I have been buying and selling real estate since I was 20 years old, and yes, that has been a long time! With very few exceptions, I’ve bought used properties and have never bought a pre-built condo until now (although I’ve gotten close a few times). The main reason I have hidden is liquidity. I can’t move a tenant right away in a pre-built, and the markets change all the time. Yes, I am a long-term investor by nature, but I have always liked the option of profiting from real estate when it makes sense to me.
With that being said, investing in pre-built condos can be lucrative. Several of my clients have done well by putting down a deposit on a suite they wouldn’t move into for 2-3 years. In many cases, they sold the contract before completion to someone who didn’t get in early and was willing to pay more due to a shortage of available properties or an increase in market value since the project began selling. If you decide to go this route, make sure you have the answers to these three questions before you sign on the dotted line:
1. Who benefits from the sales contract?
At one point, developers used the services of licensed real estate agents to market their new properties. Among other things, these agents were required to disclose whose interests they were being considered. As an independent third party, a real estate agent could offer a Buyer dual agency, suggest that the Buyer retain their own agent, or, if the Buyer chooses to forgo representation, simply write a contract as directed. But the developers soon discovered a thing or two. First, by not having to pay a “finder fee” to the real estate agents who introduced the buyers to the project, they could put more money in their own pockets.
Second, by removing the agency for Buyers, they could bypass standard contracts and use their own documents…made in their own interest, of course. For example, what happens if a year or two after making the deposit, the developer decides to abandon the project entirely? Most likely, the only thing you’ll get as compensation for the time you’ve lost (and the market rally you may have missed now) is your deposit back.
These days, many developers open elaborate show homes, contract with unlicensed sellers, and distribute glitzy sales brochures. In addition, they control prices by keeping their products off the open market. The thing to remember, ALWAYS, is that the developer is out to protect their interests, not yours. My recommendation is to never enter into an agreement without professional representation (ie your attorney or real estate agent) on your side.
2. Am I buying at a better price than the current market?
There is a difference between investing and gambling. Real estate, when done right, falls into the first category. In recent years, however, I’ve seen developers market their products based on “anticipated increases in value.” But remember, the reason you can buy that flashy new condo at the price you’ll have two years from now isn’t because the developer is committed to your financial future, it’s because the bank won’t give you the funds to complete the project. without your financial commitment to buy now!
That’s a lot of risk for you. If the developer were willing to put in writing that he doesn’t have to buy it and that he’ll get his entire deposit back with interest if it’s not worth at least what he agreed to, that would be a different story. But if he’s helping finance a project (he is), not only should he not be paying a premium to buy at some point in the future, but he should be paying less than the price of a similar existing condo, today. When you enter into a pre-constructed agreement, you are assuming some of the risk. Think of yourself in this situation as a partner, not just a buyer.
3. What if I want to sell before the building is finished?
Things change, and it’s not unreasonable to assume that in years to come, the suite being built for you may no longer meet your investment needs. Therefore, you need an exit strategy from the start. Just in case. The developers, however, do not want to make it easy for you to resell their suite. After all, if you go out on the open market, you are no longer your customer, you are now your competitor. A developer wants to closely manage supply and demand to get the best price for his units; he does not want you to be present at the same time.
So be sure to examine the bill of sale for any clauses that limit your right to assign the bill of sale, or advertise it on a Multiple Listing Service, the Web, etc. You want the freedom to get the best price in today’s market if you decide to sell.
I’m the first to admit that in a hot market, all sense and reason goes on vacation. When there’s a line of people with checkbook in hand, you may just have to take what’s on offer if you want to participate in the deal of the year. But remember, just because everyone else is doing it doesn’t mean you should. Think like an investor and leave the game to someone else.