Should I Buy a Pre-Sale Condo? | VREP #14

 

 

First-time homebuyer Pete Stojakovic joins Adam and Matt to discuss the pros and cons of buying new construction.

Episode Summary:

Tell us what your goals are.

I’m looking within a $500,000 budget; I have 20% of that for the down payment.

I was going to ask what type of down payment you have. As a first-time homebuyer, if you’re looking at built properties you can go in with 5% down; with pre-sales, you’ll need at least between 10 and 20%. Sounds like you’re covered.

Yes. Part of that is in RRSPs, but that’s fine. Yes, as a first-time homebuyer you can use up to $25,000.

Pros of buying a pre-sale condo:

  1. It’s brand new. Most of the major systems in a building have an economic life of 20-25 years, e.g. windows, roof, plumbing. You can expect the major costs down the road (i.e. special assessments) to wait for this time period.
  2. You get a warranty. This is a 2-5-10 year, which is provincially legislated: 2 years on parts and labour of the guts of the building (heating, plumbing, electrical); 5 years on the building envelope (exterior), where the strata has independent engineers assess things at the end of this period and go back to the developer with any issues (the leaky condo issue in the past makes this a comfort); and 10 years on structure. Most issues will be covered. Most issues in a unit will go wrong within the first year, but you get a deficiency walkthrough when taking possession. You can use a third-party independent representative for this; it’s good to take your realtor and a building inspector. The developer has their representative take care of deficiencies that you point out, and you have more than one chance to catch things. I helped someone buy a property two months ago and the developer has come back three or four times since then.
  3. There’s great investment potential. You may want to live in the property but you would want to see a return on it too. Consider this:
  • You buy a $500,000 1-bedroom property tomorrow
  • You put 10% or $50,000 down and the deal completes in 2019

From tomorrow to 2019, you are not paying property taxes, you are not liable for building issues, you pay no maintenance fees, and you have no tenant. The market goes up 10%, so your property is worth $550,000 at possession. So, you’ll have seen a $50,000 return on your $50,000, or 100%!

This is called a deposit structure. As an example, you’d typically make 5% at offer, another 5% six months later, 5% six months after that, and 5% at completion. We saw 25% last year on condos in the west side. This is on the high end; 10% is the low end. Investors love it because it allows them to hold a large asset with a small amount of money. The grandeur idea of a pre-sale is the idea of a master-planned community. Often, a new project is going up in an area they’re trying to establish; Canvas at False Creek Flats is a great example of getting in early. This is when there’s an attractive price point, but the next phase is at a higher price point. There is often opportunity to buy into an earlier phase and you’ll see, as the market climbs and investment potential is more apparent, the price goes up. This is how Yaletown started; there was a time when it was warehouses and toxic lands. There is opportunity to get in on the ground floor for these master communities

Cons of buying a pre-sale condo:

  1. You don’t see the unit. You can’t walk into the lobby and get an initial sense of the building; you don’t feel the countertops or see an amazing view outside. There is uncertainty. People and markets hate uncertainty. Although developers are getting a lot better at building presentation centres and they have projections of the view, it won’t be the same as seeing the actual unit. Display centres rarely have ceilings, and 500 sq. ft. feels much bigger without a roof!
  2. You don’t live in it. Can you wait until 2019? Does this make sense for you? If you’re renting during that period, you’re not building equity.
  3. There’s a different tax structure on pre-sales. There is a property transfer tax of 1% on the first $200,000, and 2% on the balance. For first-time homebuyers, on built properties this goes up to $475,000 and then a sliding scale up to $500,000. On new construction, up to $750,000 is exempt from property transfer tax.
    The crucial consideration is the 5% GST: everyone buying new construction must pay this. You get a potential rebate if you’re living in the unit (for more information, please visit: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4028-gst-hst-new-housing-rebate.html)..
  4. You can’t negotiate price. In the past year, it’s been tougher to do this in the built housing market, but with pre-sales it’s difficult to get developers to budge on price: you’re paying sticker price. There may be incentives, such as negotiating a parking stall or storage locker size, or the length of the deficiency period, but it’s challenging to get a price reduction. You may see a 2005 building where the seller is leaving the country, etc. and needs to sell; people see this as an opportunity on the buyer’s side, but there are not many developers in that position. For instance, an Olympic Village building took many units off the market for a year and a half, and then put them back on the market so they could get their price. Developers can afford to do that.
  5. Assignments. if you buy a pre-sale tomorrow that won’t be done until 2019 and you want to sell prior to then (called “shadow flip”), it is very difficult to market and sell. The display centre is usually closed, and you can’t put them on MLS so the exposure is limited. The developer usually charges an assignment fee of 1.5-2%. There’s a reason many marketing companies invest so much to build a display suite, show you the finishes and create an experience: when they’re closed and you’re marketing this yourself with a floor plan, photos and Craigslist, it is very challenging. Assignments are opportunities for buyers, as they’re not dealing with multiple offers and prices are generally a bit lower. If you bought a built property tomorrow and wanted to move to Nova Scotia two years from now, it’s much easier to sell that built property than an assignment.

If I’m getting a pre-sale, why do I need a realtor?

We would do the same things we often do in a resale market. Granted, a realtor is more valuable in a resale property, but we offer:

  • Early access to properties due to relationships with developers. It’s about getting the unit you want. We get incentives and opportunities for our clients. If you’re going to get a break, it’s through someone doing lots of business with the developer.
  • We’re two filters: you’re the filter of whether the property fits your lifestyle and you’re comfortable in it. We’re looking with a critical eye for potential pitfalls of perhaps where the unit is in the building and how that impacts resale value. We’re helping judge the floor plan, finishes, and developer’s reputation. The unit you’re interested in is always the best unit, and the person in the display centre represents the developer. A realtor represents your interests; they’re someone who does this every day. They’ll point out things you hadn’t considered. We point out things for livability and resale, the same things we do for a resale market: we see an average of 3-10 properties per day and people’s reactions to them. Just because a developer has a strong reputation doesn’t mean they’re selling you the next best project. We have a critical eye on value. We run a market analysis like any other property by looking at where is the city going and at broader opportunities in Vancouver. The market analysis can tell you if something is a good price or not.

 

Are you ready to pull the trigger?

How about I take your card?

I’ll be waiting for your call, Pete.

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