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Tag Archives: real estate prices

Why are condos still being built in Toronto, Calgary and Vancouver?

There’s still money in condos – if you’re a developer

Romana King – Moneysense

Over Thanksgiving weekend, I had a conversation with a good friend who was stunned at how many condominium projects are still being approved and built in Toronto, despite impending interest rate hikes (and subsequent fears of a housing market crash). At one point she couldn’t help but ask: “Why would developers risk building under such uncertain conditions?”

Comment: What “impending” interest rate hikes? Do they know something everyone else doesn’t? Rates may rise in the future, it will happen when it happens. But there is NO “impending” rate hike. Saying that is very dishonest. And no one really has any realistic fears of a housing crash, all evidence points to the opposite. Just because a couple of crazy people throw ridiculous numbers around to help sell books doesn’t mean anyone else shares that opinion.

Fact is, my friend could’ve asked the same question for just about any major Canadian city.

However, despite a variety of risks, condo developers aren’t really gambling when it comes building new condos. That’s because condo developers aren’t speculating on real estate prices 36 months from now-they only care about the real estate forecast in the next three to 12 months.

Comment: There are no risks to condo building, that is why they keep building them. You think your friend knows better than the boss a Tridel? Or the 10s of 1,000s of buyers and the banks that approve their mortgages? Your friend is that much smarter than everyone else involved in the Toronto condo market?

Toronto condos
To understand how this works, you’ll first need to understand the basics of construction financing. Construction mortgages are structured so that only a portion of the funds are released as building milestones are achieved. For instance, a builder may receive 25% of the funds as soon as the concrete for an underground parking garage is poured; another 25% is released as soon as the framing for the external structure is completed, and so on and so on. But in order to get construction financing a developer must provide their own equity into the project-and more often then not, a developer’s equity actually comes from condo pre-sales.

Comment: Which is why they need to sell 70% to 80% of units before they get their first financing installment. It also proves to the bank the viability of the project, that people want it and are willing to pay for it.

A pre-sale is exactly as it sounds: it’s the sale of a condo unit before the building is constructed. For potential investors it means buying sight unseen from building plans and artist renditions. It can also mean significant savings with some real estate investors experiencing up to 25% price appreciation on the price they paid for a pre-built.

Comment: Sure, the same appreciation everyone sees over 3 to 5 years. But a condo today that is completed in 2018 and you will see appreciation. New or resale, it doesn’t matter. All real estate will rise over that time.

As you can expect, developers offer this discounted pre-sale price to entice buyers to pre-purchase, thereby providing builders with cash-flow and equity, which is then used used to secure financing; in turn, this financing will pay for the construction of the building, which will lead to the sale of more units and, eventually, profit for the developer. In fact, the vast majority of condo construction mortgages won’t be forwarded to the developer until 60% to 80% of a planned development is sold through pre-sales.

Comment: It isn’t a discount. It is current value. If they are worth more later, that is because of the overall market. Trust me, the builders don’t give anything away for free!

That means by the time my friend is watching the big construction machines dig up a planned condo site, the developer has already sold up to three-quarters of all the available units-and in a few short months, all the remaining units will be sold.

Comment: Exactly. Which means that completed condos don’t “flood” the market with units for sale. The units are already sold by the time the building is complete and the condo corp registers.

Experienced condo developers, then, aren’t waiting three or four years to make a profit on their buildings-even if buyers are waiting three of four years from a pre-sale contract to a move-in date. Instead, developers are investing in a project with an expectation of profit in as little as six months. It’s also why condo buildings are still being constructed, despite the threat of rising interest rates and the fear of a Canadian real estate bubble-because six to 12 months is still plenty of time for a developer to make some money before rates start to rise, and the real estate market starts to shift.

Comment: Actually, the builder doesn’t make their money until the very end. It is not until the condo corp registers that title transfers to the owners and the mortgages come into play and the builder gets paid for all those units. And there is no threat of rising rates, so they keep on keeping on.

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.

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