How to get the Insider Market Advantage when investing in pre-construction condos

Andrew la Fleur: What is the insider market advantage and how can you get it when you’re investing in condos? Coming up on this episode.

Speaker 2: Welcome to the True Condos podcast with Andrew la Fleur. The place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur: Hi and welcome back to the show thank you very much for listening. Once again, Andrew la Fleur here. Glad to have you with me again and thank you for taking the time to listen to me talk to you. Whether you’re commuting right now, you’re working out, you’re going for a walk, you are sitting in your office. You’re supposed to be working but instead you’re learning about condo investing. Whatever it is you’re doing right now, thank you very much for your time and I really appreciate your ear. Having your ear and I don’t take advantage of that, I know time is so precious, it’s the most important commodity that we have especially as I get older and I have kids and I’m having another kid soon, life is busy. And time is very precious so thank you very much for giving me a little bit of yours today.

As I said in the intro, want to talk about the insider market advantage. It’s a term that I’ve come up with to describe one aspect of pre-construction condo investing and why you should you do it. And why I do it and why my clients do it. We want to talk about in this episode, what is, what do I mean by, what is the insider market advantage and how do you take advantage of that as a buyer, as an investor? And specifically how does it compare to the resale market? This podcast has come about, I’ve done a lot of podcasts and videos and things on this subject that one of the, possibly the most frequently asked question that I get, especially by new investors is, “Andrew, why should I invest in a pre-construction condo why not invest in something resale? Why should I invest in something that’s not going to be built for several years when I can just go out on the street and buy something that’s already built, something existing in the resale market today and get it now?”

Some of the things that we’ve, and I’m getting this question a lot, I’m getting this question a lot right now because as I said, actually I didn’t mention this, but as a time of recording this podcast, we’re at the end of summer and we’re about to enter in the fall season and a lot of people are contacting me every day and asking me and getting ready to enter into the market for the first time, whenever the seasons change it’s a common thing is people think about change and they think about doing something new and maybe that’s you as you’re listening to this episode. You’re thinking now is the time to get into the market. Or now is the time to add to your portfolio.

And certainly the fall market will be a great time to do that. September and October, there’s usually, and this year will be no exception, lots of new launches of new projects coming out even in the downtown core there’s some potentially very exciting new launches coming out. And so it’s a great time to get into the market for the first time or to build your portfolio with another property to add to it.

A lot of people are in that mindset and asking me this question this week, “Andrew, why should I buy pre-construction? Why don’t I just go and buy something resale?” And I always say, you should always buy pre-construction when you’re looking to invest in the condo market. Not that every pre-construction condo out there is a good investment. On the contrary, there’s very, very few of them that are. And that’s my job to help you find those condos and those opportunities that are the great investments and there will be some good ones certainly coming up this fall.

And some of the reasons we’ve talked about in the past and some of the reasons I’ve covered in greater detail in other episodes of this podcast and other videos in the past of why pre-construction and why not resale just quickly recap some of those. First reason being that condos are commodities. Talk about this a lot. Condos are commodities. So they’re different from houses, low rise housing that we’re typically used to thinking about, especially as Canadians at least or westerners. If you grew up in Canada you’re thinking about housing, you’re probably thinking about a house. A picture of a house comes in your mind not a picture of a condominium. Condominiums of course are the future of housing in Canada and especially in Toronto but that’s a side note.

So condos are commodities. And because they are commodities, people always want the newest and the latest thing. So the newest condos are always the most in demand both to rent and also to buy. If you are investing in condos it makes sense on that level in simplistic terms, to own the most in demand thing which is the newest thing. Which to get the newest thing, you need to buy it before it’s built. And that is where pre-construction comes in. If you’re buying older condos they may be popular today but tomorrow they’re popularity will decrease and generally over time the popularity, the demand, the appeal of your condo is generally speaking, going to decrease over time as that condo ages and as new condo buildings are constantly being added to the mix and added to the areas that you’re investing in. Condos are commodities.

