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Lockers More Important Than Ever

Over the past 2 years in particular, the size of condos in Toronto have been getting progessively smaller. The shrinking size of condos has allowed developers to continue to keep the actual prices of the units at a reasonable level, even while the average price per square foot has basically doubled in the last 7-8 years.

We’ve seen 270 sq ft studios, 395 sq ft 1 bedrooms , 580 sq ft 2 bedrooms, and 859 sq ft 3 bedrooms. All of these units would have been considered asinine and unsaleable as recently as 2006, but now they are in just about every building south of Dundas.

One big question many buyers are asking is: where am I supposed to put all my stuff? Storage lockers are more important than ever for storage, however, I am finding lately that they are becoming harder and harder to get. It used to be that developers would finalize parking spaces and locker spaces before they ever went to market, and buyers would be able to buy both at the time they signed their agreement for their unit. Now, locker spaces and parking garage areas are often still in the ‘design stage’ when projects go to market and developers don’t have exact numbers of how many they will be able to sell, so they don’t sell them in the initial launch stages. When they do become available to buy, there is often a shortage and only certain units can actually buy lockers.

Why is this happening? Two key reasons in my opinion:

1. Developers are usually in a rush to get their projects to market and investors don’t usually care about parking or lockers
2. Developers seem to be sacrificing locker space and parking space in order to maximize the number of units they can put in a building (maximize profits) as well as minimize the construction of underground levels (minimize costs)

I’m all for minimalistic living, but 400 sq ft and no locker is pushing it! I’m concerned some of these buildings will not be all the ‘liveable’ when completed. One building that launched recently is said to only have 10 lockers for around 200 units! Quick investment idea: buy a condo, gut it and split it up into storage lockers and rent them out to people in the buildings where lockers are at a premium!

Questions or comments? Please contact me.

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How to make $100K in 3 Months

There are dozens and dozens of units available for sale at Festival Tower. Most have been sitting on MLS for months as assignments (tricky to sell at the best of times), but now that the building is registering in a matter of days I expect these units will start moving quickly. I noticed something quite interesting looking through the sales data for a client – one of the bigger 2 bedroom units on a high floor sold in March as an assignment for $945K. Another one of the same floor plan also sold around the same time for about $1.03M, and just this week another one of this floor plan came up as sold for $1.05M (interestingly as I am writing this blog post I noticed the sales price has been removed and it now says ‘sold conditionally’).

So what happened? Seems to me the person who bought for $945K in March is up at least $100K in just 3 months time. Also it occurs to me that selling by assignment is a crap shoot at best – buyers and sellers alike are dealing with very limited an imperfect information and ‘fair market value’ is a very hard thing to determine.

This blog post is really designed as an illustration to show why I preach to my investor clients that the best time to sell your pre-construction purchased condo is 6-12 months after registration.

Reasons:

1. 1 year is the length of a typical lease. Assuming a 3-6 month occupancy period for most condos, selling 6-12 months after building registration will align perfectly with the end of that lease.
2. 6-12 months gives time for the dust to settle in the building (literally), and for the common areas to be completed. Common areas do add value to your property, make no mistake!
3. Allows time for the resale values of a building to get established. Much of this is driven by supply and demand principles – many investors selling at first, and few buyers aware of the building because it’s brand new.
4. To qualify for the HST/GST rebate as an investor, most lawyers will tell you you need a 12 month lease signed.

We see this pattern time and time again with new buildings when they first are finished – those who sell first tend to undersell. Those who are patient and wait reap the rewards.

Questions or comments? Thinking about selling your investment condo this year? Contact me.

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The Elephant in the Room: HST

NOTE: the following blog post is not to be considered legal or tax advice. I am not a lawyer or an accountant. I’m writing this strictly for informational purposes only. Always consult a lawyer when purchasing pre-construction real estate.

ANOTHER NOTE: If you find this article confusing, good. That’s the number one point I’m trying to make: the HST on new condos is very confusing and it needs to be fixed.

