The benefits of buying pre-construction in a softening real estate market.

The current state of the market can be described as “soft’, with the possibility of further downward movement . Condos are still fairing well (read my “September 2022 GTA Market Update”). However, in these soft market times, along with the volatility that accompanies the market, why consider purchasing a pre-construction property?

Two answers: (1) Make your money work for you. (2) Incentives.

Whether you are considering real estate investing in Toronto, downsizing or are someone looking to secure your future home, the money you have sitting in your bank account is losing its purchasing power due to inflation. You can invest it to help it keep up with inflation. One of those methods has been to invest in real estate. But why invest it in the market when the market is unstable?

Market cycles come and go but over time downtrends end and real estate increases in value and thus, so does your return on investment. Over time, your money maintains its purchasing power.

Purchasing now can be a prudent investment due to the incentives that are being offered. When the market softens and builders have already sold a significant amount of units, they are committed to the process. They may have already set the wheels in motion on ground breaking and construction. This puts them under pressure to sell the remaining units, sales that have to occur during a softening market. How do they make these sales happen? Incentives to the buyer.

As an example, in areas such as Swansea Toronto, South Kingsway and Etobicoke, there are builder/developers that are at, or very close to, their sales thresholds from which they can unlock the financing needed to break ground. The incentives they are offering to get their sales past that threshold are quite enticing.

So, let us assume that you are dealing with a Platinum and VIP Broker such as our Brokerage, Harvey Kalles Real Estate Ltd. We know who the builder/developer is, we know their reputation and completion record. This assures that your investment sees a successful follow through and completion. Our status with the builder/developer sees to it that we have front line access to every incentive available. We also know the builder/developers negotiating style and we know the best way to approach the negations with them.

The Deposit Structure of a pre-construction purchase maximizes the way your money works for you. Purchasing resale properties involves a much larger immediate down payment for a house or condo. Investors choose pre-construction purchases because they can put down a small amount of money to lock up the price for the next 3 to 5 years. During that time, they earn appreciation not just on the value of their deposit but on 100% of the value of the property they purchased while not having to worry about the expense of annual taxes, maintenance fees, mortgage payments and insurance. Over the past 25 years, no soft market cycle has lasted for more than 12 months before recovering. A 3 to 5 year timeline is a good way to ride out a soft cycle.

First the obvious incentive: First time buyer incentives. The government has incentives for first time buyers as well as breaks on the taxes in the purchase and the ability to utilize RRSP’s. Let us know if you need the links to the government sites that provide full details on these incentives.

Next obvious incentive: Customization. On a pre-construction purchase you can customize the home or condo right down to the colours. This can save you significant sums that are usually spent on a resale purchase.

The next important incentive is the deposit structure. When the market is hot, the builder/developer may ask for up to 25% and all within 180 days of the purchase, with no flexibility. Now the builder/developer will accept aggressive deposit structures of 10% to 15% spread out over 2 to 3 years. This makes for a much higher rate of return to the investor and lightens the load of locking in a pre-construction condo sale or pre-construction house sale for the future property owner.

Regardless of the market, the builder will negotiate the price last or not at all. But there are incentives that, when averaged agains the square footage of the unit, amount to a discount in the overall price per square foot.

Here is a list of some of the incentives that amount to savings on the final purchase price:

The Cost of Appliance Packages – Opportunities exist for the negotiating of free packages or free upgrades.

Upgrades to the Finishes – We will know if you can get upgrades to your finishes at no additional cost.

“Live Free” Bonuses – The first year’s maintenance fees could be covered by the builder. If the new home has a common roadway fee, that would be one less expense to you.

Free Assignment Fees – The builder may waive the fee to assign your purchase. Condo assignments and house assignments can have fees in excess of $10,000 when you wish to complete an assignment sale of your pre-construction purchase agreement.

Two Year Rental Guarantee – A big plus for investors. Also, if you have purchased to live in the new construction it could be a big plus for you if you are not ready for the move when the unit is completed.

Free Condo Fees – When buying a condo, in some instances, we can negotiate up to a year of savings on the payment of condo fees.

Money Towards Closing – This is a direct financial cost that every new construction purchase faces and that can directly translate to a reduction in the purchase price. Sometimes this is offered as a specific sum credit on closing such as “up to $10,000 credit on closing”.

Free Parking and Locker – Depending on you location, parking can cost $50,000 or more. A locker can cost $5,000 or more.

Capped Development Charges or Paid Development Charges – The buyer is responsible for that portion of the development charges that pertain to that specific unit. An opportunity may exist to cap it at a lower cost or have a portion paid for by the builder. Keep in mind that development charges escalate annually and having them capped removes the variable factor of that expense.

Incentives such as these are a great way for us to negotiate the costs of the purchase to bring about a final purchasing price that is well below what is advertised to the public and that is in line with the current market value.

If you are considering a potential purchase of a pre-construction home or condo, contact us so that we can guide you towards a safe and sound purchase goal. We are here to help.