Pre Construction Investments in Condo

by | Pre Construction

preconstruction due diligenceBuying Pre-Construction Condos

Does buying a pre-construction condo make sense in today’s market?  This has been the most asked questions in the recent weeks and the answer is not that complicated.  To explore the opportunities in the pre-construction investments of the post-recession era, we briefly examine how the pre-construction properties could create quicker equity and how they enjoy more equity than the resale properties.

Even though the pre-construction properties historically are offered at a price range below the prices of the completed units, but there are some exceptions to the rules.  For example, the condo markets that were not affected by the real estate meltdown of the last few years, like in Toronto Canada, the prices of some resale condos are the same, and sometimes even lower than the prices of the compatible pre-construction condos.  Now, the question is if buying pre-construction condos in such markets are wise and how could a preconstruction investor create equity under most circumstances?

In our view, there is nothing wrong with entering into the pre-construction markets when there are no initial discounts offered by the developers.  As we all know the main objective of investing in pre-construction projects is simply to acquire more equity, quicker.  In a healthy market, this equity is attainable even without any initial pre-construction discounts, although having the discount wouldn’t hurt!  The equity gain is reached in different ways.  First, most developers will eventually adjust their pre-construction prices in order to offset the inflation.  This price increase becomes like a discount for a pre-construction investor who had already locked in the initial prices.

The second way to look at the equity is through computing the total money put into a pre-construction investment against the final profit.  To explain this better consider the following simple example that compares the purchase of a resale condo with the similar pre-construction condo at the same price in the same market after 3 years:

1)      Resale Condo Unit=                                    $1000,000 +

Annual market appreciation 3%                              $90,000     for 3 years

Total Gain                                                             $90,000

2)      Pre-construction Condo                       $1000,000+

Annual developer’s price increase 4%           $120,000+        for 3 years

Annual market appreciation 3%                        $90,000         for 3 years

Total gain                                                             $210,000 

If the initial investment amount for the pre-construction investors is the typical 15% deposit, then by investing $150,000 he has a return of $210,000.  This is a simple illustration to show the possibilities and as most seasoned pre-construction investors will tell you the 12% developer price increase in 3 years is a conservative number and attainable in most markets.  In most cases there are many price hikes during the construction, which starts at a base, or the lowest price for pre-ground breaking, then an increase in time for the ground-breaking and the next increase is when the foundation is completed/  Market permitting this could continue until the completion of the project.

In another word by purchasing a pre-construction condo the investor locks the price and when the project is completed he buys it at the prices of 3 years ago and resells it at the current market value.  In the above example when the investor closes on the property at the $1000,000 locked-in price, the developer is selling the exact condo for $1,210,000.  In the past, we have witnessed many unforeseen factors had forced the developers to resort to substantial price increases in many pre-construction projects that were not in their initial projection.  Perfect examples were the shortage of the cement or dry walls that resulted in an increase in the prices of both items which affected the developers’ costs of the construction that is eventually transferred to the home buyers.  While this was a misfortune for the developers and consumers it became a windfall for the preconstruction investors.

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