Is there something nasty simmering away under Canada’s increasingly hot condo markets? As the price of detached homes continues to run away from the average buyer, condos have become an increasingly popular, affordable alternative.
Unfortunately some buyers are being left out in the cold. They have tried to take advantage of attractive pricing on a pre-sale unit. Basically they are buying a picture of a condo on the promise that it will be built and they will be able to move in. Sometimes that does not happen. The developer scrubs the deal and hands back the deposit. (In some cases the project comes back on the market a short time later with much higher prices.)
It is rare. In Toronto’s red hot market there are more than 600 projects in pre-sales or in planning. In the past year just eight have been cancelled. Even though it is unusual there are still calls for regulation to make it more difficult for developers to pull out.
There is rarely anything illegal in the cancelation of a project. The contract between the builder and the buyer is almost always sound, even if it stacked in the builder’s favour. The developers that cancel projects routinely cite a lack of pre-sales, financing difficulties or delays in permits and approvals. Incredibly this can including something as fundamental as zoning approval.
Legalities aside, cancelation can still be very hard on buyers. They have often made important family and financial plans based on their move-in date. When the deal is yanked out from under them they are left to rearrange their lives. Due to price acceleration in the market they can find themselves unable to re-enter.
The attraction of pre-sales is, of course, the price. Inevitably the pre-sale unit will be worth more on the move-in date that it was when the contract was signed. Part of that appreciation, though, comes from the mitigation of risk – buying something that actually exists rather that a picture and a promise.
Anyone getting involved in a pre-sale needs to know the market and should research the developer – examine their track record. Pre-sale events are deliberately designed to create a frenzy and ratchet-up the sense of urgency to buy. Knowing the true nature of the market and the true nature of the builder can go a long way to calming the frenzy in the mind of the buyer.
There is also the option to look at the purchase of older, existing units. They are harder to find but they can offer better value and may provide a better opportunity to build equity. For example: existing, larger units in suburban Toronto sold for $590 a square foot in 2017. Downtown, new, existing and smaller condos are going for $1000 a square foot.