TorontoRealtyBlog

I have been perhaps the harshest critic of the pre-construction condominium industry in Ontario over the past two decades.

It’s an odd position for a real estate agent, of all people, to take.

But having obtained my license to sell real estate in 2004, it didn’t take long for me to start questioning how the pre-construction industry in Ontario works, why we allow it to work that way, and eventually, why people bothered purchasing pre-construction condos at all.

Don’t get me wrong; there was a time when it all made sense.  There was a time when you could, and this will sound naive, trust in the process and the partner.

But if you’re like my father, you believe in the saying, “all good things come to an end.”  As the real estate boom of the late-2000’s began, buyers flocked to pre-construction condos – many of them completely inexperienced and naive, and as a result, the industry, the process, and the prices began to change.

Some of you, reading this, have made money in pre-construction.  I have no doubt about that.

But I maintain that just like every type of investment, there are those that make money and those that don’t.  I have two clients who I would classify as “experts” in pre-construction investing, neither of whom purchase through me, since I have never sold a pre-construction condo.  But I have also watched countless people lose their time, money, energy, and sanity trying to navigate the wild west that has become the pre-construction industry in Toronto, and most of these people have themselves to blame.

While I believe in the concept of personal liability and responsibility, and I think that people should be held accountable for their decisions and actions, I’ve also watched the pre-construction industry evolve, watched developers gain power, and watched the government do absolutely nothing to intervene.

I’ve been writing about the perils of the pre-construction industry since the late-2000’s, so while I don’t want to regurgitate everything I’ve ever written or said, I do realize that there are a lot of newer readers on Toronto Realty Blog, many of whom have never even heard my opinions on this subject.

I think I grew so disenfranchised with writing about the perils of pre-con that I finally stopped.  I had said everything I’d wanted to say, and I realized that you can’t save people from themselves, especially when those people have a lead-pipe, can’t-miss, lock of a get-rich-quick opportunity.

Honestly, I felt as though I sounded like a broken record.  The same thing from David about pre-construction, over-and-over; he’s been saying this for years.

When a condominium project is cancelled, I often blog about it.  When the buyers cry foul, I’m not averse to posting “I Told You So.”

But in terms of the actual reasons why I don’t like, don’t sell, and don’t agree with pre-construction condo sales, it’s been a while.  I think I reached a point many years ago where I simply moved on.

I spent years saying, “The Condominiun Act needs to be completely re-written.  It’s out-dated.  Developers know all the loopholes.  The Act doesn’t need amendments; it needs to be re-written!”  Every few years, a politician would stand up on a soapbox and say something along the same lines, but after whatever election it was that necessitated a hollow promise of consumer protection, nothing ever changed.

Over the last few years, there have been attempts at consumer protection in real estate, but mandatory home inspections in B.C., banning “blind bidding” in Ontario, and providing tenants over-reaching rights that cause chaos in the rental industry aren’t the changes I was looking for.

Thankfully, there has been some good legislation in recent years, especially here in Toronto.  The “Housing Affordability Task Force” produced a report that I may have mocked in part here on TRB, but at least it showed there were efforts being made.  And the recent “New Home Construction Licensing Act” shows promise.

There are many things “wrong” with the way pre-construction condos are sold here in Ontario and as I said, I’ve been writing about them for eighteen years.  But the proverbial straw that broke the camel’s back and actually caused the government to intervene took so long to draw attention, it was like it happened in slow-motion.

I’ve you were paying attention last week, you know exactly where I’m going with this: condo cancellations.

But as I said at the onset, many of the readers here on Toronto Realty Blog are new, or newer, and thus those who haven’t been reading since 2007, 2011, or even 2015 might need a refresher.

Shall we?

Back in the mid-2000’s, I bought a pre-construction condo for $99,000 (it was a bachelor) with a 5% deposit.  That was it.  5%, total.  That was essentially $5,000 out of my pocket, and in three or four years, the condo would be completed.

Voila!