Also another aspect of that and help you understand it is to think about a house. And with a house you can buy an old house, it could be a 100 year old house. There’s thousands and thousands of them in the city of Toronto, I own one of those 100 year old houses myself. I know what that’s like as well. You can completely renovate an older home inside and out and essentially make it brand new, you can change all aspects of the property to whatever you want and make it essentially appear as brand new or extremely close to being brand new. And so you can’t do that with a condo in the same sense. You can only have control over the inside of the condo, you can’t control what the building looks like, what the technology and the plumbing and the electrical and internet and everything else that goes into a building, you cannot change. And so again, the commodity nature of condominiums get the new ones. The new ones are always the best to have and to own and to invest in. First point.

Second point why pre-construction? Is that the arbitrage opportunity. Arbitrage, taking advantage of differences in markets. Another way to explain this is basically when you can buy the best and most obvious great investment opportunity in a condo is what I call UP investing. When you can get something, UP stands for U P stands for, U is under market value and P is positive cashflow. UP investing is a term that I’ve come up with a few years back and a lot of people are using that now. If you can get something that is under market value and that has positive cashflow and is projected to have positive cashflow then that’s basically your tried and true sure fire way to make sure that you’re going to have a great condo investment that is going to do very, very well for you in the long term when you’re buying a pre-construction.

If you’re, and the key ingredient there of that equation is under market value. If you can buy something pre-construction today, that’s not going to be built for three or four years and it’s cheaper than existing newly completed resale condos in the same immediate area. So if I can buy something pre-construction for say $900 per square foot and there’s a building right across the street that is brand new, it was just completed this year and units are trading there on the resale market at $1,000 a square foot, that is arbitrage. That is a sure fire way to make sure that your investment is going to do very, very well. There are those opportunities that exist in pre-construction. Those are the opportunities that we key in and look for. Not every single time are we able to achieve that but we’re able to get close to market value or slightly under market value or slightly above market value is sometimes okay too depending on the situation. But we’re able to find those gems where we’re clearly under market value, under resale market value when we’re buying pre-construction, that is a huge advantage from an investment perspective.

The third reason, deposit structure. When you’re buying resale you have to come up with the full 20% minimum down payment as an investor immediately, right now, today. And if you’re buying something pre-construction of course, that deposit usually 20% is spread out over a longer period of time. Usually one to two years. In some cases you can get less than 20% deposit structures, depends on the building. Vast majority of the buildings are going to be 20% but occasionally you can get 15, rarely you can get 10 and once in a blue moon you can get 5% deposits on pre-construction. We’ve done a few of those here and there but they’re extremely, extremely rare.

Again effectively, if you are able to put down less than 20%, compared to buying a resale, you’re effectively reducing the price of the property because you’re spreading out that deposit, spreading out that capital that you have to take out of your investments, your whatever you’re doing with that money, that’s making you some money somewhere else. Because you don’t want to just be sitting on cash of course. You don’t have to take all that money out right away. You’re spreading it out over a period of time. Mathematically speaking, that’s reducing, that’s effectively reducing the price that you’re actually paying for the unit. So some food for thought there.

Another reason, other less tangible reasons is if you’re buying pre-construction you don’t have any landlord issues, any landlord headaches, any landlord, you don’t have to be a landlord. You’re buying property but you don’t have to take possession of it and rent it out for a few years so you’re in the market, you’re money’s in the market but you don’t have to worry about being a landlord.

And tied in with that you don’t have to worry about getting a mortgage. So there’s no mortgage requirements to have a mortgage when you’re buying pre-construction, your mortgage kicks in when the property is finished. That is helpful for a lot of people who are perhaps self employed or their income situation is not as great today as it will be in three, four years. Maybe you’re getting help from your parents, starting out, you’re making a low income today but in three, four, five years from now when the property’s finished you’re going to making a much higher income therefore you’re going to be able to qualify for a much bigger mortgage. That is extremely helpful for a lot of people to be able to buy property, invest in the market without having to go and get a mortgage today because either you don’t want to or you’re not able to get a mortgage today but you will be in the future.

