Agent Will

What’s this all about? A realtor telling me not to buy?

You bet, kinda.

First I want you to think about why you are going to buy that presale. If it is because you want to take the opportunity to get the location you want and you agree with the price then by all means, go ahead. If it’s beacuase you plan to live there and are sure that the developer will complete within a reasonable time frame that the bank, who pre-approved and guaranteed your right, will honour that financing package, then go ahead. You can stop reading now and go on to some of the other posts here.

If it’s to flip at a later date and make some money then this post is for you.

There was a time when pre-sales, pre-construction contracts, were used as a way for developers to raise capital to fund the project or demonstrate demand to a bank who would fund the project. Back then all the developer had was a showroom, maybe a model suite (usually a remodeled trailer) a floor plan, and a lot of promises. The goal was to stir desire in the buyers heart and drive the imagination wild. Thing was imagination did not come cheap and folks were weary to just plunk down a lot of cash for what was essentially empty air, a load of promise, and, in fact, a piece of paper. The only way they could pry this money from the more discerning buyer was to be able to offer future new at discount to today’s current resale price. It may not have been a big discount but it was a discount nonetheless.

My how things have changed. Over the past few years with pre-sale mania causing lineups around the block and everyone expecting to make money off arising market, and with rising construction costs, labour and materials, and expected appreciation developers have not only ceased offering such discounts they are actually charging future prices for future new.

How much more? A lot more. Example: 1 Bedroom in a new highrise downtown sold by developer in 2007 for $496,000. It was 510 Sq.ft. (I saw the contract and nearly choked). Not only that but developers are allowed to include solariums in the interior measurements. On resale we are not allowed to do that. This 510 Sq.ft. was actually more like 480 Sq.ft. That’s near $1000/sq.ft.

There is no way I can see making any money off this unit. It’s not waterfront. It’s not gold plated. It’s not even rentable for anywhere near the mortgage payments. I hope they plan to keep it.

It’s hard to pinpoint where this started but I like to refer to Woodwards for selling out at obscene prices. A building that is not in a great part of town sold at unheard of prices. Many realtors were shocked and that helped to drive up prices in resale. I mean, if someone will pay that much for that property how much will they pay for a great established building in a great neighbourhood?

Another neat trick developers started doing was an Assignment fee.This used to be a fairly reasonable processing fee around $1200 (which, since lawyers are likely involved and time certainly is, doesn’t seem bad) but now they ask for a piece of the action between 1.5-2%. On a $500,000 property (love how we so casually refer to half a million dollars these days) is $10,000. That is a big chunk of money.

So let’s say you bought one of these half mil places and want to flip it. Original purchase price $500,000. Realtor fees close to $17,000 (and we in Vancouver are rather cheap compared to the rest of the continent. It would cost you an average of $25-30,ooo elsewhere). Developer wants at least $7500. So you have to sell just it for more than $525,000 just to break even. You also had to put down a deposit on the property, let’s say 15% (but as high as 25%), of $75,000. And you certainly want a return on that money (unless you are panicking) so let’s say 20% of your deposit, or $15,000. Now you just need to find a buyer to give you $115,000. Not bad. That’s definitely doable. I you put down 25% then you need a buyer with $140,000 and it gets trickier. The numbers work… until we look at what the buyer is actually buying: A 480 Sq.ft one bedroom for $540,000. Yikes.

If you don’t assign it and go to completion you will have to pay GST (roughly 3.8% but your lawyer will confirm the exact rate as it is on a scale for new property purchases) and Property Transfer Tax. On a $500,000 place we’re talking taxes totalling about $29,000. So that $500,000 place really cost you $529,000. And then you go to sell it. Add realtor fees of $17,000 and your break even is now $546,000. If you want a profit you’ll be asking about $560,000. Better hope we keep going up by double digits every year. Sell it for $560,000 and (realtor fees increased to $18,250) you will profit by $12750.

So what are the alternatives? Well if you do believe we are going to go up double digits (or even single ones) check out the new math. Resale is sexy. Resale is smart. Resale is profitable. There are great, under two years old, units available, with parking, about the same size or larger for as low as $360,000. If you are concerned that it have the same finish I promise you that you can add that for under $50,000. If you want a building with more class then you can get about 600 Sq.ft. for under $440,000. Oh yeah, no GST. That will save you close to $19,000 alone.

So there are cheaper places available resale. But you want to bank your money and ride the appreciation wave? (Some are smirking now, but trust me, I hear this a lot). Well, with that presale you have to put down at least $75,000. You could go get one of those cheaper resales and put only 5% down and rent out the rest. Just to be fair, let’s keep the selling price the same. A $500,000 resale at 5% down is only $25,000. That’s a $50,000 difference favouring the resale. But you now own it and must make payments. Mortgage payments will be about $2500/month (5.75% amortized over 40 years). Strata Fees another $200. Property Taxes about $150. Total monthly outlay will be about $2850. But you have a tenant in there paying you $1800/month (maybe more but let’s be conservative). I know, that is terrible, you are still out every month and are basically subsidizing a tenant but your goal is the appreciation wave, right? So now your monthly outflow is $1050. At that rate it will take almost 4 years to match the same investment made on a presale.

Let’s review: Presale is smaller, a bigger investment up front, and more expensive. Resale is larger, can be sold at anytime, and is a much smaller investment initially.

If the market goes up 10% it will not be just the pre-sale condos affected. That rate is for all properties and is the average overall. 10% up on your presale then sold would net you a profit of $2750, or a piddly less than 3% return. Remember all those taxes and fees brought your break even up to $547,250. On the resale your break even is $528,250 and your profit is $21,250, or 28%

The choice is obviously yours to make but 3% or 28%? The choice seems pretty clear to me.

Note: while writing this another thought occurred to me. In the book “The Millionaire Next Door” it was discovered that the majority of wealthy people buy used cars and not new ones, taking advantage of someone else experiencing the depreciation. This is kind of the same thing. Then another thought popped into my head. That was the debate about the hot new dotcoms when they were in fashion versus established solid brick and mortar industries. Well we all know how that turned out. More people should have listened to Buffett.