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My Experience With the New Residential Rental Property Rebate (HST Rebate)

I wrote about the HST issue a couple months ago, calling it the “Elephant in the Room” with respect to the pre-construction condo market. I wanted to follow up this post with my own personal experience with dealing with the HST rebates (New Residential Rental Property Rebate-NRRP) when buying a new condo for investment. In short, it was a surprisingly quick and painless process to get back my rebate money once I figured out all the forms and the calculations.

The photo above is of One Park West, or 260 Sackville Street. The building was recently registered and I own a unit in the building which happens to be the Smallest Condo in Toronto. I recently closed on the unit and as an investor-owner had to pay an additional amount for HST on final closing. Here is my story for getting that money back from Revenue Canada:

In order to qualify for the rebate, I had to have a tenant in the property and a signed lease for a minimum 1 year (which I did). All in all it only took just 40 days from the time I sent in my application to the time I received my rebate monies back in full. Quite contrary to some of the reports I have heard of it taking as long as a year to get your money back. If you have your paperwork in order and you complete the forms properly this seems to be the result you get. I even was paid some interest on my rebate amount (presumably taking into the account the time I paid it until the time I was paid it back).

Some additional things that I learned when going through this process:

• Provincial tax (PST) is the biggest portion of the rebate by far
• Federal tax (GST) is the smaller one
• Provincial rebate is 100% until Fair Market Value (FMV) hits $450K, then is zero after that
• Federal rebate is 100% until FMV hits 350K, then reduces down to zero when you hit $450K
• Therefore if your FMV is less than $350K you should receive 100% of your HST monies back. If your FMV is between $350K-$450K you will receive most of it back. If your FMV is greater than $450K you will receive zero back.

The Problems I see with the New Residential Rental Property Rebate:

• If the FMV of your condo is $450K you will receive back more than $20K. If the FMV is $451K you will receive zero. What policy maker in Ottawa came up with this scheme??
• FMV is still a conundrum to me. Who determines it? How is it determined? What happens if the government doesn’t agree with your FMV number?
• FMV of  your unit does not take into account what you will actually ‘net’ on your unit if you sold it at FMV (it does not take into account selling costs).
• A better system might be to simply add an additional tax on investors who flip their unit after final closing as a percentage of their actual profit. Under the current system, you might both lose money on your sale (due to closing costs when buying and selling), and also have to pay tens of thousands extra in HST just for the ‘right’ to lose money on the transaction. Doesn’t make sense.
• Is the government in the business of discouraging people from investing in real estate unless that real estate is priced below an arbitrary figure of $450K??
• FMV is the crux of the calculations used to figure out if you qualify for the rebate. FMV is determined at the time that the HST is paid (at final closing in Ontario). The higher the FMV, the lower the rebate amount. Therefore I observed that it might be better for investors to actually pay the HST amount UP FRONT when buying a pre-construction condo, because this will result in a lower FMV and therefore a higher rebate amount!

Questions about the New Residential Rental Property Rebate (HST rebate)? Wondering if you qualify for the rebate or need help completing the application process with Revenue Canada? Contact me or leave a comment.

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Statement of Adjustments from Hell

When buying a new condo, you need to be aware of the costs involved. Buying a new condo is not the same as buying a resale condo, there are additional costs you will incur on closing day. The sales people at the condo sales centres will NEVER bring any of these items to your attention.

A reader of this blog (not my client) recently emailed me asking for my advice/help after they got the shock of a lifetime when seeing their statement of adjustments on their new condo that they were about to close on. The person in question bought a large unit at Festival Tower a couple years ago when they were offering their 5% deposit program. The price of the unit including some minor upgrades was ~$840K. Imagine how you would feel if your lawyer told you you had to come up with $74K for closing costs (not a cent of which would go towards equity in the unit). The costs that the buyer had to pay on closing included:

• HST of $39K
• Land Transfer taxes of $19K (after the first time buyer rebates were applied)
• Tarion enrollment fee $1250+HST
• Legal fees – for interim closing and for final closing $1300+HST
• Property taxes pre-paid by developer $750
• Development Charges $2900+HST
• Occupancy fee not already paid for $2500
• 3 months common element fees for reserve fund $1800
• Water and gas hook up fees $1000
• Nickel and dime admin fees $550
• Nickel and dime disbursement fees, mortgage registration etc. $1200