This is a subject that very few people in the pre-construction condo industry are talking about, but one that could actually have major repercussions on our industry over the next few years. HST and how it affects new condo purchasers, specifically those purchasers who are investors (i.e. up to 80% of the market right now), is a terribly unclear issue. When the Mcguinty government introduced the HST in July 2010, it was said that it would not really affect the real estate market. While this may be true in an overall sense, for investors of new condos, there can be serious implications to your bottom line.

The issue is essentially this: there is an HST rebate built into the price of every new condo sold in Toronto. The assumption is that the buyer of any given new condo is an end-user (they are buying it for themselves to use, not to flip for profit, or to rent out to a tenant), therefore they qualify for this rebate which the builder collects on their behalf. In reality we know that the pre-construction condo market is dominated right now by investor-buyers NOT end-user buyers. Investors do not qualify for this rebate, so the builders must charge them to account for this rebate, effectively increasing the price of their units significantly at final closing. Now, there is a process in place whereby investors can apply to get this extra money back from the government after the fact, but as you can imagine any application process involving extracting money from the government is long, painful, and tedious.

The key questions that are so difficult to get concrete answers on are:

• Who qualifies for the HST rebate in the first place?
• How much is the HST rebate? How is it calculated? How much do I have to pay extra if I am an investor?
• How do I apply to get my money back if I am an investor? When can I apply? What conditions must I meet? When will I get my money back? Do I get all my money back or only a portion of it?

If you talk to 3 different real estate lawyers, I gaurantee you will get 3 different answers as to how the HST rebate works and how it affects investors. This is a serious issue as thousands of investors are buying condos in Toronto every month, and I think many will get a shock in 2-4 years when they meet their lawyers for final closing and they are asked to write a cheque for thousands of dollars to cover the HST.

Why are there seemingly no clear answers on how the HST works for investors? Part of it can be explained by the fact that the HST has only been in effect for a year, and very few (if any) NEWLY purchased condos have actually completed and closed in the last year. In other words, very few lawyers have actually completed a final closing for a client who purchased a new condo during the HST era which began July 1, 2010.

Toronto real estate lawyer Stephen Shubb has done his best to explain how the HST works (and I think he did a pretty good job) on his website: HomeLegalCost.com. Essentially his explanation boils down to this: if the purchase price is less than $450K, you will get the full rebate back after the fact as long as you rent it out for at least 1 year after final closing. So you will be in the same position as the end-user is, but you have to pay up front and wait to get your money back. If your purchase price is over $450K (which many units are of course in Toronto), buyer beware! You may have significant additional costs at final closing that you might not be getting back.

Call me crazy, but I actually believe that someone up there at Queen’s Park might be reading this blog (especially with an election coming). With that in mind, I am calling on the Ontario government to do the following:

• Come up with a clear statement and communication to the public about how the HST will affect buyers of new condominiums in Ontario.
• Come up with a clear statement and explanation for the real estate law industry (lawyers) so they can explain it to their clients
• Increase the limits on who qualifies for the full HST rebate. $450K is a ridiculous upper limit in a city where the average single family home costs about double that
• Get rid of the application process for getting back the HST rebate for investors. If the rebate is in fact the same as for end users, why complicate the entire process, create unnecessary bureaucracy at a great cost to the public, just to get the same result in the end?

Questions or comments? Totally confused? Please contact me.

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Quality Investments in Pre-Con Becoming an Endangered Species

Hype-driven marketing seems to be at an all time high in the pre-construction condo market. I am finding it harder and harder to find quality investment opportunities to recommend to my clients. This at a time when a new condo project is launching almost every week. Prices are soaring. Suite sizes are shrinking. Every agent and their mom is calling themselves a “VIP” agent. Something has got to give.

I am getting more and more calls from buyers who have felt pressured into signing contracts to buy pre-construction condos without really thinking through what they are doing. So far this week I talked to 2 people who were in their 10-day rescission period and they flat out told me they don’t trust their agent who they used to buy the condo and were unsure if it was a good investment. They attended one of these hype-driven “VIP” sales events (VIP has really become a meaningless term), everyone there told them it was a great investment and they would make a lot of money, and so they signed on the dotted line. [Side note: Often I find that the agents used in these scenarios know nothing about the pre-construction condo market (or worse, the condo market in general), and there is often a family connection - the agent is the buyer's uncle, friend's uncle, god parent etc. Hire a professional who you trust!]

