If I was asked if preconstruction condos were a good investment, I would say yes. But there’s more to it…
Whether you’re a seasoned investor, or a first-time buyer, buying a preconstruction condo poses some risks. A preconstruction agent can help you avoid unnecessary stress, hidden costs, and unreasonable contract terms. A preconstruction agent can also get you first access into the development, often saving you as much as 10% or more. Since our fees are already built into the sales price, it makes sense to take advantage of our guidance. However, if you register on the builder’s website you may forfeit your right to representation. A good place to start when thinking about investing in a preconstruction condo, is by touching base with an agent.
Below are some factors to remember when buying a preconstruction condo:
Buying a preconstruction condo as an investment is a great way to hedge yourself in our appreciating market without getting a mortgage. Buyers put down around 20% in the first year, and earn appreciation on the purchase price of the condo for a few years.
However, it’s important to buy at a good price, and ensure the contract is tight. You want to “cap” the final closing costs on the home, as well as educate yourself on the actual final out of pocket costs.
How do you spot a good preconstruction investment?
All builders release their projects in phases. The first phase is sold within the company. The second sale is to agents that recently sold in one of the developer’s previous projects. The third sale is to VIP agents who have sold with the developer in past years. If you’re waiting for the developer to send an invite to buyers who registered on their website, you will be waiting around 3-6 months longer than buyers who had VIP access through their agent.
If you’re looking to make a meaningful investment, you would need to invest in one of the first sales events. Prices at the first sales event are the lowest for the whole project. After 3-6 months, prices have usually risen around 10% or more. The builders also stop including as many incentives at their subsequent sales events. Say goodbye to capped closing costs, free lockers, free maintenance and the right to 1 free assignment.
The maintenance fees, the amenities, the site plan, even the unit layout are all subject to change. The builders put their “best case scenario” in the marketing material, but their contracts disclose that the final product could change. Expect the maintenance fee to increase around 20% in the first few years of ownership, expect the closing date to be pushed back by delays, and expect that some of the amenities promised might not come to fruition.
- Preconstruction condos have additional closing costs compared to regular resale condos. Even if you cap the additional costs, you should expect to pay around 5.5% of the purchase price to close. Read more about these costs here: The 5 Most Overlooked Hidden Costs In Most Preconstruction Condo Contracts
Is buying a preconstruction condo for you?
This type of investment is not for everyone. If you really want to maximize your investment, you need to educate yourself on the risks and the rewards. It’s important to hire the right representation, and buy in one of the first launches.
Are you in a situation to afford this condo in 3-5 years? If you can’t afford the condo in the future, you might lose your deposits. Some builders will allow you to sell your contract to someone else, but others will not.
If you buy a preconstruction condo, the law requires the builder to give you a 10-day cooling off period. Sometimes the builder will make the contract available online and remove this condition in their contracts…
During the 10-day cool off, it’s pertinent that you have the contract reviewed by a lawyer, and get trusted advice from your accountant. There are three parties that should be involved in your purchase: your realtor, your accountant, and your lawyer. Your realtor will get you the best price and incentives. Your accountant will let you know your tax liabilities for this type of investment. And, your lawyer will ensure you understand exactly what the contract says.
Some of the incentives we often get our clients include: Capped closing costs, fewer hidden fees, right to lease during interim occupancy, free maintenance, free rental management, guaranteed rental rates, free parking, free lockers, free right to assignment, free unit upgrades, and more!