Now obviously the BIG expense here is the HST. He purchased the unit shortly after the HST came into effect but shortly before developers universally started to include the HST in the cost of the unit. (If you bought a new condo post June 2009, you better check and see in your contract if HST was included.) Development fees, Tarion enrollment fees, and water/gas hook up fees are all examples of costs that buyers incur when buying pre-construction instead of going resale. This buyer was NOT an investor so this is HST money that he will never get back (see my previous post on the HST debate/question).

The buyer told me he was not expecting these closing costs and had to scramble to get the $74K in funds together just to close on this property and not be in default of his contract. Ouch. How can this happen?

This story once again illustrates what I have been preaching for nearly 4 years on this blog:

1. Never buy a pre-construction condo without using a Realtor who is experienced and competent in handling pre-construction sales and working with developers. Ask them what they can do to minimize or eliminate hidden closing costs.
2. ALWAYS get your contract reviewed by a lawyer who is experienced in dealing with pre-construction condos and dealing with developers. Ask them what closing costs you will incur (according to what the contract says) on closing day. Go into your purchase with your eyes wide open.

Questions or comments? Do you have a story of how you were surprised when you saw your statement of adjustments? I’d love to hear about it. Contact me here.

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Developers Rolling Out Incentives

There has been such a crush of new condo launches in the past 6 weeks that developers are now actually being forced to compete with each other for buyers! Who’da thunk it! There have been so many launches (or at least soft launches to the Realtor community), representing thousands of units of inventory that even though most of these developments are selling very well (Tableau reportedly received ~1000 worksheets submitted for ~400 units), they are not selling ‘enough’ units in the eyes of the people responsible for selling them. When this happens, incentives start rolling out for buyers (developers are loathe to actually reduce adjust prices.)

Over the past few years, prices have risen dramatically on a per square foot basis. I was just talking to an investor today who bought at the Ritz Carlton for $650 PSF about 5 years ago. Now that is pretty much the going rate for mid-market condos in the same area. But while price on a per square foot basis have been soaring, the actual prices of the average 1 bedroom, 1+den, 2 bedroom etc. have remained somewhat flat. Developers have been shrinking suites and getting creative with their floor plans. A $300K 1 bedroom is a lot easier to sell to the masses than a $450K 1 bedroom is. But we’ve reached a point where suites can’t really get much smaller and so the average investor off the street is starting to get downright scared by the prices that they see: $400K+ for 1 bedrooms, $500K+ for 2 bedrooms, $45K for parking etc.

Incentives are starting to roll out even for projects that are still in the VIP selling stage, which is not something you usually see. Incentives that I have personally seen are something like $5-20K in rebates at final closing, or slightly discounted parking spots, or 15% deposits instead of 20% (up front). Nothing earth shattering, but these did not exist 3 months ago. Still, I don’t see this as a fundamental problem with the market, or a pre-cursor to some sort of market correction, but rather I think it’s due to 3 factors:

1. Timing issue (too many projects launching at the same time all vying for the same investors)
2. Perception problem ($400K 1 bedroom units)
3. Lack of differentiation. So many of the developments that have launched lately are very ‘vanilla’. Nothing about them really ‘stands out’.

Contact me with any questions or to find out which developments are offering the best incentives downtown!

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Client Service Is For Clients

Using a buyer’s agent is not for everyone. Even though I constantly preach on this blog that having a buyer’s agent is absolutely necessary I recognize that not everyone agrees with me. Some buyers prefer to go directly through a seller’s agent, or in the case of new construction-directly through the developer. Everyone has their reasons for doing so, and that’s fine, but what I don’t understand is why some buyers feel they can have their cake and eat it too!

Quite routinely I get emails from buyers who have elected to ‘go it alone’ and buy condos directly from developer. They usually go something like this:

Hi! I really like your blog and what you have to say about the condo market. I just bought a condo at “XX” development but I don’t know if I made the right decision. Did I pay too much? Is this a good area? Are other projects better? Help!

