10 tips for prospective buyers

Toronto Life

We know: you’re confused. The market’s softening. The deluge of new condos has some experts predicting a nasty correction; others argue that a steady stream of new Torontonians will keep the vacancy rate low and prices sky-high. And then there’s you: caught in the middle, terrified about forking over a fortune for a unit that might bottom out in a matter of months. So what to do? Well, first, breathe easy: a condo is still a savvy investment in Toronto. To help you avoid the pitfalls, we’ve compiled 10 expert-approved tips for navigating the market in uncertain times.

Comment: No, the market stopped softening a few months back. And the “deluge” of new condos are already bought and paid for. And there is a steady stream of people moving here, some 60,000 per year. They all need somewhere to live. Do not fear bottoming out, even as sales slide late last year and into this spring, prices rose every single month. As they pretty much every month for the past 50 years. Inflation affects everything, prices rise for EVERYTHING over time. Houses, cars, chocolate bars – they all cost more today than they did 10 years ago. Whatever property you buy, it will rise in value over the long term, guaranteed. Here are the average prices for last year and the decades previous. You can see for yourself that real estate appreciates over the long term.

2012 – $497,298
2002 – $275,231
1992 – $214,971
1982 – $95,496
1972 – $32,513

If that makes you concerned about prices falling, then there is nothing I can do to help. And if you are afraid of interest rates, let me repeat that list with mid-year mortgage rates (posted bank rates, I don’t have access to discounted or broker rates going back far enough).

2012 – $497,298 | 5.24%
2002 – $275,231 | 6.90%
1992 – $214,971 | 9.26%
1982 – $95,496 | 19.22%
1972 – $32,513 | 9.41%

Even though rates have steadily fallen for almost 20 years now, prices still tripled as mortgage rates doubled from 1972 to 1982. So don’t let anyone convince you that the recent 0.2% rate increase is going to end the world. Rates rose 10% in the late 1970s and it did not cause prices to fall. That is a rate increase 50x higher than the one that just happened. And even if we see a 2% rate jump, that is still only 1/5th of the late 1970s increase. And it puts us back in the same range as rates were 10 years ago – when prices were still rising 5-8% per year.

1) New or resale: The great divide

Ben Myers, vice-president of the condo research outfit Urbanation, says it takes 3.85 years for the average Toronto condo to move from the initial sales stage to occupancy, and in this supply-heavy climate, pre-construction units might take even longer to complete as developers fall short on cash. On the bright side, that lag provides lots of time for patient buyers to save up for the unit of their dreams. Buying new also means lower maintenance fees, since the units and shared spaces haven’t been subjected to wear and tear. A new condo does have its downsides, though. Brian Persaud, a real estate agent with ReMax and author of Investing in Condominiums: Strategies, Tips and Expert Advice for the Canadian Real Estate Investor, says that condos are getting smaller. The average Toronto unit has shrunk 65 square feet to 750 square feet in the last four years. If you don’t mind a few fusty ferns in the lobby, it’s worth looking at resale buildings in established neighbourhoods – if only to check out expansive square footage and what closet space constituted in the 1990s.

Comment: Developers are not slow to build because they don’t have cash, it is because they have trouble with permits, staff and supplies. If you see a crane, they have their funding. Any slowdowns are due to extraneous circumstances, like strikes. And there is not a lot of saving up to do, as builders typically want 20% down on a new condo. It is usually spread out over 3 payments and 6-12 months, but that can be a good $80-100,000 required, up front, from the builder. Unless you are sitting on a ton of cash, all of your saving will be going toward raising that capital.

2) Sneaky low fees are, well, sneaky

Rock-bottom maintenance fees – typically less than 40 cents per square foot – may seem like a bargain, but not if they don’t cover the building’s real maintenance and repair needs. Low fees may also mean the building just doesn’t have many amenities – certainly no pool, basketball court or screening room. Before buying, compare to the fees of buildings with similar amenities and roughly the same number of residents. New buildings typically have fees in the 50-cents-per-square-foot range, says Urbanation’s Myers. Older buildings average 60 cents per square foot, while buildings in need of major repairs can reach $1 per square foot. Generally, rates shouldn’t rise much faster than the rate of inflation – around 2% per year – except in a building’s third year of occupancy, when control switches from the developer to the condo board.

