3 Questions Your Condo Developer Hopes You Never Ask
I’ve been buying and selling real estate since I was 20 years old, and yes, that has been a long while! With very few exceptions, I’ve bought pre-owned properties and, so far, I’ve never bought a pre-built condo (although I have come close a couple of times). The main reason I’ve shied away is liquidity. I can’t move a tenant in right away on a pre-built, and markets change all the time. Yes, I’m a long-term investor by nature, but I’ve always liked the option of taking a profit on a piece of real estate when it makes sense to me.
That said, pre-built condo investing can be lucrative. Several of my clients have done well by putting down a deposit on a suite that they wouldn’t move into for 2-3 years. In many cases, they sold the contract before completion to someone who didn’t get in at the beginning and who was willing to pay more based on either a shortage of available properties, or an increase in market value since the project began selling. If you decide to go down this road, make sure you have answers to these three questions before you sign on the dotted line:
1. Whom does the sales contract benefit?
At one time, developers used the services of licensed Real Estate Agents to market their new properties. Among other things, these agents were required to disclose whose interests were being considered. As an independent third party, a Realtor could offer dual agency to a Buyer, suggest the Buyer retain his own agent, or, if the Buyer chose to forgo representation, simply write up a contract as directed. But developers soon discovered a couple of things. First, by not having to pay a “finders fee” to Realtors who introduced Buyers to the project, they could put more money in their own pockets.
Second, by eliminating agency for Buyers, they could bypass standard contracts and use their own documents… crafted in their own self-interest, of course. For example, what happens if a year or two after you’ve put your deposit down, the developer decides to abandon the project entirely? Chances are, all you’ll get as compensation for the time you’ve wasted (and market uptick you may have now missed) is your deposit back.
These days, many developers open elaborate show homes, staff them with non-licensed sales people and distribute glitzy sales brochures. Further, they control prices by keeping their products off the open market. The thing to remember – ALWAYS – is that the developer is out to protect his interests, not yours. My recommendation is to never enter into an agreement without professional representation (i.e. your attorney or your Realtor) by your side.
2. Am I buying at a better price than the current market?
There’s a difference between investing and gambling. Real estate, when done right, falls into the first category. In recent years, however, I’ve watched as developers market their products based on “anticipated increases in value.” But remember, the reason you are able to buy that flashy new condo at what the price will be in two years is not because the developer is committed to your financial future – it’s because the bank won’t give him the funds to complete the project without your financial commitment to buy now!
That’s a lot of risk for you. If the developer were willing to put it in writing that you don’t have to buy it and that you’ll get all of your deposit back with interest if it’s not worth at least what you agreed to, that would be a different story. But if you’re helping to finance a project (you are), not only should you not pay a premium to buy at some point in the future, you should pay less than the price of a similar, existing condo, today. When you enter into a pre-built arrangement, you’re taking on some of the risk. Think of yourself in this situation as a partner, not just a buyer.
3. What if I want to sell before the building is finished?
Things change, and it’s not unreasonable to assume that over the next few years, that suite that’s being built for you may no longer meet your investment needs. So you need an exit strategy in place from the outset. Just in case. Developers, however, don’t want to make it easy for you to resell your suite. After all, if you go on the open market, you are no longer their client, you are now their competitor. A developer wants to closely manage supply and demand in order to get the best price for his units – he doesn’t want you out there at the same time.
So make sure you examine the sales contract for any clause that limits your right to assign the contract of Purchase and Sale, or to advertise it on a Multiple Listing Service, the Web, etc. You want the freedom to get the best price in the current market should you choose to sell.
I’m the first to admit that in a hot market, all sense and reason take a vacation. When there’s a line of people with cheque book in hand, you may just have to take what’s being offered if you want to get in on the deal of the year. But remember, just because everyone is doing it, it doesn’t mean you should. Think like an investor, and leave the gambling to someone else.