We know: you’re confused. The market’s softening. The deluge of new condos has some experts predicting a nasty correction; others argue that a steady stream of new Torontonians will keep the vacancy rate low and prices sky-high. And then there’s you: caught in the middle, terrified about forking over a fortune for a unit that might bottom out in a matter of months. So what to do? Well, first, breathe easy: a condo is still a savvy investment in Toronto. To help you avoid the pitfalls, we’ve compiled 10 expert-approved tips for navigating the market in uncertain times.
1 | NEW OR RESALE: THE GREAT DIVIDE
Ben Myers, vice-president of the condo research outfit Urbanation, says it takes 3.85 years for the average Toronto condo to move from the initial sales stage to occupancy, and in this supply-heavy climate, pre-construction units might take even longer to complete as developers fall short on cash. On the bright side, that lag provides lots of time for patient buyers to save up for the unit of their dreams. Buying new also means lower maintenance fees, since the units and shared spaces haven’t been subjected to wear and tear. A new condo does have its downsides, though. Brian Persaud, a real estate agent with ReMax and author of Investing in Condominiums: Strategies, Tips and Expert Advice for the Canadian Real Estate Investor, says that condos are getting smaller. The average Toronto unit has shrunk 65 square feet to 750 square feet in the last four years. If you don’t mind a few fusty ferns in the lobby, it’s worth looking at resale buildings in established neighbourhoods—if only to check out expansive square footage and what closet space constituted in the 1990s.
2 | SNEAKY LOW FEES ARE, WELL, SNEAKY
Rock-bottom maintenance fees—typically less than 40 cents per square foot—may seem like a bargain, but not if they don’t cover the building’s real maintenance and repair needs. Low fees may also mean the building just doesn’t have many amenities—certainly no pool, basketball court or screening room. Before buying, compare to the fees of buildings with similar amenities and roughly the same number of residents. New buildings typically have fees in the 50-cents-per-square-foot range, says Urbanation’s Myers. Older buildings average 60 cents per square foot, while buildings in need of major repairs can reach $1 per square foot. Generally, rates shouldn’t rise much faster than the rate of inflation—around two per cent per year—except in a building’s third year of occupancy, when control switches from the developer to the condo board.
3 | HOTEL CONDOS: MORE FINE PRINT THAN A POLYAMOROUS PRE-NUP
If you’ve got the cash flow and want to be pampered with valet and spa services, condos run by hotel brands are a decadent option. However, not all hotel condo units are created equal. Condos at the Four Seasons can’t be rented as hotel rooms; condos at the Trump can. Both options are complicated, says Calum Ross, an independent mortgage broker. Property tax for all hotel condos is calculated at the commercial rate, which is quadruple the residential rate, and hotel condos aren’t eligible for provincial new home warranties. So unless the builder offers its own equivalent warranty, owners won’t have access to the same home insurance plans they would with a regular condo or house. Some banks impose restrictive conditions on mortgages for hotel condos, which means prospective owners can have a tough time securing financing. Nervous lenders might not offer the same mortgage terms at closing that they offered at the outset. “When the bank is arranging your purchasing documents, make sure you’re getting approval that lasts until closing,” says Ross. Otherwise, you may be stuck scrambling for a bigger down payment than anticipated.
4 | CREDIT UNIONS MIGHT BE THE ANSWER TO YOUR PLAYERS
Since interest rates plummeted to tantalizingly low levels, the feds have been applying restrictions that make it harder for some—especially self-employed and first-time buyers—to borrow. “Those restrictions have had the biggest impact on the market, because people aren’t being approved for as much as they’d like,” says ReMax agent Persaud. The good news is that the rules only apply to federally regulated lenders. Credit unions are exempt from many conditions that disqualify borrowers. Although interest rates are often higher than at banks, credit unions have much more flexibility regarding who they can lend to, and for how long—they’re not even bound by the maximum 25-year amortization rule that took effect last year. Most credit unions cost $5 to join—a small price to pay.
5 | BEWARE THE MAINTENANCE-FEE MONEY PIT
When condo bidding wars were at their peak, buyers tried to sweeten deals with unconditional purchase offers—including waiving their right to a post-purchase inspection—but those days are long gone. Good. Tell your lawyer that, in addition to various other conditions, you want to be able to review the status certificate, which is a snapshot of what’s going on with the condo, and that you want the option to withdraw your offer if you spot anything troubling. Look for bills owing, rising common-expense payments, lawsuits against the condo, etc. This is a great time to review the building’s reserve fund (where the maintenance fees are put aside for long-term costs). “Be very wary if the fund can’t cover anticipated repairs,” warns Yemi Asalu, a real estate lawyer with Korman and Company. It could result in a fee increase or, worse, a special assessment. That means ponying up your share—potentially thousands of dollars—out of pocket.
6 | TOO MANY SHINY PERKS CAN MEAN SOMETHING’S AMISS
Most condos have VIP sales nights, when developers wine and dine realtors, who in turn can bring along a few select clients. Prices offered at these events tend to be a little lower than when the units go to market. Be wary though: sometimes there’s no model suite to look at, meaning guests are paying up without seeing layouts. Other perks, like free parking or a free locker, can be enticing, but be careful not to inflate their value. Persaud recommends converting all special offers into dollar figures. “Perks usually represent five per cent of the purchase cost,” he says. Too many free incentives might mean a developer is having trouble selling the minimum number of units needed to secure financing and get shovels in the ground. That could mean a long delay, or a looming cancellation. Stay focused on your budget and space needs, and don’t be swayed by the buzz. “They offer free cocktails and build up the hype,” says Inga Toi, a real estate agent and president of Wide World Properties. She says VIP events don’t offer the bargains they used to. “It can trigger an emotional buy. You have to be careful.”
7 | SMART LANDLORDS PLAY THE LONG GAME
Population projections suggest that by 2031, the city will need an estimated 93,000 new rental units to meet demand. If you’re buying as a landlord, be patient, says Toi. “You want a modest return and long-term capital appreciation.” Those who try to strike it rich quick are bound to be disappointed.
8 | THE CREAKY, CRUMBLING, INEFFICIENT TTC IS CONDO GOLD
Every one of our experts had the same answer when we asked about the best place to buy: a neighbourhood with good TTC access. In a cool market, subway access and walkability will keep your condo desirable, whether you’re looking to sell or rent.
9 | “POSITIVE CASH FLOW” IS A PHRASE WORTH REMEMBERING
Renting your unit is a smart way to weather the storm until prices rebound, but the numbers have to make sense. “Any unit where the rent isn’t greater than the carrying cost with a 20 per cent down payment will be difficult to sell,” says Ross. Remember that renters want the same things you do: decently sized units above street level, a good selection of shops and cafés nearby, and access to transit.
10 | FLIPPING IS SO 2009
During the condo boom, there was money to be made selling units that had appreciated before the physical property even existed. Today, that’s rare. Most builders require that a certain sales threshold be met before buyers can sell. They also might make the seller pay back the HST rebate they qualified for as an owner-occupant, or pay the legal cost of transferring documents to a new owner.