I am not thrilled with the tactics some developers are using to sell their projects, but more importantly, it’s the pricing that is automatically precluding me from recommending several projects to my investor client base. Buying at $600+PSF when comparable resales are selling at less than $500PSF just doesn’t make sense. To be clear, I am not in the camp that believes it is only a good investment if pre-con prices are LOWER than equivalent resale – I just think the gap needs to be about $50-$75PSF in most cases to make sense from an investment perspective.

Questions or comments? Wondering what projects I am recommending to my clients for investment and which ones I am not? Please contact me.

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Let’s Put an End to “Phantom Buyers”

This post is meant to be a sort of open letter to the entire pre-construction condo industry in Toronto regarding what I believe has become a significant problem. It’s time to put an end to the practice of “Phantom Buyers”.

Phantom Buyers is a term that I have coined for buyers of pre-construction condos who are not really buyers. Usually what happens is this: when a new condo launches of any significance in the city, a large number of Realtors will camp out for several days to be first in line when the VIP broker event takes place. Many of the Realtors who are in the first several spots in the lineup do not have any actual clients who want to buy! These agents will buy units in their own name (usually the cheapest units available), and then they will use the 10-day rescission period to try to find an actual buyer to take the unit(s) they have ‘reserved’ in their name.

This is why you often will see ads on Craigslist and Kijiji posted by these agents, advertising “I HAVE UNITS AT XYZ DEVELOPMENT!!! CALL NOW”. They are desperate to find someone before the 10-days expire. I regularly get calls from these agents asking me if I have any buyers for their units and asking me if I want to split the commission! As someone who takes my role as a buyer’s agent very seriously, I find this practice absolutely ridiculous.

This needs to stop for the following reasons:

1. It is unprofessional and contributes to a ‘hype-driven’ pre-construction condo market.
2. It may be artificially inflating the condo market because creates a type of artificial demand
3. It shuts out real buyers who want to buy (especially end-user buyers)
4. It is clearly an abuse of the 10-day rescission period.

This is bad for our industry, this is bad for the condo market, this is a farce. I’m asking all Realtors, brokers, developers, condo marketers, and consumers to call for an end to this silly game. What do you think? Leave a comment or send me an email.

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What Your Lawyer Will Say

So you just bought a pre-construction condo. Well, you haven’t actually bought anything yet, you’ve just signed the paperwork, dropped off a deposit cheque, and your 10-day cooling off period has begun. You hired a good buyer’s agent to represent you, therefore you already know that it is imperative to have a lawyer review your agreement of purchase and sale during the 10 days (if your agent didn’t tell you this, ask yourself why). Here is what you can expect he or she will most likely talk to you about:

• Capped Closing Costs. If you don’t have caps in place for things like development levies and hydro/gas hook-ups, your closing costs could theoretically be in the tens of thousands (not including land transfer taxes and legal fees). The number one thing your lawyer will recommend is having a good cap on these costs. What constitutes a ‘good cap’ is always up for debate. 5 years ago, caps were in the $1-2K range. Now developers are pushing things up into the $8-9K range. Most lawyers push for something in the $2K range for levies, $1K for utility hook ups, but frankly, most lawyers are out of touch with what is normal for pre-construction contracts in 2010.
• “Nickel and Dime” charges. Developers are notorious for trying to sneak in charges for all sorts of things related to the purchase. They can be very creative. Your lawyer will probably point out some of them and recommend you ask them to be waived. Most builders will say no.
• Square Footage. You will get a copy of your floor plan in your agreement but 90% of the time the square footage and dimensions are not listed. Your lawyer will point out that you may get a unit that is 600 sq ft instead of 700 and there is nothing you can do about it! In one sense they are right: there is no protection in the Ontario New Home Warranty Act (provincial legislation) for consumers on this issue. There is a bulletin that Tarion put out in 1989 stating that the size of unit should not be off by more than 2%, but this is just a guideline (not written in law). In reality, variances are usually negligible, but if there was a major discrepancy, it would be a legal issue that you would have pursue through the courts. One option would be to have an amendment added to the agreement that explicitly states variance will be in accordance with the Tarion Bulletin, however, be prepared that most builders will not agree to this. Proceed with caution and understand this is part of the risk of buying pre-construction.
• Rent During Occupancy. Make sure you tell your lawyer if you are planning on using the property as your principal residence or as investment. If investment, they will probably tell you the contract says you cannot rent during the occupancy period. You may want to request a clause which allows you to do this.
• HST Rebate. There is an HST rebate (formerly GST rebate) for end-user buyers that is built into the purchase price of condos in Ontario. If you are not planning on living in the unit, you might have to pay this amount back to the developer on closing. You may apply to the government to receive the exact same rebate given back to you after final closing. Your lawyer should advise you of this reality of buying for investment.
• Assignment. If your lawyer is really sharp, and he or she knows you are buying for investment, he or she will recommend you get an assignment clause that allows you sell prior to occupancy.

