/month. That would mean that in order to have positive cash flow, that investor could carry a maximum $150 000 mortgage on that property, meaning that a $200 000 investment is paying less than a 2% return a year - that's not good. When these investors realize this and have trouble renting, they'll flood the market. It is possible that the demand scenario you envision could come true however. If interest rates climb even 2%, it will have a corresponding effect on prices/sales and most of the 1 bed condos will be out of reach of purchase for first timers, thus throwing them into the rental pool. The market will always figure itself out, but the next 5 years will be a wild ride.

Great feedback! I've turned my attention to smaller cities with reasonable condo prices and a strong demand for rental units.