So those are some of the reasons we talked about in the past for why you want to invest in pre-construction instead of resale but what we want to highlight today, of course in this episode is this idea of the insider market advantage. And I was just chatting with somebody about this yesterday. And they’re asking me about resale versus pre-construction and I said, well one of the big things is this idea of the insider market advantage and when you look at the resale market there is no opportunity for an insider advantage. The resale market by definition, by the existence of the MLS system, it’s essentially a very, very close to being a completely open market where properties are just exposed to the world and anyone can come and buy those properties.

And that’s exactly what happens. Anyone does come and the whole idea of selling those properties is to expose them to as many people as possible if you’re the seller so it’s very difficult to get a, there’s no insider market. There’s no sub market or black market or gray market or whatever you want to call it for the resale where you can swoop in and get properties that are not known to the public. Short of going around and knocking on doors, which obviously some people do do that and they create their own insider market. But for 99% of the buying investor population you don’t have time to go out there and knock on doors of properties and try to find private deals that are under market value or take advantage of grandmas who don’t know how much their house is, their condo is worth and you offer them some low ball offer which is a whole discussion for another day on the ethics of that obviously, that does go on in the market. But for 99% of people there is no insider market when you’re talking about resale.

But on the other hand with pre-construction there very clearly is an insider market advantage that you can get if you’re working with, as I’ve talked in the past, if you’re working with the right agent. So if you’re working with a platinum broker, platinum real estate agent, like myself, or another one, that’s doing work as, similar type of work and has similar relationships with builders, then that is your main insider advantage. You can take advantage and get access to and invest in opportunities that are otherwise not available to the vast majority of the buying public. And certainly the vast majority of investors.

Let’s compare how pre-construction versus resale the differences between them. I want to go into this in a little more detail. Resale as I was saying, is basically an open market. Pre-construction is much closer to being more of a closed type of a market. On paper you could say, yeah, well it’s it is an open market. Anyone can go out there and buy a pre-construction condo. But if you want to get that pre-construction condo at the lowest possible price, at the earliest possible stage when the projects are not available to the public then you have to have, you have to know the right person. You have to have a relationship with the right platinum agents to get access to that.

Resale, it’s basically an open market to the whole world. You put it on MLS and anyone has access to that. Pre-construction, yes you can buy pre-construction properties but the best properties at the lowest prices, those are only available to a very select few people. Resale market has that public access, pre-construction is very limited access. Essentially millions of people can look at realtor.ca and other websites and anyone in the whole world can purchase a resale property that is on the market at any time. With pre-construction there’s only, compared to the millions and millions people who could potentially buy any given resale property, any resale condo, there’s only a couple of hundred, approximately I would estimate about 200 platinum agents who have true platinum access to new condo opportunities in the greater Toronto area. There’s only about 200 agents in the entire city of six million people and 50,000 real estate agents, there’s only about 200 of us who are actually true platinum agents. Very, very few select people have access to these opportunities and who you can get access to them, to the opportunities through these people.

Bidding wars in resale. Bidding wars are common of course. Bidding wars happen all the time in resale because again, anyone has access to these properties and so when bidding wars happen, the prices tend to go up and they’ll go up higher and higher as more people have access to them. Versus pre-construction, when you’re buying with a platinum agents and you’re buying at the earliest possible stages the prices tend to be more fixed and the prices tend to not really move. The prices tend to be set at a certain level, at the initial stage, those units are sold and then the next group of units are released to more people and the unit prices are increased. Obviously as an investor that’s a huge advantage.

