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How Much is Too Much for a Pre-Construction Condo?

How Much is Too Much for a Pre-Construction Condo?

Realtor David Fleming at TorontoRealtyBlog had a great analogy on this topic: “Why is cake mix selling for more than a cake!” It is amazing to me the number of pre-construction condominiums whose prices are out of whack! By out of whack, I mean disconnected from prices in the resale market.

Don’t get me wrong - a new condo is obviously better than a 20-year-old condo, but it’s not worth much more than a recently-built comparable building that is actively trading in the resale market. Not to mention, if you’re buying pre-construction today, you should be paying a price based on today’s resale market values. If you have used our website, you will know that Condos.ca can show you the dollar per square foot trends and price ranges for any resale condo in Toronto .

Our advice and strategy for determining how much is too much for a pre-construction condo is to simply find a fairly new comparable condo - ideally in the same location - on our site as a base for comparison when analyzing a pre-construction investment.

For example, if you are thinking about buying at the Bisha Hotel & Residences, review the Thompson Residences or Festival Tower values and trends on Condos.ca beforehand. The resale market has a massive variety of buildings, so don’t let a developer’s sales rep tell you his project is by far superior to anything else.

Just look at what happened to the buyers of the Ritz Carlton and Shangri-La. I am sure the developer put stars in buyers’ eyes, only to build a luxury condo that is 1 of 20 equally luxurious Toronto condos. Another prudent strategy would be to review a developer’s most recent developments on Condos.ca to see what the trends and prices are of their latest project; this is actually a feature we are working on and hope to release very soon.

Why and How Pre-Construction is "Out of Whack" If you are still wondering why this happens and how pre-construction condos “out sell” the resale market, it’s a combination of many factors; some are quite controversial, indeed, but worth mentioning:

1. Commission : Developers pay nearly double the commission to sell a new condo vs. a resale condo (4-5% vs. 2.5% on the resale side).

2. Inaccurate Market Research : Developers support their prices to investors with somewhat misleading data from organizations like RealNet Canada that report price per sqft. trends of other new condos by compiling price data from developers price lists and not the actual selling prices. The table below is compiled from a RealNet report given to investors and agents at a 2012 condo launch at 60 Colborne .
REALNET VS ACTUAL

REALNET VS ACTUAL

* Historical Sales Data from Land Registry, sqft. Data from Condos.ca Investors were told that the average new condo price in the core was $961 per sqft. Obviously this makes any developers' prices look cheap, so we investigated this further, as the number was substantially higher than our research within the resale market. RealNet did provide the list of buildings used, and now that many of the condos on that list have registered, it clearly shows a disconnect between the asking prices and actually selling prices.

: Developers do a great job at hiding the actual cost of a new condo. When you buy a resale condo, the price you see is the price you pay, while the price on a pre-construction condo has a list of added expenses. Parking, development charges etc. are examples of a couple extras that need to be added into the equation when evaluating investment potential.

If you have any questions about investing in the Toronto condo market, contact me at [email protected] .