$5,000.  No-brainer.

But more important than the deposit was the fact that a comparable unit was selling at the building next door for $130,000.

The $99,000 price, in my opinion, factored in the risk.

I was buying a $130,000 asset for $99,000, knowing that the project could be canceled, or delayed, or materially changed, and all the while, if the market tanked, I would be holding onto an illiquid asset that I couldn’t sell.

Risk.

It simply needed to be adjusted for.  And I felt that, given the price of resale condos next door, I was being compensated for my risk.

But soon thereafter, the deposits required for similar pre-construction condos increased.

One day, I heard you needed 10% down.  It would be something like $3,500 at signing, the balance of 5% within 30 days, and then another 5% within 90 days.

Months or years later, it was 15%.  Mind you, this was when you could still purchase any resale property at any price with a 5% down payment, so the idea of needing 15% on a pre-construction was a bit tough to swallow when you compared it to resale.

Soon after, developers started to insist on a 20% deposit, of course structured in payments over 180 days or more, but they still needed 20%, and this was four times as much as when I started in the business.

I said above, “More important than the deposit,” and noted that comparable units were selling for more than pre-construction.  So on that note, as the deposits began to increase, guess what else began to happen?  Prices of pre-construction condos, relative to resale, began to increase as well!

That “gap” that I spoke of?  That gap that made perfect sense, on account of the risk involved, that was building in your profit for taking on such a risk – that gap began to shrink.

Eventually, the $300,000 pre-construction condo was next door to a resale condo that you could buy for $300,000.

So why bother buying it?

I was never sure.

When pre-construction prices rose above that of comparable resale, I simply couldn’t understand it.

And when I tried to explain to people why this was insane, and people wouldn’t listen, I finally decided to dumb it down to the most basic level.

In 2011, I filmed what is known in the industry as my “Cake versus Cake Mix” video, where I used the analogy of buying cake-mix instead of an already-baked and iced cake, to compare buying a pre-construction condo instead of a resale condo:

I know what you’re thinking: I haven’t changed a bit!

But seriously, why was this filmed like it was the Blair Witch Project?  Were tripods not invented when this was recorded?  Was a 99-year-old with cataracts behind the lens?

Oh, technology!

But the point in that video was absorbed.  Not by everybody out there, especially those with their minds made up about the get-rich-quick virtues of buying risk-free, can’t-miss investments, but by enough that people took notice of the video and the contents therein.

As bad quality as that 11-year-old video is, I enjoyed making it.  I loved speaking out, I really liked being creative, and I was always happy to share.

Over the years, I wrote countless articles about the perils of pre-construction, and while I made sure to specify that many people can and did make money, there’s just a lot more that you need to beware of compared to that of resale.

I’m not naive.  Any time there is money that can be made, money will be made.  But by few, and by those who are truly experts.  In the case of pre-construction condo buying in the early-2010’s, a lot of people made money, but a lot of people made LESS money than they could have made by purchasing resale.  Mostly everybody was hit with surprises, and the pitfalls I spoke of always seemed to pop up.

So here we go, the most noteable issues with the pre-construction condo projects in Toronto:

-The project can be delayed in perpetuity

-There is an “occupancy” period whereby you’re given the keys to the condo, yet you don’t own, it, and you pay the equivalent of rent for upwards of two years

-Material defects are discretionary, and the builder doesn’t fix them – you complain to TARION

-Material changes are also discretionary, and the builder decides what is material and when you can/can’t get out of your agreement

-The common elements can be changed or completely eliminated, ie. you bought thinking there was a pool, but the developer decided not to build one

-The project can be cancelled and/or “re-launched” so you’re being sold your own condo back, at a higher price.

How do we explain the above?

Well, I could do that with words, or, I could show you a video!