There may be other issues that come up like mistakes in the contract or inaccuracies that will need to be changed, but most of the time these contracts are 95% the same from one to the next. Questions or comments? Please contact me.

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Investor Mentality

In contrast to yesterday’s post, “Losing Mentality“, I wanted to present to you some observations about the people who are successful condo investors. Those who buy (and sometimes sell) multiple condos over years and understand that condos as a great way to accumulate long term wealth.

1. They are entrepreneurial. Either they run their own businesses, or they can at least think like a business person. They treat buying and selling condos as running a micro-business. Money in + time + effort = Profit
2. They are risk takers. Buying a piece of paper and hoping it turns into a highly profitable asset is RISKY. Either embrace the risk, or put your money in the bank at 1%.
3. They don’t follow the flow. Simply put, if your mom/friend/uncle/blog-comments-section tells you shouldn’t be investing in condos because ‘there are too many condos downtown’, you are listening to the wrong advice.
4. They are focused. They decide what they want before they go looking for it. They don’t consider every development and project that appears just because it is the ‘flavour of the week’. They have a set of criteria and they stick to it.
5. They have money. Let’s face it, most people don’t have the typical 15-20% deposit required to buy most pre-construction condos. Those that do and have invested it in condos in Toronto, have done very well. The rich are in fact getting richer.

Some exhibit these characteristics on their first purchase, others learn them in time. Most of these can be acquired and practice makes perfect, but at the end of the day, you either have the stomach for condo investing or you don’t. I’d love to hear your comments and thoughts. If you are a seasoned condo investor, or want to learn how to become one, let’s talk.

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Losing Mentality

Buying a pre-construction condo takes guts. It takes vision. It takes money. It’s not for everyone, but for those who understand the game and play it well, the rewards are huge. Those who are fearful, lack vision, and have no access to capital will continue to sit on the sidelines and wait. And wait…

Every month I meet people who are looking to buy their first investment unit on a pre-construction sale. Some of them end up buying a unit and in time will reap the rewards. But most get stuck and never actually buy anything. They are trapped in what I call a ‘Losing Mentality’ that prevents them from taking part in one of the most incredible investment vehicles ever.

These would-be buyers all suffer from a similar mindset/perspective that prohibits them from getting into the condo investment game:

1. They don’t think like an investor. Investors don’t worry about if a suite is facing the wrong direction, or if the neighbourhood is not one they would like to live in, or if the building only has 3 treadmills instead of 4. The condo is not for you to live in, it is a vehicle to accelerate the growth of your money!
2. They listen to bad advice. No offense to all the moms, uncles and internet trolls* out there reading this, but you don’t know anything about real estate, let alone the specific niche of pre-construction condo investment in downtown Toronto. Stop listening to people who have never bought a condo and start following those who own dozens of them.
3. They don’t know what they want. So many would-be investors I talk to can’t make up their mind – Do I want to buy new or resale? Am I buying an investment property or is this for me to live in? Up and coming area or established neighbourhood? If you don’t know what you are looking for, you’ll never find it.
4. They are risk-averse. Purchase agreements for new condos are downright scary (from the buyer’s perspective), just read one if you don’t believe me. The developers write them, so what else would you expect?! Developers are out to protect their own butts and in exchange they offer you the chance to make a ridiculous return on your investment. If you want safety and assurances that everything will be fine and your money is totally safe, put it in the bank at 1%.
5. They are looking for something that doesn’t exist. The proverbial 2 bedroom condo downtown, close to subway, with parking for $250K doesn’t exist. Get a grip on reality and stop dealing in fantasy. Understand the process and the capital investment involved. Understand where the market is today and where the market is going to be in 5, 10, 20 years.

