For the last couple of years, the housing market in Canada’s major cities had been sizzling hot and there was no shortage of real estate news coming out on a daily basis. Being a Realtor, a homeowner and a real estate investor, I definitely have a vested interest in the real estate market and tends to read quite a few headlines on a regular basis. There is noise everywhere. The governments are introducing foreign buyer taxes and stricter mortgage qualification requirements to try to limit speculators in the real estate market. Some economists think that the Canadian real estate market is forming a huge bubble and it’s going to burst any time soon. Affordable housing activists are calling out governments and builders for not building enough affordable housing units for low-income earners or not doing enough to help first-time buyers. Builders are pointing at governments for not providing enough new land to build on. The list goes on and on and on. With all these distractions out there, no one seems to have the real answer to a fundamental question, “What’s causing all these price inflations in the real estate market?” I don’t claim to have the answer nor will I ever have the answer. However, I’ve come across some real estate practice that’s very alarming during the last couple of weeks and I feel that I should share with my readers as this knowledge may help them save potentially thousands of dollars in the future. So here it goes…
A New Investment Opportunity
Back in mid-January of this year, I got an email from my brokerage with information regarding a new condo development project. I get these emails all the time as there are condo development projects being initiated everywhere around the Greater Toronto Area (GTA). However, this project seemed interesting to me as it was located just steps away from a future subway station, close to three major highways, in the vicinity of major malls, restaurants and major retailers like Home Depot, Wal-Mart and Ikea. If you’ve read my guide on how to buy an investment property, this project met most of my ideal investment criteria that I outlined in that post. So it’s definitely worth my time to check out this project to evaluate if all these euphorias are for real. If the potential is there, then I can deploy some of the leftover cash from my mortgage refinance last year into this project instead of investing all of it in the stock market. On top of that, I also have a client who’s also looking to deploy his cash to purchase more properties. It’s a win-win for me if everything goes smoothly as I can make a commission on the purchases and I will also benefit from the investment in the condo project with really great potentials.
Gotta Do Your Homework
After I’ve decided to further investigate the potential of the project, I started to look for more information related to the future subway. Based on the information that I found on the Toronto Transit Commission (TTC) and the Metrolinx website, the location of the condo is less than 200 meters away from the subway entrance. I also drove to the current location of the condo and the subway entrance to verified the distance – it was accurate. In addition, I also found out that the subway station will be scheduled to be completed within the next couple of years, which is ahead of the planned completion date of the condo project in 2021. Having access to public transit is crucial when it comes to an investment property. The next item on my research list is to do some analysis of the newly built and recently sold condo units in that area. This will provide me a baseline to compare the price of the new development condo with the market price of the area’s recently sold units (since I am a Realtor, I have access to all these information. You can have access to this info too by contacting me or the Realtor that you work with.) Once armed with this information, I was excited and couldn’t wait for the launch of the project.
The Launch Of The Condo Project
About a week later, the official launch of the project started and Realtors from all over the GTA were invited to the launch party. I couldn’t attend the party as I had other commitments. However, colleagues from my brokerage attended the launch and got me the floor plans, deposit structure and the pricing for the units. One piece of crucial information was missing, which as the selection process. How does the developer determine the pecking order of who gets the appointment to buy first? From what I was told, all interested buyers need to submit a worksheet with their personal information and preferred unit to purchase. For those buyers who submitted their worksheet through a Platinum Agent (it’s just a fancy title for an agent that does a certain sales volume per year, but there is no actual educational credential required for this title), they will get their applications reviewed first. My brokerage had a couple of Platinum Agents so I piggyback on their status and submit my application through them. Now the waiting game begins…
Waiting For An Appointment
Three days had passed. I didn’t get any reply from the developer nor did my Platinum Agent colleagues from my brokerage had any feedback regarding my application. A week had passed, still no responses. So I decided to give the sales center a visit. It was busy and the environment was like a crazy flea market with Realtors everywhere and associates at the sales center wouldn’t even talk to you if you don’t have an appointment. Two weeks had passed and I finally got words from my brokerage. I thought it was news regarding my application, but it was not. The first phase of the condo project was sold out and the developer was taking application for the second phase. So once again, I filled out the application for myself and my client and submit it myself and through my Platinum Agent colleague.
