Over the past eight years or so, many pre-construction condos in Mississauga served as great investment tools for investors. As previously mentioned on this blog, I personally know clients who made $30k, $40k or even $50,000 on a single condo investment venture. Many of these clients have bought and sold several condos and each time they have managed to come out with substantial profits.
However, this is not to say that all condo projects are great investments. To illustrate this, I decided to use a real-life case study to show how one person managed to come out financially negative when trying to sell their condo investment. For privacy reasons, the person’s name and the builder’s name are not disclosed in this post. I hope this case study will help some first-time home buyers and first-time condo investors overcome some of the biggest mistakes made by amateurs.
The Case Study
Last week I met with a client who was interested in selling her pre-construction condo which she took possession of less than a year ago. Her initial plan was to buy a pre-construction condo, live in it for a year, sell it and then move out east to a smaller town in Ontario. Her search for a condo started in late 2010 when she began looking for a condo by herself, without the assistance of a Realtor. The clients’ requirements were as follows:
1) Pre-construction condo near downtown Mississauga
2) Two bedroom
3) A condo which is close to being complete
After driving around Mississauga on a Saturday afternoon, and seeing numerous signs for various projects, she “popped into” one of the condo presentation centers. This particular condo project was already complete and the builder was selling the “remainder” of the inventory.
The client was very excited and took home all the various price sheets and floor plans offered by the builder to look over. After about three days she decided to visit the presentation center to finalize her purchase. She refused the help of any Realtor and it did seem like a good investment at the time being. She took possession of the condo nearly a year later and believed that she bought a good investment which will appreciate in value.
Fast forward in time to August 2012; at this point, the client decided that she wants to sell her unit and capitalize on her gains. She contacted me and wanted to list her property for sale. I conducted a CMA (comparative market analysis) and the results were shocking, to say the least. Similar units in the building, on a higher floor (keeping in mind that there is a $1000 floor premium) were selling for the same price and even a little cheaper ($4000-$5000) than what she had paid for two years ago. This means that by the time she pays the real estate agents, the lawyer fees and land transfer tax she will be in the negative as much as $23,000.
Why The Client Lost $23,000
No Qualified Realtor – The number one reason why this client lost money on her pre-construction condo is that she had no qualified Realtor representing her when she initially purchased the condo. I cannot stress enough the importance of this point. If she contacted a real estate agent who specializes in pre-construction condos prior to visiting the sales center, the Realtor would have explained to her, that the unit she purchased would have NOT been the best for short-term investment purposes. The project was already complete, the selection was very poor and the prices at the time were simply too high. A good Realtor would have taken her to other nearby projects where clients have now walked away with positive cash flow. Also, she did not know that a Realtor was free of charge to her since the builder makes this payment. Another point that is important to make is that having an agent who has access to VIP sale events, ends up saving you even more money. For more on this subject, please be sure to read this post.
Disclaimer: I should also add that by “Qualified Realtor” I do not mean your friend who is a real estate agent and advertises pre-construction condos on craigslist. By qualified, I mean someone who has a president’s club agent status with the builder and has a proven track record with references. It seems more than ever that many real estate agents want to appear to be qualified, but the moment you ask them complex legal questions about a pre-construction condo (such as closing costs, caps and parking ownership rights) they are completely lost. Ask yourself this question – are you more concerned about your investment or your Realtor/friend’s commission? Think twice before you decide who to work with.
Bad Timing – If you are interested in buying a pre-construction condo anywhere, it is imperative that you buy at the early stages of the project. The earlier you buy the better the price. I strongly suggest you pick your unit before the project has actually started construction (hence the term “pre-construction condos”). Many of the pre-construction sales events are by invitation only. Hence get in touch with your local Realtor who focuses on pre-construction condos.
Going back to the case study. I decided to dig a little deeper and find out what other people have paid for similar units in the same building. My findings proved to be exactly what I had anticipated. Back in 2007-2008, similar units in the building where sold by the builder to different agents/people for $30-40,000 cheaper than what the client in the story had paid. If she had bought at an earlier stage of construction she would have easily been positive in cash flow.
Bad Unit – The unit this client bought was from the “leftover inventory”, hence it was the unit that nobody wanted. In addition to, she was buying the unit which was already built, so she could not choose her finishes. I truly felt bad for this client and wished that I could have told her better news.
The moral of the story is as follows. As with any investment, it is important to be educated and surrounded by the right people. Learning of your own mistakes can end up costing you a lot of money, which is why I encourage you to read my real estate blog and always use a qualified Realtor when buying a pre-construction condo.
As we are well in 2012, pre-construction condos in Mississauga continue to be a popular choice for most investors having about $60-80,000 of cash to invest. If you are interested in a pre-construction condo, please contact me and I can help.
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