Real Estate

Question for Pre-Con Investors

  • Last Updated:
  • Feb 15th, 2020 11:40 pm
Tags:
[OP]
Jr. Member
Feb 7, 2018
113 posts
122 upvotes

Question for Pre-Con Investors

Looking at pre-con pricing, I’m curious as to what draws buyers in at $300/sf more than a similar resale condo <10 years old in the same area?

I understand that some people value newness differently, and typically fees are lower for new condos in the first couple of years, but even under the best case scenarios, the price differences are so wide I’m not seeing value in the pre-con space right now. Hoping someone here who invests in these can share their thesis on why pre-con > resale.

My only theory to date is that people are signing up only to hold the unit and sell on assignment before closing - which is lucrative at the moment, but doesn’t seem sustainable longer term if you can’t find someone to buy your unit before closing.
15 replies
Deal Addict
Apr 5, 2016
3867 posts
2500 upvotes
Calgary/Vancouver
Now, it's dumb as they factor in future value. Back then there was a discount buying presale as opposed to existing condo. Plus, you don't tie up all of your cash and only spread out the deposit over a few years. Some developers even only require 5%. This can allow you to buy multiple presales and sell on assignment compared to only being qualified to buy one property with a mortgage.
Current Fido customer.
Ex Koodo customer.
[OP]
Jr. Member
Feb 7, 2018
113 posts
122 upvotes
bomber17 wrote: Now, it's dumb as they factor in future value. Back then there was a discount buying presale as opposed to existing condo. Plus, you don't tie up all of your cash and only spread out the deposit over a few years. Some developers even only require 5%. This can allow you to buy multiple presales and sell on assignment compared to only being qualified to buy one property with a mortgage.
Right - and not to sound like a bear but doesn’t the whole flip on assignment scheme seem unsustainable? Wondering about the people who are actually buying in the hopes of closing and living there/renting it out.
Deal Addict
Apr 5, 2016
3867 posts
2500 upvotes
Calgary/Vancouver
wiab89 wrote: Right - and not to sound like a bear but doesn’t the whole flip on assignment scheme seem unsustainable? Wondering about the people who are actually buying in the hopes of closing and living there/renting it out.
You can say that about any investments or stocks. Can never know what the market will be like, but demand is currently still there. Worse case, the realtors will prop up the market like they always do.
Current Fido customer.
Ex Koodo customer.
Jr. Member
Sep 11, 2007
152 posts
15 upvotes
toronto
i buy pre-con when i don't have 20%+ for downpayment.
when i do, i buy resale.

if you have $$ i would buy resale. lot of pre-con these days are very expensive based on future value,
i also look at last minute assignment deals because sometimes they could be really bang for the buck.
Deal Addict
Mar 27, 2004
3543 posts
985 upvotes
Toronto
when precon condos were 1000$ sqft downtown core. people were baffled and asked the same question. those $1000sqft units are now reselling for 1400$. look at 88/100 harbour.

does that answer your question?

you are taking a risk. when it pays off. it's really good.

people are buying up King Toronto at 1800$sqft

1 Bloor west is well over 2000$sqft and it's pretty much sold out of everything below the high rise suites.

you dont win w scared money. 90% of millionaires get there from investing in real estate.

your theory about selling reassignments is wrong. investors buy and hold. why do I say that? I would say on avg 60% of condo units are leased out.
Full-time Realtor
Award Winning Realtor.
[OP]
Jr. Member
Feb 7, 2018
113 posts
122 upvotes
oasis100 wrote: when precon condos were 1000$ sqft downtown core. people were baffled and asked the same question. those $1000sqft units are now reselling for 1400$. look at 88/100 harbour.

does that answer your question?

you are taking a risk. when it pays off. it's really good.

people are buying up King Toronto at 1800$sqft

1 Bloor west is well over 2000$sqft and it's pretty much sold out of everything below the high rise suites.

you dont win w scared money. 90% of millionaires get there from investing in real estate.

your theory about selling reassignments is wrong. investors buy and hold. why do I say that? I would say on avg 60% of condo units are leased out.
So if people are buying to hold - why are they paying a premium for pre-con vs resale? And what is the math that makes it a better investment over resale?
[OP]
Jr. Member
Feb 7, 2018
113 posts
122 upvotes
bomber17 wrote: You can say that about any investments or stocks. Can never know what the market will be like, but demand is currently still there. Worse case, the realtors will prop up the market like they always do.
Except you’re not investing per se - you’re essentially buying a call option to purchase the unit with a strike price set sometime in the near future. However, unlike call options you actually have to exercise the option on the future date. No problem if the value is above the strike price, but if it’s below then you’re left holding the bag and having to qualify for a mortgage to close.
Deal Addict
Jan 9, 2010
1454 posts
659 upvotes
wiab89 wrote: Except you’re not investing per se - you’re essentially buying a call option to purchase the unit with a strike price set sometime in the near future. However, unlike call options you actually have to exercise the option on the future date. No problem if the value is above the strike price, but if it’s below then you’re left holding the bag and having to qualify for a mortgage to close.
Lots of reasons per se depending on what you're looking for:

End Users:

1) Some people might not have the downpayment to buy something now
2) Some people want to live in new if they're an end user, and are planning for a future event when they will need a home (ie. getting married)
3) Some people want to live in a specific building or location and they can't find something comparable on the resale market

Investors:

1) Some people are buying to flip on assignment, although I don't think it happens as much anymore.
2) Some people may not have the down payment to buy resale
3) Some people want to buy into special projects or locations such as Sugar Wharf, 1 Bloor West, 1 Yonge etc., which are unique projects where you can't find something comparable on the resale market
4) You're assuming that the appreciation of a condo building is a straight line when it's far from it. The appreciation of a condo building has historically seemed to increase and spike early and starts to level off around the 5 year mark, so if you're buying pre-construction and prices continue to go up (big if), you're going to be able to benefit from all of that appreciation. Builders know about this now which is why you see pre-construction being priced higher than resale in the area since they factor in this appreciation. You would have to do your own analysis and judgment as to whether or not this "baked in appreciation" by the builder is going to leave you enough room for profit once the place closes. It really depends on your investment horizon though since if you buy and hold it's more of a moot point.
Jr. Member
Sep 11, 2017
163 posts
102 upvotes
I bought a precon 1 bed in Downtown East Toronto last October because, it was a surprise release from the builder @ $1070sqft. Very difficult to find that price point for precon back then in the area (now you'll never see it). It allowed me some time to work out financing/DP, etc while the unit appreciates in value through completion time. Sure I could have bought a resale, but with various closings/build stages in my portfolio happening currently, I prefer to stagger my projects.
Jr. Member
Aug 21, 2017
122 posts
44 upvotes
It's very simple - people see condo market skyrocketing. They are driven by greed, they dont want to miss out but cannot get mortgage with B20 or don't have enough down payment.

wiab89 wrote: So if people are buying to hold - why are they paying a premium for pre-con vs resale? And what is the math that makes it a better investment over resale?
[OP]
Jr. Member
Feb 7, 2018
113 posts
122 upvotes
moofur wrote: Lots of reasons per se depending on what you're looking for:

End Users:

1) Some people might not have the downpayment to buy something now
A lot of your post makes total sense, thanks for sharing - especially the bit about non-linear price growth. I would challenge your quoted assumption, however. Most pre-cons you need to put down 15% within 90 days. With resale, a buyer can get in with a minimum of 5-7% down. Factor in the lower price of resale, and I don’t know how not having a DP for a mortgage makes sense in this scenario. It would seem as if resale would be the only option for people without a big DP.

The only thing I could see here is someone borrowing from LOC to fund their 15% stake in the pre-con and hope to pay it back in the 2-3 years between buying and closing.
Jr. Member
Sep 11, 2007
152 posts
15 upvotes
toronto
wiab89 wrote: A lot of your post makes total sense, thanks for sharing - especially the bit about non-linear price growth. I would challenge your quoted assumption, however. Most pre-cons you need to put down 15% within 90 days. With resale, a buyer can get in with a minimum of 5-7% down. Factor in the lower price of resale, and I don’t know how not having a DP for a mortgage makes sense in this scenario. It would seem as if resale would be the only option for people without a big DP.

The only thing I could see here is someone borrowing from LOC to fund their 15% stake in the pre-con and hope to pay it back in the 2-3 years between buying and closing.
I may be wrong but my assumption is i need at least 20% downpayment and for precon its never that fast for me i pay 15%-20% in 360-520 days and 1% at occupancy. gives me enough time to make the downpayments.
Deal Addict
Jan 9, 2010
1454 posts
659 upvotes
wiab89 wrote: A lot of your post makes total sense, thanks for sharing - especially the bit about non-linear price growth. I would challenge your quoted assumption, however. Most pre-cons you need to put down 15% within 90 days. With resale, a buyer can get in with a minimum of 5-7% down. Factor in the lower price of resale, and I don’t know how not having a DP for a mortgage makes sense in this scenario. It would seem as if resale would be the only option for people without a big DP.

The only thing I could see here is someone borrowing from LOC to fund their 15% stake in the pre-con and hope to pay it back in the 2-3 years between buying and closing.
Most of the precon I've seen have a deposit structure of 20% within a year, and now some have stretched it to 1.5 - 2 years given the recent run up in prices. That being said, your point still stands, although it still does give people some time to come up with the down.
Deal Expert
User avatar
Feb 11, 2009
16612 posts
2943 upvotes
Toronto
wiab89 wrote: Except you’re not investing per se - you’re essentially buying a call option to purchase the unit with a strike price set sometime in the near future. However, unlike call options you actually have to exercise the option on the future date. No problem if the value is above the strike price, but if it’s below then you’re left holding the bag and having to qualify for a mortgage to close.
Except...you don't have to "exercise" the option since most Pre-Cons come with a free Assignment clause (unless its out-of-the-money)
Real Estate Agent - CPA, CA -

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)