The Lack Of Transparency From The Builder
Once again, I waited to get an appointment and I still didn’t get any responses from anyone. Now it’s about a month since the first launch of the project and I know that my chances of buying a unit in that project are pretty slim. However, I was not very happy about the whole selection process and the lack of transparency provided by the condo developer. One Saturday, when I was in the area, I decided to drop by the sales center and inquire about my application. This time, the sales center was a bit less busy and there were actually people there who I was able to talk to. To my surprise, nothing was reviewed about the appointment selection process and I was told that the second phase was sold out too. Now they are on to phase three. For this phase, buyers no longer have to send in their worksheet and waited to be contacted for an appointment. It’s a first come first serve basis. Feeling a little forgotten and mistreated, I kept my cool and asked for the price list and the available units. When I received the available units and price list, I couldn’t believe my eyes…
The Lack Of Regulations
The first thing that really surprised me was the price list. The price for a one bedroom unit of approximately 504 square feet in size was priced at about $283,999 at the start of the launch and the price for a two bedroom unit of approximately 773 square feet in size was priced at about $458,999. For a similar sized one and two bedroom unit, I was provided a handwritten price list of $319,999 and $520,999 for a one bedroom and two bedroom unit, respectively. On top of that, I was told by the sales representative that she can only hold that unit for me for an hour so. Instead of providing a deposit of $5,000 on signing as stated in the original price list at the start of the launch, I’d have to provide a 5% deposit instead. I was really disappointed to see that price list and was even more disappointed that the real estate industry was allowed to conduct business in such a manner. If I didn’t have the original price list to compare the prices with, I would have been outright robbed by this builder for tens of thousands of dollars. Sadly, I saw a few people who were signing their purchase and sales agreement for a unit and they probably had no idea how much the prices had increased and how the builder was able to arbitrarily offer buyers any price they want on a daily basis. Would you have paid for a condo unit that was not even built yet, and knowing the price for a similar unit was offered for $60,000 less about a month ago?
The Difficult Recommendation
After seeing the price list, I decided that I didn’t want to be robbed by this builder, even though I really liked the potential of this project and the investment opportunity it presented due to its location. Now, I had to call my client to inform him that he has an opportunity to purchase a unit in the condo project if he wanted. However, I decided that it’s not wise for me to get ripped off by this builder and he shouldn’t be ripped off too. So I recommended against buying a unit in that condo project. My logic was quite simple. One of the purposes of purchasing this investment property is to make a profit through price appreciation in the future when you sell (here is a recent post on how I helped one of my clients saved $30,000 when he sold his home). But when your cost is significantly higher to start with, you are also losing out in other investment areas too. For example, you’ll be borrowing more to purchase the unit due to a higher purchase price, your cash flow will be less as a higher percentage of your cash flow will be used to service the mortgage debt. Suffice to say, he was disappointed too with this decision not to invest in this project. This recommendation cost me more than $20,000 in potential earnings as the commission was 4% of the purchase price, but as I mentioned in my previous article, I am not in the real estate business to make a quick buck. My client’s interest comes first, and everything else is secondary.
My Two Cents
With such a hot real estate market, it seems like everyone is making money in the real estate market and there are opportunities to make money everywhere. For sure, if you have purchased a property anywhere in the Greater Toronto Area within the last five years, your chances of making money is almost 100%. However, with such a lofty market and all these euphorias, sometimes, investors lowered their guard a bit and do less due diligent. For me, it doesn’t matter what the investment is or the time during the economic cycle, the same due diligent needs to be conducted for every investment. If the investment is putting you at a disadvantage to start with, one must be prudent enough to reject such investment, regardless of how good it looks paper. There will always be another investment opportunity in the future as long as you have investment capital.