Condo pre-construction

[DEWDROPS]

Is it a good idea to buy pre-construction condos/townhomes (downtown/other areas) and sell right before the possession? I heard from my colleagues that few of them doing so. Has anyone here done so? Wondering if any money can be made by doing so?



I don't want to get much involved in RE and my initial target is set low: 10-12k a year.

 

[DEWDROPS]

Should have mentioned: that was my first ever post. Excuse me if I broke any rule of posting or haven't given enough details.

 

[Thomas Beyer]

That is a high risk strategy that works if



a) you buy the condo low enough, say 20-30% below anticipated future retail price, and such a discount is usually reserved for a few condos only or if you buy multiple units

b) you could close if you had to (i.e. have enough cash and access to a mortgage)

c) the supply and demand is in balance at the time of the intended exit (1.5 to 4 years out), i.e. there is enough demand to buy your (now more expensive) condo



As such, this is a highly speculative strategy that may work, or it may not.



It is extremely difficult to judge supply and demand 1.5 to 4 years out given the world's currency fluctuations, interest rate outlook, debt picture, local buying behavior, local condo market (both used and new) and national mortgage market.



So, the $500,000 (alleged future retail price) condo that you buy for $400,000 today may or may not be worth $400,000 in 1.5 to 4 years. Maybe only $375,000, or $350,000, or $425,000. Minus realtor costs to sell minus a few months of holding costs (condo fees, mortgage interest, property taxes).



Where I used to live in Canmore prices rose from 2000 to 2007 and many speculators, including local realtors made a quick $100,000 per condo buying pre-sales, and then in 2007 the $650,000 dropped hard to now $400,000. So, as stated it may work .. or it may not.

 

[DEWDROPS]

Thanks for your input Thomas! I thought about a and b but c was not in my mind. That's why getting advice from experts is important.

 

[Rem]

What about purchasing a pre-construction condo for the purpose of renting it out? Are there any issues I should be aware of that I might not have considered?

Also I just remembered an article I read last week talking about CRA deeming the process of flipping a pre-built condo without having rented first to be taxable as income, not capital gain, just a heads up!

 

[invst4profit]

Condo fees usually increase dramatically within a couple of years of construction and the ratio of rent to purchase price generally results in negative cash flow.

 

[Rem]

Thanks for the heads up Greg. Is this a consistent rule, therefore stay away from pre-construction, or is there any way to determine the likelihood that this will happen? One thing I was thinking was to look at average condo fees in the area and see if cash-flowing is feasible with condo fees similar to mature developments. Thanks again!

 

[Thomas Beyer]

Condo fees are at a minimum 30 cents per sq ft, more if lots of amenities like pool, sauna, concierge, 4 elevators, .. so check the advertised condo fees and budget 30 cents, or 40 if loads of amenities.



The risk with pre-construction is that the building does not yet exist, and that therefore the exact features are unknown, the construction quality is unknown, and the deficiencies are unknown. Most buildings have deficiencies, some of which that take years to fix, or never get fixed by the developer because the property manager installed by the builder is builder friendly and knows how to delay these tasks past the warranty period ! Then the owners get the bills, 2, 3, 5 years later. Example: a poorly installed or cheap elevator can cost a few hundred thousand to fix.



As such, pre-construction condos most be about 10-15% cheaper than a similar 3 year old asset where the issues are now all known and usually documented in the condo board minutes !



Houses or townhouses make more sense in most cases as the land under the house is yours and that is what goes up in value. Most cities also restrict new suburbs now, or they are quite expensive to service, so you get more equity upside in single family houses than a condo in most cases.