Here’s the infamous sketch I did back in 2014 comparing pre-construction condos to pre-construction jeans:

Yes, those t-shirts are all mine.  And they are all Banana Republic.  I never said I was interesting…

The “target completion date” of any pre-construction condominium is meaningless.  A builder can launch today and say they’ll be done in the spring of 2023, but it doesn’t matter.  The language they use in their contracts is iron-clad and they can delay, delay, delay, and delay.

They can start digging in 2028 if they want to.

The “occupancy period” has always been a wild one to me.  When your unit is finished, they hand you the keys.  It doesn’t matter if they’re still jackhammering in the unit above you, because guess what?  Your condo is finished!  So you start paying “occupancy fees,” and the hallways could be unfinished, the lobby could be under construction, and there’s a 0.00% chance that the amenities are finished.

The occupancy period can be four weeks or three years, and since you don’t own the condo until the building is registered, you can’t sell it.  You’re stuck paying those fees, and there’s no way around them.

The developer defines “material changes” so you’re S.O.L.  Imagine that you purchased a pre-construction condo in a “soft loft” building that had loft-like features, such as the 11-foot ceilings that your unit was going to feature.  Except, one day, the phone rings and somebody from the developer’s office reads off a screen in a monotone voice:

“Hello, it’s Lucy calling from ABC Developer with respect to your purchase of Unit #123 at XYZ Lofts, agreement of purchase and sale dated July 8th, 2009.  I’m calling to inform you that there have been some changes to the floor plate of the building and your ceilings are now 8-feet instead of 11-feet.  However, we do not consider this a material change, as defined by TARION, and therefore there will be no changes to the agreement of purchase and sale.  You do not need to take any action at this time, as this phone call is simply a courtesty.

Going from soaring, 11-feet ceilings to 8-feet ceilings is a material change, but it the developer doesn’t define it as such, then too bad!

This has happened before.  Think of a developer who has approval for a tower at a height of 88 feet.  The developer draws up plans for an 8-storey tower with 11-foot ceilings on every floor.  Years later, after the building is long sold-out, the developer decides that the condo will now feature 11-storeys with 8-foot ceilings on each floor.  Why?  Because the developer just created three new floors of condos that he can sell and profit from!

When you do your Pre Delivery Inspection (PDI) and look for those “material defects,” you’re not making a list for the developer to fix next week.  You’re making a list to submit to TARION, and lord only knows if and when those items will be addressed.  It doesn’t matter if a tradesperson put subway tile on backwards and upside down, you’re the owner of that condo, so contgrats!

As for those “common elements” being changed, here’s my favourite example of all time:

April 27th, 2014: “North York Condo Developer Faces $30 Million Lawsuit”

The developer sold a condo with underground subway access and then just, POOF, decided not to build it.  But guess what?  They can do that!  When you buy pre-construction, you’re buying your unit, and you have a right to your unit, but not to a whole lot else.  If you saw a rendering or a scale model with a rooftop pool, there’s no guarantee that it’s going to be included in the finished product.

In 2017, I sat down and filmed a video where I went through the builder’s “standard forms” and highlighted the pitfalls for buyers:

If you’ve watched all three videos that I posted today, then bravo, and thank you.

But for the other 99% of you, you’ll just have to trust me on this – especially with the last video.

I don’t believe that any buyers of pre-construction condos actually read the standard agreement; you know the one – the one that’s been poured over by lawyers, over and over, to strengthen, tighten, and make the agreements iron-clad in favour of the builders?  Yeah, those ones!

In that video, I went through the most egregious parts of the agreement and demonstrated what developers can get away with and how.

But it’s the last point that I wanted to talk about today, with respect to the “big news” I mentioned from the last few weeks.

It’s “cancellations” that, despite the preceding issues, ended up being the biggest problem in the pre-construction condominium industry.  Despite the deposit structures, ridiculous prices, delays, occupancy periods and costs, deficiencies, material changes, and lack of any guarantee with respect to the common elements, the cancellations were what finally got the government involved.

(to be continued)

The post Cleaning Up The Pre-Construction Condo Industry! appeared first on Toronto Realty Blog.