Even though if they’ve put them out in theory to the open market there would be bidding wars and prices would be bid up as an investor if you’re able to get in you’re able to get that property that’s in demand and that maybe 5, 6, 10, 100 people want to buy but you’re able to get it at the set price without having to enter into a bidding war. Again, it all comes down to that access and if you’re able to get in through a platinum agent at that earliest possible stage.

Resale market is it’s an example of the efficiencies of capitalism. It’s a very efficient open marketplace in that sense. Pre-construction there are inefficiencies built in as I’ve been describing. And these inefficiencies as an investor are great. You can exploit them. As a capitalist, you look at that and maybe if you’re thinking entrepreneurially, you’re thinking well there’s got to be ways that builders could do this differently and make it more open and increase prices and have bidding wars and this sort of thing but that’s a debate for a different day but the reality is that is not happening and there are inefficiencies built into the system that you as an investor can exploit. You can’t exploit those inefficiencies in the same way in the resale market because it is a much more of an open system. A property sells for what it’s worth. Properties will often sell for less than they are worth in the pre-construction market if you understand what I’ve been saying for the past 15, 20 minutes here.

Resale, with resale you have individual property going on the market from an individual seller. That seller only needs to find one buyer. That seller can afford to sit and wait. That seller has very few, in most cases, very few time constraints, they have the luxury of time to sit there and wait to sell that property. They only need one buyer for that property, that property that you might want to buy. So they can afford to just in sense, put it at a higher price and just sit there and wait. Wait for that one buyer to come through and buy it. They only need one. They only have one thing to sell. It’s a very fragmented market. Every single property is sold by a different seller.

The pre-construction market on the other hand with condos is extremely consolidated not fragmented. It’s few sellers selling hundreds of units each. So a handful of sellers selling hundreds of units each. They need hundreds of buyers. When you are a seller selling something, you need of hundred of buyers, you cannot afford to price your properties too high. You cannot afford to sit there and wait. Time is money when you are a developer. Again, as the investor buyer you can take advantage of that. Another, just thinking structurally how this market is set up, in order to build a condominium building then developers need to hit a certain amount of sales. They need to hit 70% of sales. 70, 75% of sales before they can get a loan to actually construct the building.

And so in order to reach that level of sales, they need to price the units at the beginning low. They need to make sure with certainty that they can move the first 25, 30% of the building pretty much like that. Right away. And then in order to keep the momentum going for the next 20, 30% of the building, they may raise prices only slightly. They will raise them less than what they probably could raise them in order to keep that momentum going so you’re still able to get in at a below market price. And it’s not really until that 70, 75% mark is hit that a developer can afford to essentially raise those prices up to the market level, the equilibrium level price that they are quote unquote worth in the open market.

Again, if you’re able to get in that first 20, 30% or even in that second 20, 30%, you’re still purchasing something for less than it is quote unquote worth in most cases because the developer is artificially pricing those units lower in order to get sales momentum in order to get them to that magic number 70% so they can get the project built. If they raise prices too quickly, they lose momentum, they lose buyers’ interest and they are suddenly stuck. And this is a very common thing that we see where developers get stuck at 30, 40% sold, 50% sold and it’s very hard for them to regain that momentum and get it going back up again.

So most sellers, most developers will take the approach of, again, of underpricing of, devaluing and selling for less than they really should be selling in those early stage in order to get them to that magic 70% number. Again, as investors we can take advantage of that and if you’re working with a platinum agent who’s going to give you that insider market advantage, you’re able to reap the benefits of that and buy under market value and make money.

There you go, I hope you enjoyed today’s episode. I hope that gave you some new perspective on this question of why you should invest in pre-construction condos and why it’s better than investing in resale. And of course, to get the insider market advantage, make sure you’re working with a platinum agent. If you want to work with me, I’d love to hear from you. You can always reach me, andrew@truecondos.com. 416 371-2333 is my phone number, direct line. And make sure you are receiving my weekly email updates by subscribing anywhere at truecondos.com.

There you have it. Hope you enjoyed this. Until next time have a great week and happy investing.

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