So essentially they don’t want to hire me as their agent (at zero cost to them), but they want my expert advice and opinion on whether they made the right decision! Even better is when the buyer tells me they have their own agent, but yet they don’t care what they say, they want to know what I think!

I’ve been writing this blog about downtown condos for over 3 years now. I’m flattered that many people value what I have to say, but my client services including my advice, opinions, analysis, and access to the best developments in the city are for my clients only. Hiring me as your buyer’s agent will cost you nothing. Not hiring me as your buyer’s agent could cost you thousands.

Questions or comments? Think I’m being an arrogant jerk? Contact me or leave your feedback in the comments section.

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10 Days is a Long Time To Think

When you buy a new condo in Ontario, you have 10 days after you receive your copy of the executed agreement of purchase and sale and the condominium documents to rescind on your agreement if you choose to do so. This can be for any reason whatsoever, technically you do not even have to provide a reason. You are released from your obligations and your deposit cheque(s) are returned to you.

I think this law is valuable and necessary and that it does what it is supposed to do – protect buyers from doing something they will regret. Unfortunately, some people are thinkers, and thinkers often think too much.  A lot what-ifs and worst-case scenarios can play out in your mind over the course of 10-days and the initial joy and excitement of buying a condo can be replaced by anxiety and fear over future events that may or not occur.

Typical rescission rates for most new condos is about 20%. That means out of every 5 purchasers, 1 will change their mind during the 10 days and will return their unit. By contrast, conditional deals in the resale market go firm about 95% of the time.

In my own experience, buyers who rescind on their agreements tend to do so because of one reason: risk. They just don’t have the stomach for the risk involved in buying pre-construction – and there is a lot of it! This has led me to believe that some people just should not buy a pre-construction condo. They are not cut out for it, and they would be far better off looking at lower risk investment opportunities in the resale market.

Buying a pre-construction condo is a high-risk, high-reward scenario. If you tend to be a risk-averse person, understand the inherent risk involved and use the 10-day cooling off period to carefully consider whether you are comfortable proceeding.  Questions or comments? Contact me.

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Protect Yourself: Never ‘Register’ With a Developer

When you enter into a new condo sales office, the first thing the pretty girl behind the desk will say to you is “Have you been here before? / Can I get you to sign in? / Have you registered with us yet?”.  Hmmm…you’ve got to ask yourself why they are so quick and in-your-face to get your personal information when you’ve only just walked through the doors. The reason is simple but most people are shocked to hear it.

When you sign-in/register with a developer, you are giving up your right to be independently represented on any future purchase at that condo development. You are effectively saying, I am not working with an Agent, and I give up my right to have an agent represent me in the future.

NEVER REGISTER OR SIGN-IN WITH A DEVELOPER!

Even if you have absolutely no intention of working with a Realtor, or if you think you have absolutely no intention of actually purchasing a suite at the development whose sales office you are entering, don’t give up your right to be represented! Remember that the sales people in the sales offices are working exclusively for the developer – they have ZERO obligation to you and your interests.

Remember, it costs you nothing to be represented by an exclusive buyer’s agent. The developer pays the fee on your behalf! Be smart, protect yourself and always leave yourself the option to be represented.

So what should you do?

1. Never give up your personal information on a sign-in or ‘registration’ forms. Tell them you are working with a Realtor/you have an agent.
2. If they press you to fill out the form anyway, put down your agent’s name and contact info. Better yet, give them your agent’s business card with your name on the back of it. (If you don’t have an agent, feel free to use my name and contact info.)
3. If they give you a hard time, or refuse your agent’s name as registration, you’ve got to ask yourself if this is a developer you want to buy from.

If you are thinking about buying a new condo, click here to hire me as your exclusive buyer’s agent.

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New Condo Sales Back From The Dead

After nearly a year of massive declines in sales and stagnant or falling prices, it seems that new condos are back. Urbanation’s sales figures for Q2 2009 show a dramatic change from Q1. We aren’t back to the hedy days of 2007-2008, but 2963 units sold sounds a heck of a lot healthier than the paltry 917 sold in Q1. Still, the numbers are 40% below Q2 2008 when 4,962 new condos were sold.