Check back in tomorrow as I contrast this list with a list of common characteristics for what I call the “Investors Mentality”. Things that many of my most successful investor clients have in common. What do you think about this list? Leave a comment or contact me.

*Tongue-in-cheek representation of the types of people who tell you that buying a condo as investment is a bad idea. Many of my clients are actually moms and uncles, although I try not to associate myself with internet trolls!

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What Ever Happened to Cash Flow?

Investing in Toronto condos used to be a pretty straightforward proposition: buy a property with as little down as possible then rent it out with the income from the rent covering your mortgage, taxes, maintenance on the property etc. For much of 90s and the first half of the 2000s, this was the way it worked in Toronto and many investors took this approach. Sometime around late 2006 this all changed when property values continued to rise while rental rates began to stagnate and in some cases drop. Positive cash flow with 20-25% down disappeared.

When the market dipped in late 2008-early 2009, prices fell, interest rates fell, and rental rates stayed the same. It was a perfect storm whereby positive cash flow with 25% down reappeared on the Toronto scene, and a few savvy investors noticed this and began to buy once again. The market heated up in mid 2009 and has stayed hot ever since.  Prices rose, and so did interest rates. Today, it’s safe to say that buying a resale condo downtown for more than about $500 per square foot will result in a negative cash flow situation (assuming 25% down). Nobody likes negative cash flow!

The obvious question is how sustainable is a market like this where investors are buying condos by the thousands priced at $600-$800 per square foot that they know for a fact will not generate positive cash flow? So many investors are counting on their properties to appreciate so that they will make a profit. This could very well happen, but by definition this is speculation rather than investing.

I’d like to know what cash flow rates in the larger cities like New York or London are like. Any of my readers with experience in these markets, feel free to comment on how investors approach this issue in one of these cities that Toronto is being compared to more and more often these days.

Questions or comments? I always welcome my readers’ feedback!

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Pricing Starting to Favour Pre-Construction

Once upon a time in Toronto real estate, there was a rule  that investors followed religiously – you only buy a pre-construction condo if the price is lower than that of a comparable existing resale condo. If the price wasn’t lower than existing resale condos of similar quality in the immediate area, then it just didn’t make sense to buy. After all, why take on the risk of buying ‘from plans’ when you don’t know how long it will actually take to be delivered, what the final build quality will be like, and what additional surprise costs you may incur along the way.

When market really started to get hot sometime in mid-2007, and pre-construction condos became the thing everyone and their mom were investing in, this long-held rule was abandoned. Prices of pre-construction started to reach heights never seen in the resale market. $600 Per Square Foot was suddenly a normal rate for pre-builds, whereas resale prices were still hovering around $425 PSF.

Over the last six months, there has been a seismic shift in the resale market. Prices have escalated at about 2% per month since June 1. If you bought a condo on May 1st of this year anywhere downtown, it likely has appreciated about 12% in value. Congrats.

Prices have gone up so much and so quickly in the resale market that the value is now, incredibly, starting to once again favour pre-construction.  Resale prices in several of the ‘prime’ downtown buildings like College Park, The Hudson, The Met, 18 Yorkville, Mozo, are now routinely hitting the $550-$575 PSF range. One upper floor 1+den with parking unit at College Park recently sold for $660 PSF! With several pre-construction projects across the downtown still selling between $500-$550 PSF, it doesn’t take a genius to figure out where the best value for your investment dollar is and where it will be in the months ahead.

If you are interested in taking advantage of some hidden gems in the pre-construction market downtown, let’s talk.

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