Comment: Yes, beware the low fees advertised by the builder. Estimate double what they promise and you will be safe. The more the building has, the more it costs to run. Someone has to pay the concierge, to heat the pool, to maintain the roof top deck. And make sure what the fees include. The more utilities they include, the higher you can expect them to go. Water, hydro and natural gas all cost money!

3) Hotel condos: More fine print than a polyamorous pre-nup

If you’ve got the cash flow and want to be pampered with valet and spa services, condos run by hotel brands are a decadent option. However, not all hotel condo units are created equal. Condos at the Four Seasons can’t be rented as hotel rooms; condos at the Trump can. Both options are complicated, says Calum Ross, an independent mortgage broker. Property tax for all hotel condos is calculated at the commercial rate, which is quadruple the residential rate, and hotel condos aren’t eligible for provincial new home warranties. So unless the builder offers its own equivalent warranty, owners won’t have access to the same home insurance plans they would with a regular condo or house. Some banks impose restrictive conditions on mortgages for hotel condos, which means prospective owners can have a tough time securing financing. Nervous lenders might not offer the same mortgage terms at closing that they offered at the outset. “When the bank is arranging your purchasing documents, make sure you’re getting approval that lasts until closing,” says Ross. Otherwise, you may be stuck scrambling for a bigger down payment than anticipated.

Comment: CMHC also refuses to insure mortgages on some of these combos, which can make resale difficult. And if you are concerned about maintenance fees, hoo boy, stay away from these developments!

4) Credit unions might be the answer

Since interest rates plummeted to tantalizingly low levels, the feds have been applying restrictions that make it harder for some – especially self-employed and first-time buyers – to borrow. “Those restrictions have had the biggest impact on the market, because people aren’t being approved for as much as they’d like,” says ReMax agent Persaud. The good news is that the rules only apply to federally regulated lenders. Credit unions are exempt from many conditions that disqualify borrowers. Although interest rates are often higher than at banks, credit unions have much more flexibility regarding who they can lend to, and for how long – they’re not even bound by the maximum 25-year amortization rule that took effect last year. Most credit unions cost $5 to join – a small price to pay.

Comment: And they pay dividends! Your mortgage rate may be higher than a bank, but the credit union cuts you a cheque every year!

5) Beware the maintenance-fee money pit

When condo bidding wars were at their peak, buyers tried to sweeten deals with unconditional purchase offers – including waiving their right to a post-purchase inspection – but those days are long gone. Good. Tell your lawyer that, in addition to various other conditions, you want to be able to review the status certificate, which is a snapshot of what’s going on with the condo, and that you want the option to withdraw your offer if you spot anything troubling. Look for bills owing, rising common-expense payments, lawsuits against the condo, etc. This is a great time to review the building’s reserve fund (where the maintenance fees are put aside for long-term costs). “Be very wary if the fund can’t cover anticipated repairs,” warns Yemi Asalu, a real estate lawyer with Korman and Company. It could result in a fee increase or, worse, a special assessment. That means ponying up your share – potentially thousands of dollars – out of pocket.

Comment: Uh… almost no one does inspections on condos. And 99% of sellers and their agents provided status certificates, even in condo bidding wars (which were also 1/10th of what we saw with houses, maybe even 1/20th). Financing conditions were the ones waived the most, which is still stupid and dangerous for everyone. You want to play bidding war, fine, let the best price win. But let’s quit with forcing people to delete conditions that protect EVERYONE in the deal. Regardless, be sure to get a proper real estate lawyer who knows condos and will go over those documents with a fine tooth comb.

