What You Need To Know About Pre-Construction Investments
The utilization of assignments for pre-construction condo investments have been increasing year over year, and this will only continue. Assignments are a rather recent development, purchasers were having an issue fulfilling their payments for their pre-construction investment due to it being such a large sum over the course of a couple of years. Realtors pushed for this clause in order to cause less strain on the original buyer if hardship did occur, allowing another buyer to take over with no issue.
An assignment is when the original purchaser sells a pre-construction unit generally 6 months before occupancy, so they can capitalize on the increase in value. But also the new purchaser can benefit from a lower than average cost on a property in a shorter window of time. Many buyers don’t know where their interest will lie in 3 years nor have patience to wait so long, so they find it more comfortable to pay the increased amount. It was about 4 years ago investors realized they could make significant money on paper in a relatively short period of time. They were easily seeing an increase of $150,000 in about 2 years. This became such a utilized practice that the government got involved, adding fees for when these properties were flipped.
Cost for these units is determined by square footage. The current downtown average in the City of Toronto is between $1250–1300 per square foot on the average residence. In the Yorkville area they can go as high as $1800. For assignments, we’ve generally seen $1000–1100, but they can be as low as $900. Hundreds of dollars difference per square foot is a substantial amount of money, especially considering larger units.
The initial purchase for the original buyer is $125,000–150,000 under market value. These properties in the Greater Toronto Area are generally worth $500,000 at the time of purchase, and will be sold around $575,000 — $600,00. All that’s required for investors is the down payment, which is rather substantial at 20%, but will be returned during the purchase by the new owner. It’s the only method to buy well under market value. Especially in Toronto, continuously doing this is with more properties year after year is a resourceful way to invest.
The initial buyer does not need to get a mortgage, while the secondary buyer would. The builder wants to determine if the new purchaser can pay for the property, so this must be setup during the sale. This isn’t payable until occupancy. If you purchase an assignment you can get a 5 year fixed rate at around 2.75%. You can lock in a good mortgage rate, and you have the advantage of knowing exactly what you’ll be paying.
It’s important to note that not every investment is suitable for everyone, nor is every opportunity free of risk. There is the possibility that the project might not go through. If this does happen you will receive a full return on your money, but that’s time your money could’ve been tied into something else. To best avoid this, it’s important to purchase from a reputable buyer as they will prefer to take a loss rather than damage their reputation for further developments. For assignments, there is the lender requirement of the 20% down payment, which is needed sooner rather than later as you need to replace the deposit the original purchaser has put forward. This requires approximately $75,000 up front, as generally 15% is already paid, but you need to cover the difference. Keep in mind you don’t need to pay the remaining 5% until you get the mortgage on closing.
Assignments can be a very fruitful endeavour, but always ensure that you do your due diligence before you purchase. Striking quickly is important, but being comfortable is a necessity. If it seems out of your price range, you could always do a joint venture. There is much room for growth, and it all starts with looking for the right opportunities.