In the past 3 months, I’ve personally been involved with 3 major new condo launches or relaunches: FLY, One Cole, and Liberty Market Lofts. All three saw sales in the hundreds of units in a just a matter of 2 or 3 days. This was the norm back in 2007-2008, where new condos were launching every week and if they weren’t quick to raise their prices after initial launch they would sell out faster than you can say ‘economic collapse’.

Now some developers are starting to do something I wouldn’t have predicted just 3 months ago: raise prices. Check out one of Brad Lamb’s recent ‘tweets‘. And all this is taking place concurrently with the resurgence of the resale market. It seems that the lack of inventory in the resale market and elevating prices have people once again looking at new developments as a viable alternative. More bodies in the new condo sales centres of late has developers thinking less about lowering prices and more about raising them.

The focus now for buyers is ‘where can I get the best price, the best value for my investment long term’. No longer are they swayed by frilly incentives like free maintenance fees or low interest rates. Buyers are returning to the price per square foot equation as the best predictor for long-term ROI.

Still, there are more shoes to drop. More condo projects will be axed or relaunched in the coming months. I expect an active fall for the new condo market and more opportunities for buyers and investors to come.

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New Details on The HST

The provincial government is proposing to harmonize the GST with the PST. This new tax will be known as the HST. This would underlying principle is to increase efficiencies by having just a single tax, however, some goods (like housing) that have never been subject to the PST, suddenly would be.

This has many people inside and outside the Real Estate industry very concerned. The cost of a new condo or home in the GTA could jump overnight by tens of thousands if this new tax was implemented with no concessions. (Resale properties are not subject to the GST or PST).

The province just announced some new proposed changes to be made to how the HST is implemented as it pertains to new housing. Continue reading for the full press release from TREB.

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Monarch Introduces “Sales Tax Protection Program”

I received an interesting email from Monarch today that stated:

Unsure of how the Harmonized Sales Tax (HST) will affect your condominium purchase?

Rest assured!

Let your confidence soar with Monarch!

Monarch understands your concerns about the Government of Ontario’s intentions to harmonize the PST with the Federal GST.

To ease your concerns of buying a new condominium and to assure you that the purchase price of your suite is not increased by the harmonized PST, Monarch has implemented a “Sales Tax Protection Plan*” which guarantees you that Monarch will pay the additional tax if the additional “Harmonized” PST applies to the Purchase Price of your Suite while this program is in place.

As the email states, Monarch is offering to pay the additional taxes incurred if the Provincial government goes through with its proposal to harmonize the PST and the GST which will effectively mean that all new homes and condos will be subject to a 13% tax (as opposed to just the 5% GST).

They are the first developer I have heard to do this. I suspect others will follow with similar promises.

Yet another example of a developer trying to instill confidence in buyers and stimulate demand in a stagnante market.

The most interesting thing from my perspective is that it shows that developers (even large ones like Monarch) are getting more responsive and are adapting faster to the marketplace. And they need to. Buyers are looking to buy in developments where they feel that the developer ‘gets it’ and does not have their head in the sand with respect to the current economic conditions.

Current projects by Monarch include Twenty Gothic at High Park, Couture at Bloor and Jarvis, and Vibe in Liberty Village, and Quay West at Tip Top.

I’d love to hear your thoughts. Leave me a comment or contact me directly.

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Pre-Sale vs. Assignments

Buying an assignment may seem at first like something very similar to buying pre-sale (or buying new directly from the developer), but there are many key differences to consider.

Buying an assignment usually means you are getting a better price than if you just bought directly from the developer. However, instead of dealing directly with the developer – the entity that you are buying a condo from, you are negotiating and dealing with an individual. There is an element of risk by definition because you are inheriting someone else’s contract rather than negotiating your own from the start with the developer.

Most lenders are very familiar with pre-sale condos and they have programs set up for buyers to arrange the financing portion of the sale. When it comes to assignments, some lenders are not familiar with the process and buyers and sellers often encounter difficulties when dealing with the banks on assignment deals. This is another reminder why having a lawyer and a lender who are experienced with assignments is crucial for both the buyer and the seller in any assignment transaction.

Questions? Leave a comment or contact me.

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