Why Would A Toronto Condo Developer Sell Below Current Market Value?
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I had a great question from a new client over this past weekend. I was explaining how YC Condos is priced below current available resale condos (see more by watching this video) and my client asked me:
Why would a Toronto condo developer sell a pre-construction condo for less than current market (resale) values?
I’m going to answer that question in this post, but first, a little background.
You see, when it comes to condo investing I have 2 cardinal rules that I always tell my clients to follow. If you follow these 2 rules you will always do well in condo investing:
Cardinal Condo Investing Rule #1: Always buy a pre-construction condo below current market values.
If you buy something that will not be completed for 3-5 years that is priced below what comparable finished condos are selling for, you get built-in equity from day 1 that will serve to provide you with
1) tremendous upside potential on price appreciation
2) insulation against any potential downturns in the market between when you buy and when the building is completed.
Cardinal Condo Investing Rule #2: Always buy a pre-construction condo that will be cash-flow positive.
If you buy a condo that is cash-flow positive (potential monthly income is greater than potential monthly expenses with 20% down payment) then you will always be earning positive income on the property regardless of what happens to the price (up or down) of that property.
Generally speaking, if you follow rule #1, then rule #2 takes care of itself because a condo priced below current market value is cash-flow positive 90% of the time.
3 Reasons Why Toronto Condo Developers Would Sell A Pre-Construction Condo For Less Than Current Market Values
There may be a number of reasons why a condo developer in Toronto would take this approach to pricing but I need to emphasize that this type of pricing is not a given when it comes to pre-construction condos.
In fact, I would say that MOST new condo projects out there are priced HIGHER than comparable resales. This was certainly true for the better part of 2010-2012 during the last condo boom. Now the market has shifted back in favour of buyers as the number of new condo sales are down significantly over the last 18 months.
Here are 3 reasons why some developers are pricing their buildings this way now:
1) Keep Condo Investors Happy
Developers realize that if they want to sell out a building with 300 or more units, a building that will not be completed for several years, they are not going to do it by marketing to end-users alone. They need investors to buy the majority of their suites so that they can get construction financing to get the project out of the ground.
So how do you attract investors, and more importantly, how do you ensure they will be repeat buyers that keep coming back every time you launch a new building? Simple. Offer them something worth investing in. Something with a huge upside potential. And that is the primary reason why they price their buildings below current market resale values.
2) The Current State of the Pre-Construction Condo Market In Toronto
The pre-construction condo market in Toronto is currently a buyer’s market. For most of the last decade it was seller’s market.
Before it was pretty much a given that prices would rise by around 8% every year and therefore if you bought a little above current market values you would not worry because you knew that in a couple years, prices would be much higher.
Today there are no guarantees. Buyers are more cautious. Over the last 18 months prices have been more or less flat.
NOTE: Over the past 3 months there is growing evidence that prices are set to rise again with resale condo sales picking up serious momentum. So this buyer’s market that we are in right now might be very short lived.
3) Sell Out The Building Quickly
Momentum is so vitally important when selling a condo building with hundreds of units. Developers can save millions of dollars in marketing and ‘soft costs’ if they are able to sell out a building in a few months rather than dragging things on over a few years.
They have a strong incentive to reach 70% sold as quickly as possible and the best way to sell out a building quickly is to price it low and generate as much ‘buzz’ as possible especially during the first 30 days after launch when buyer interest in the project is at it’s peak.