BY: JAY BRIJPAUL
“Builders in Toronto’s frenzied condo market are walking away from giant towers they have pre-sold, reflecting a rougher road to profits and leaving buyers in the lurch,” said Natalie Wong from Bloomberg. Mary, a first-time buyer, gathered all her financial resources to make a down-payment on what she thought would have been a good investment. “I received a registered mail stating that the pre-built condo project I purchased four years ago, has been canceled. I am devastated because prices climbed steeply since then.”
Since 2012, twenty-three condo projects in the GTA have been canceled; five over the past year alone. The developers claimed that the higher cost of financing and escalating construction costs are to be blamed. Condos are far more affordable compared to homes, and they are favored among first-time buyers. As a result, prices on condos have climbed, in some instances, as high as thirty percent. Is it the higher cost of construction or financing to be blamed, or is it developers’ greed? Why is it that developers can cancel their contracts with buyers, but buyers cannot cancel their contracts with developers?
In Langley, British Colombia, a supreme court judge allowed a developer to cancel buyer contracts and resell the units at a higher price, giving the previous buyer the first right of refusal. Buyers tied up as much as twenty percent of the purchase price in deposits. By law, the deposit must be kept in a trust account and for cancellations, returned to the buyer with interest. When there is fraud or bankruptcy, Ontario New Home Warranty (Tarion) will cover to a maximum of twenty thousand dollars and the remainder is a loss to the buyer. Buyers of new condos must shop carefully.
Buy from an established corporation versus a shell corporation. Established corporations are in it for the long term and protect their reputation. Most failed projects are from shell corporations. Do your research before purchasing and avoid making instant decisions. An experienced realtor can assist in the purchase. Many builders offer pre-sale events, and, in the hype, people purchase. If that happens, the buyer can cancel the contract within ten calendar days of receipt of a signed purchase of sale agreement along with a disclosure statement from the condo corporation. This is called the cooling off period.
Cooling off does not mean to chill. It is imperative for buyers to consult a real estate lawyer to review the contract and get a pre-approval from the bank. If a buyer plans to cancel the purchase, then, he must put it in writing within ten days. If not, the contract becomes firm and binding. There are uncertainties when buying newly built condos even with all the precautions are taken. An interest rate hike, for example, can trigger a price drop and cause a reduced appraised value. The banks would lend based on the appraised value and therefore buyers will need a larger down-payment. Buying a resale condo is a viable option as well.
With resale condos, first-time buyers can move in immediately and save on rent. Over the same time that it takes to close the newly built, they would have paid down their mortgages and prices would have climbed, allowing them to gain much more equity. Investors will also benefit because they can collect rent from the first day, pay down their mortgages, and build equity. Some may arguably prefer pre-built condos. If you are one of those, then proceed cautiously. Uncertainties such as cancellations and market trends are beyond your control.
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it,” said Warren Buffet. Pre-built condos are still a popular option among buyers despite the risk. The key is to buy what is easy to sell. In addition to location, size and amenities, the builder’s reputation, is important.