Let’s talk about the process of buying a pre-construction condo in Toronto. We continue to get questions from a lot of our clients about how the process actually works. So why don’t we start out with talking about what a pre-construction condo actually is?
In a Preconstruction condo purchase, you’re ultimately buying the right to purchase a specific unit at a future date. So you’re looking into a price point. And that’s really what a pre-construction condo is. And then in three, four or five years that building is going to be complete. And then you close that transaction with the builder on that set price that you agreed to three, four or five years previously. So it’s a great way to invest in the real estate market and participate in appreciation without actually owning the physical asset
So why would I want to buy a pre-construction condo?
So it’s a great investment tool if you want to participate in the real estate market, but not have to worry about the mortgage aspect right away, or you don’t want to deal with tenants right away. And also with where pricing is today, It allows you to lock into that price point. Let’s say rents today aren’t providing that cash flow that you need to be able to lock in up today’s price point. But you’re going to get future rents in three, four or five years. So we lock into that price point. we don’t have a mortgage on the property will have that mortgage in three, four or five years. At that time, we would have seen rents go up. And now we’re in a cash flow positive situation at that future date.
So buying it with today’s price, but getting future rents on the property, I find that really attractive, because, in today’s competitive, condo market, which is the entry-level product in downtown Toronto, I’m competing against the end-user. So when I go by that one-bedroom condo, in Toronto, there’s someone that wants to live in that condo, if I’m looking at the resale level. So if I’m looking at my rent bill numbers to cover costs, that other person is looking over Maslow’s hierarchy of needs. Shelter being one of the most important things, they require shelter, so they’re willing to pay more money than you as an ambassador because they require shelter, you’re just doing this for investment purposes. So they’re going to get the property because you’re not willing to pay that much.
In the pre-construction market, It’s a reverse. Again, the end-user is looking for shelter, but the shelter isn’t going to be ready for 3, 4, 5 years, you as an investor are looking for a return on your investment, you are no longer competing with that end-users and users aren’t typically buying preconstruction that first release, because it’s too far off for them to accommodate their shelter requirements. So now we’re not competing against end-users anymore. We’re just in there with other investors. And then we’re going to look at rental numbers. And the rental numbers make more sense. this is a completely passive investment at the beginning, you just put your money down and then forget it for a few years until the building is actually built.
Just make sure the money’s in the bank account for your upcoming deposit checks. When the building’s done, there isn’t much to do after that initial phase of deciding on the unit security and it’s signing, I’m just making sure that you have the money in the account when the deposit checks come out. So it is truly passive, set it and forget it kind of operation. And this is what most of our investors do.
Pre-Construction Condos For Sale
What’s the process of purchasing a pre-construction condo and how does it differ for resale?
quite different from the resale process and the resale prices, an agent send you an MLS listing you go see the property, you decide if you’d like the property, you’d make an offer to the person selling the property, then the offer could potentially be accepted could be some negotiation, you provide a deposit, and when you close on the property in 30 to 60 days.
In terms of pre-construction, it is quite different. In a pre-construction purchase, we’re buying from a floorplan. So then what we would do is we select the plan that is available and then we go to sign the contract. So the contract, it’s a really thick document about 40 pages deep, that is heavily favored to the developer, very little changes that you’re actually able to make to those contracts to negotiate the terms.
Since I am a Platinum VIP agent my client are the first person buying in these projects. What that means is you’re buying at the lowest possible price point in the building and getting the first access to units. So preferential pricing, preferential selection. And with that, you are getting a built in profit, because in future phases, and future releases, the price continually goes up. So we want to get you in there, in the beginning, to get you at the lowest possible price point. But if you want to make money, you always want to be the first person in on the building. So the things that you want in your contract, you want the right to assign.
What is the Condo assignment?
The assignment is if you decide not to close on the property, you have the opportunity to sell this, right. It is when you’re purchasing preconstruction to sell this right to someone else. And there’s an opportunity to profit off of that. Sometimes you are better off closing on the property. But if circumstances out of your control, you need to unload the property the assignment allows you to do this.
Make sure you’re able to lease the property during occupancy. So you have your occupancy date, and your date of registration, which is another difference between resale and pre-construction. So what your occupancy date is, that’s when you get your keys to the property. So you can move into the property. Now let’s say the building is a 50 stories tall, the 10th floor is going to be done before the unit on the 50th floor. So they give you keys but you haven’t closed on the property yet, the title hasn’t transferred over to you. And this protects you the consumer. So you get your keys for the 10th floor, but the building has to be finished. They’re sending people there and spending inspectors in the sending engineers and to make sure everything is to a satisfactory level before that title will be transferred. When titles transferred, that’s when you get the mortgage on the property.
So that’s your difference between your occupancy date and your date of registration, this period can last anywhere between three months to six months, sometimes a year, it really just depends. Now during that time you are paying an occupancy fee, that occupancy fee is made up of your maintenance fee, property tax and the interest-only portion remaining on the outstanding balance for the unit. And that’s calculated at the prime rate, this cost would be lower than if you just had your traditional mortgage on the property with your maintenance and property taxes on the unit. So during that time you’re paying the document, and what we do is we rent the unit out, and that rent is going to cover the occupancy costs. And you’re really going to have a nice piece of cash flow during that time. Because we’re not paying a full mortgage amount on the property. So we don’t have that right to lease so we can release it during the occupancy period.
Then number three will have caps on our development charges. So what development charges are, these are charges that the city charges the developer for every unit to complete in the building. Now the issue is the developer doesn’t know what the development charge will be in five years. So what they say is that, okay, your development charges are included in the price for this unit. But we don’t know what the increases, we don’t know what the development charge is going to be in five years. So what we’re going to do is we’re going to cap the amount of this potential increase. So the increase is more than this cap amount we’re going to absorb those costs. That’s our loss, you’re responsible for this portion of the increase. And beyond that, we’re responsible so we want to make sure that amounts of the cap because if there’s a significant run-up of Development Charges, that extra cost is not put on the purchaser and the builder is taking that cost into account. So those are the three things we want to make sure are covered in a pre-construction contract agreement.
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