6 mistakes new condo investors make

To keep an investment property profitable, you need to avoid these mistakes

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Mistake #1: Condo investors trust the floor plan

Ken Grunber, who works at a video production house in Toronto, found out too late that the new condo unit he bought wasn’t nearly as large as advertised. When he and his partner moved in and measured the area, they discovered it wasn’t 700 square feet after all. The condo was actually 560 square feet—if you don’t count the balcony and bathroom.

“That’s not unusual,” says Martin Rumack, a real estate lawyer with over three decades experience in new build construction. “Condo sales staff will often include balcony or terrace measurements as part of the total square footage.” They’ll also base room measurements on external walls. “You can’t rely on their verbal assurances, on the floor models, or on the sale pitch or brochure.”

While listings for resale homes and condos can not include hallway, bathroom, basement or outside space (such as decks and balconies) as part of the listed square footage, no similar restrictions apply to new build or pre-sale condo listings.

This has become a problem with so many new condo purchase decisions relying solely on brochures or artist renditions. Worse, is that builders have the discretion to change an image, or floor plan, or layout and “you have no say,” says Rumack. He suggests asking for a breakdown of room sizes and plan details, and to “get it in writing.” Then, if there’s a substantial difference between what you’re sold and what you get you can either negotiate a price reduction or try and get out of the deal.

Mistake #2: Condo investors don’t get a lawyer

Whether you’re buying a new or pre-sale condo, the purchase agreement is the legally binding document that spells out what you’re getting and the conditions of the sale. It’s full of fine print and legal-speak, and if you sign without legal representation, you risk being bound to terms you don’t understand or don’t want. More importantly, says Rumack, it destroys any chance of re-negotiating the terms of the sale.

“Skip legal advice and you could end up with an electrical utility box on the front lawn of your townhome that you can’t do anything about, regardless of what the plans looked like,” he says. “You could find yourself stuck with any manner of substitutions, exclusions or inclusions that could detract from your unit’s future value.”

When you’re buying a condo, depending on the province you live in, you may have a cooling off period of up to 10 days. This gives you a chance to pay between $800 and $1,600 to a lawyer who will walk through your contract after it’s signed. If you don’t like what they find, you can back out of the deal. (Unfortunately, there’s no such period for freehold new-build homes, and many home builders demand that you sign a contract on the spot to secure your sale price or lot selection. Try to avoid this situation if possible, but if you must, at the very least insist on adding a clause that makes the deal conditional upon approval by your solicitor.)

Mistake #3: Condo investors accept delays without a fight

About 10 years ago, if your new-build condo wasn’t ready on time, it was your problem. “Builders were not required to provide reasons or to limit their delays,” says Rumack. But that all changed when Toronto condo buyer Keith Markey challenged a 2006 Tarion decision.

In 2001, Markey bought a unit in a soon-to-be constructed condominium tower in downtown Toronto. His initial possession date was Nov. 30, 2002. But as the date approached, the builders sent letters announcing delays. Markey’s possession date was moved back six different times—and he didn’t move in until eight full months after the initial possession date.

As such, he requested $5,000 from the builder to compensate him for the delays. The builder refused. The case went before a tribunal, and Markey won. Tarion appealed the case, but in 2006, Markey was vindicated: Not only did he receive $5,000 in compensation but he was also awarded close to $9,000 in damages. And the case changed how Tarion and other provincial warranty programs handle builder delays.

“The law is now clear,” says real estate lawyer Sheldan Silverman. “Critical dates are now included as part of the purchase agreement and contract. If a builder misses these critical dates and requires an extension, a buyer can either agree, and seek compensation, or simply get out of the deal.” Either way, Silverman suggests seeking legal advice whenever you’re presented with a request to delay a critical date.

Mistake #4: Condo investors think they have a warranty—but don’t

Most buyers assume that all new-build lofts, condos and homes are covered by a provincial warranty, but this isn’t the case. Only three provinces—B.C., Quebec and Ontario—make warranty coverage mandatory.

“In Ontario, it’s illegal to build without being registered,” says Janice Mandel, vice president of corporate affairs at Tarion. But in other provinces, where the warranty program isn’t mandatory, builders can simply opt-out of coverage.

Mandel suggests buyers get their new home warranty in writing. They should also go online to determine if their builder is registered with a provincial regulator as a new home builder. This is particularly important for loft or condo conversions—residential units constructed inside an existing building shell. At present, new-build warranties don’t apply to conversion projects, although there is currently discussion about whether or not to change this.

Mistake #5: Condo investors are ambushed by hidden closing costs

When you sign the purchase agreement for your new place, many of the closing costs are estimates, explains Rumack. And you need to know that these costs often escalate as you approach your possession date. Not only do they escalate, but they can get quite absurd, explains both Rumack and Silverman. For instance, you may find large charges that suddenly materialize for hooking up gas and electricity meters, plus mortgage discharge fees, development fees, deposit verification fees—Rumack has even seen a fee for “public art contributions” to cover the cost of a sculpture at a new-build condo’s entrance. “That’s why I pay close attention to the adjustments and try and get a cap on certain items and remove others,” Silverman says.

Mistake #6: Condo investors buy at the wrong time

If you’re buying a new condo or townhouse as an investment, the key is to get in as early as possible. In order to get the financing to start a new project, builders will often raise initial funding through pre-sales. These pre-sales often kick off with invitation-only VIP events, says Max Wynter, a realtor with Re/Max Realtron Brokerage in Markham, Ont. Usually, only high-volume realtors who specialize in the type of building on offer are invited. “If you see a line-up at a sales office, it’s often because a VIP event has been scheduled.” Once the VIP event is over, the builder will open sales up to all interested realtors, then finally they’ll open the project up to the public. “By the time a builder throws a grand opening for the general public, often 50% of the units have already been sold and the price has gone up three or four times,” explains Wynter.

It’s easy to get in on these VIP pre-sales, but you’ll need to work with a realtor who specializes in new developments and be ready to move quickly. For instance, the Paintbox development—the second phase of condos in the newly revitalized Regent Park area of Toronto—gave VIP realtors a week to register their clients for the pre-sale. Four days after registration closed, clients and investors were required to sign the paperwork.

Despite the potential savings on purchase price, this can be a risky way of buying real estate. For instance, when the Vancouver condo market turned in 2008 many pre-sale buyers found themselves with a contract price that was much higher than the current value of the unit. At the time, the builders refused to renegotiate the purchase contracts, and the banks refused to grant pre-arranged mortgages for the original, higher-value purchase price. As a result, many buyers were forced to either default—and lose their money—or find additional funding elsewhere, at significantly higher interest rates.

Keep in mind that purchasing at the right time of year can also save you tens of thousands. For instance, in the Greater Toronto Area, the summer is the best time to shop for a new development, says Stan Garrison, an industry insider with more than 20 years experience. “People are on vacation in July and August and don’t have time to look for houses. When things slow down for a builder you have more bargaining power as a buyer.” Another good time to look is in December and January, but by mid-February activity starts to pick-up and deals are taken off the table, explains Garrison.

In Vancouver’s Lower Mainland the opposite is true: real estate and new home purchases are typically hot in the summer and slow down significantly over the rainy months of November and December. Each local market has its own cycle, so it’s best to talk to an experienced realtor.
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2 comments on “6 mistakes new condo investors make

  1. And also as a new investor you need to consider HST implications in Ontario and Capital Gains implications as well.

    Reply

  2. There is more to it than written here.. you forget by-laws restrictions, the rules of the condo corp are always subject to change, assignment restrictions, failure to see how to make money because they have no strategy . I can go on lol

    Reply

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