6) Too many shiny perks can mean something’s amiss

Most condos have VIP sales nights, when developers wine and dine realtors, who in turn can bring along a few select clients. Prices offered at these events tend to be a little lower than when the units go to market. Be wary though: sometimes there’s no model suite to look at, meaning guests are paying up without seeing layouts. Other perks, like free parking or a free locker, can be enticing, but be careful not to inflate their value. Persaud recommends converting all special offers into dollar figures. “Perks usually represent 5% of the purchase cost,” he says. Too many free incentives might mean a developer is having trouble selling the minimum number of units needed to secure financing and get shovels in the ground. That could mean a long delay, or a looming cancellation. Stay focused on your budget and space needs, and don’t be swayed by the buzz. “They offer free cocktails and build up the hype,” says Inga Toi, a real estate agent and president of Wide World Properties. She says VIP events don’t offer the bargains they used to. “It can trigger an emotional buy. You have to be careful.”

Comment: I don’t think builders with problems are giving away things they can sell. If they are hurting, why would they lose money on purpose? Perks are just that, perks. It is like clients who walk into a staged home and wonder what is wrong since it is “so obviously staged”. You think maybe the sellers just want their place to look the best for YOU, the buyer, so you will buy it? Don’t look for conspiracies where there aren’t any.

7) Smart landlords play the long game

Population projections suggest that by 2031, the city will need an estimated 93,000 new rental units to meet demand. If you’re buying as a landlord, be patient, says Toi. “You want a modest return and long-term capital appreciation.” Those who try to strike it rich quick are bound to be disappointed.

Comment: True enough. The path to riches is to buy and let someone else pay your mortgage over the longer term. One of the main reasons the Toronto condo market is doing so well is that it has replaced the traditional apartment building market. There very very few apartments being built, condos fill the gap. Get in on it!

8) The creaky, crumbling, inefficient TTC is condo gold

Every one of our experts had the same answer when we asked about the best place to buy: a neighbourhood with good TTC access. In a cool market, subway access and walkability will keep your condo desirable, whether you’re looking to sell or rent.

Comment: Buy along Yonge Street, or wherever you think new transit will be built, such as along Eglinton. The east end is a great bet as well, look at all of the development going on there.

9) “Positive cash flow” is a phrase worth remembering

Renting your unit is a smart way to weather the storm until prices rebound, but the numbers have to make sense. “Any unit where the rent isn’t greater than the carrying cost with a 20% down payment will be difficult to sell,” says Ross. Remember that renters want the same things you do: decently sized units above street level, a good selection of shops and cafés nearby, and access to transit.

Comment: Don’t worry about making money every month, that is hard to do. If you break even, or even lose $100 a month, you are doing just fine. Think about it this way, $100/month is $24,000 over 20 years – would you pay $24,000 for a condo worth $300,000 or more? I thought so. And make sure to buy as big as you can afford, as well as think unique. You do not want to have the same boring 1-bedroom CityPlace unit as 20 other landlords, getting into a race to the bottom of the rent barrel fighting to get a tenant. Think loft, think view… location, size, you name it.

10) Flipping is so 2009

During the condo boom, there was money to be made selling units that had appreciated before the physical property even existed. Today, that’s rare. Most builders require that a certain sales threshold be met before buyers can sell. They also might make the seller pay back the HST rebate they qualified for as an owner-occupant, or pay the legal cost of transferring documents to a new owner.

Comment: Not really. That was honestly more of an urban myth than anything. Up to 20% of a new condo sells within a year or two, but that is not just flipping. Some, maybe, but mostly it is people with different lives, new jobs, or a different location than when they bought 3-5 years ago. And while it is true that new condos appreciate by the time they are complete, all real estate appreciates over 3-5 years. Toronto prices rose almost 26% on average from 2009 to 2012. New and resale, condo and house. Buy anything and you will see a return over time – which brings us right back to my point at the top. Time is your friend, with enough of it, you are sure to make money owning real estate!

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

Laurin Jeffrey is a Toronto Realtor 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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