More millennials are seeing pre-construction condos as the only way into the market
Author of the article: Laura Hensley, Special to National Post
Publishing Date: Jul 22, 2021
A few years ago, Ava Baccari was in her mid-20s, renting a studio apartment in downtown Toronto while working full-time, and was close to giving up her dream of owning her own place.
“When half your paycheque is going to your rent, it’s difficult to save and get closer to that goal of buying,” says Baccari.
She decided to move back home to Vaughn to save money, and started considering pre-construction condos. When she visited a new development showroom in late 2016 in the city’s west end, she was drawn to the building — expected to be done by July 2020 — and its payment plan.
The 20 per cent down payment was more manageable since it was spread out: five per cent was due shortly after signing, and two additional payments of five per cent would be spread out over the next few months. Baccari’s final five per cent was due at occupancy, and her mortgage payments wouldn’t kick in until the building closed.
Baccari moved into the condo, at Dundas Street and Royal York Road, this year after a few pandemic-related delays during the building’s occupancy period.
Given real estate prices have soared in the four years since Baccari bought – the average Toronto condo selling price was $465,400 at the end of 2016 – she’s grateful she purchased when she did it.
“There were so many [moments] along the way where I thought, Oh, this may not work out,” she says. “But now that I’m in my place and it actually happened — and I did this on my own — it feels very rewarding.”
More young and first-time buyers are seeing pre-construction as the most feasible way to enter Toronto’s real estate market. The price of homes in the GTA has steadily climbed over recent years and skyrocketed during the pandemic: average sold prices hit nearly $1.09 million as of June, and the average price of condos reached $683,479. Pre-construction condos are attractive to millennial buyers because of their payment structure and the fact that buyers will have years before they need to start paying off their mortgage. They also allow buyers to jump into the market before getting further priced out.
Nasma Ali, a Toronto real-estate agent and founder of One Group, says she’s been surprised by the current demand in the pre-construction condo market. Because condos prices were harder hit by the pandemic, she says the belief among agents was that the pre-build market would lose steam. Instead, it’s heating up.
“Ten years ago when pre-con was still seen as extremely risky and people were like, ‘What – I’m buying a piece of paper that’s not even built?’ builders were trying to [move] units by selling them under market value,” Ali says. “Now, forget it. Nothing is free.”
Data from real-estate insights organization Urbanation found that new condominium sales were 2.5 times higher in the first quarter of 2021 than the last three quarters’ average in 2020. What’s more, new units that launched for presale during this year’s first quarter sold at a “record high average sale price” of $1,261 per square foot, up nearly nine per cent from sales prices during the same time last year.
Ali says most of the clients she sees who buy pre-construction right now are either investors who are speculating that the rental market will continue to get stronger post-pandemic, or first-time buyers who can’t afford houses and want to get into the condo market.
In the case of the latter, Ali says some of them are dealing with instability as a result of the pandemic, whether they had a change in jobs or moved back home. “There’s just a little bit of uncertainty and they feel like they will be more comfortable buying something and having a mortgage four years from now versus right now,” she says.
Buying pre-construction, however, means your condo won’t be ready for years — and timelines of projects are often pushed out. For millennials who are planning to live in their new purchase, this means most of them will have to stick out the high cost of rent or move back home with family to save up.
This was the case for Jacquie, who asked that her last name not be used. She was living with her family when she purchased a pre-construction condo in 2016 when she was 26. She took occupancy in April this year and, like Baccari, feels relieved.
“This was definitely long-term planning,” she says. “I knew that [the condo] wasn’t going to be done within the next year or two, so it kind of gave me a sense of footing as to where I’ll be financially.”
While her experience has been largely positive and she is happy with how her unit turned out, she says she wishes she got a lawyer to review her contract. “I overlooked two things,” Jacquie says, including the assignment clause — which determines whether or not you can pass the contract onto another buyer without penalties — and the cap on development charges.
If your development fees aren’t capped at a certain amount in your contract, you can be on the hook for higher costs — in the thousands — once the condo is finished.
Ali says it’s smart for buyers to work with a real estate agent and have a lawyer review their agreement before signing; she’s heard horror stories of people signing contracts without understanding the terms and being on the hook for more fees than they’d expected. While some buyers opt to deal directly with the developer when buying pre-construction, Ali says the value of working with an agent is the guidance they bring to representing you, not the building.
She also advises making sure you understand whether or not you can rent the property out during the occupancy phase, as some builders won’t allow tenants during this time. Even if you plan to live in the unit yourself, a lot can change in four to five years and you may not want to take occupancy.
“You’re paying the builder $2,000 or whatever per month [for occupancy fees] and you’re bleeding that money because there was a clause stipulating that you cannot rent it out,” Ali says. “That could have been an easy fix, if you knew about it beforehand, because that’s in the agreement.”
As a safeguard, buyers of pre-construction buildings have a 10-day cooling-off period in Ontario when they can change their mind and get out of the deal without penalties. During this time, if a buyer hasn’t already, it’s best to have the agreement reviewed by an expert who understands real estate law.
But even with all the precautions, there’s still risk. Instances of builders not finishing projects or development companies filing for bankruptcy are realities that have left some Canadians in dire financial situations. What’s more, units can look different than buyers expected or have finishes of a lower quality than expected.
Even though Baccari says she’s heard pre-construction horror stories, she feels lucky she went with a reputable builder.
“When I was signing that day back in 2016, it was like signing your life away to this place that doesn’t even exist,” she says. “But it’s worked out better than I thought it would.”
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