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We’ve been meeting with a lot of new condo owners lately who have finally, after years of construction and delays, taken possession of their newly-built condominiums. It’s not uncommon for someone’s housing needs to change between the time they fall in love with a floor plan and actually take possession of the condo: what seemed like the perfect 600 sqft of open concept space in the Entertainment District isn’t quite as appealing today with a spouse and baby in tow.
The problem? It’s really really hard to break-even in many of Toronto’s newly-built condos.
1 – When builders sell condominiums pre-construction, they often price into the future – in other words, they price today for what they think the condo will be worth in 2, 3, or 4 years. For example, they might price a condominium at $650 or $700 per square foot when comparable resale condominiums are selling at $550 or $600. Truth: some condominiums were purchased at really high prices 3 or 4 years ago and the market hasn’t kept pace with those appreciation expectations. What does that mean? Those condos purchased at $650 or $700 per square foot are now worth $650 or $700 per square foot.
2 – Closing and selling costs – When you buy pre-construction, you pay a lot of extra closing costs, in addition to land transfer taxes, legal fees and of course real estate commission when you want to sell. So breaking even means selling the condo at what you paid for it + all of these costs – and that isn’t always easy.
3- Sometimes, what seemed like it was going to be the perfect condominium building didn’t quite turn out to be that perfect. The workmanship is shoddy, the views aren’t as expected, the layout is strange, that rooftop pool is now in the basement…I could go on and on. All of these affect value.
Truth: it isn’t just the new condominiums having a hard time breaking-even. While the overall condo market in Toronto shows has shown gains of 3-5% per year, there are particular buildings where values have been going down.
It’s easy to spot the buildings that are struggling: we see beautiful units in great locations sitting on the market for months on end, in a market where the average condo sells in under 30 days. And of course, we see sale prices that are lower than the last comparable sale.
Unfortunately, Sellers (and their real estate agents) don’t decide how much a property is worth. Buyers don’t care about how much a Seller paid or what their break-even point is. Market value is the point where a willing Buyer and a willing Seller meet.
How to Find a Willing Buyer
1 – Price yourself at market value, lick your wounds and move on. If you’re an investor, you may have a capital loss (which yes, I realize isn’t great consolation). If you’ve been renting out the unit, don’t forget that you’ve built up some equity and you should consider that in the total.
2 – Price yourself below the last sale for a quick sale. This can be an especially effective strategy if there are lots of similar units in your building competing with each other at the same time. It sends a strong signal to Buyers that you’re ready to sell.
3- Staging and marketing are critical. Don’t hire a cut-rate real estate agent to save a couple of thousand dollars in commission and end up losing many thousands more in the sale price. Photos and marketing matter.
Are You Really a Willing Seller?
Many condo owners who find themselves owning a condo that is worth less than they paid, want to sell their condos but don’t want to lose money. In these cases, your options are:
1- Price Optimistically and Pray. Most of the other Sellers in your building are probably pricing at their break-even points in the hopes that Buyers will respond. Usually, these units usually sit on the market for extended periods of time and go through a number of price reductions. Note: this strategy usually nets the same price as it would if it had been originally priced at market value – it just takes longer to sell.
2 – Rent and Hold. Maybe you’re not really a Willing Seller? The right strategy for you might be to rent out the unit and wait out the market. If you decide to Rent and Hold, keep the following in mind:
- What are your goals? Do you need the money for other purposes? How comfortable are you with risk?
- Be honest with yourself about your time horizon. If you decide to rent and hold, how long can you do that for? If prices in your building continue to decline, can you afford to wait 5 years? 10 years?
- What do you think will happen to the market in the short and medium terms? If you’re in the camp that thinks the market has peaked, are you prepared to hold the property for the long term? Or should you cut your losses and sell now? If the idea of losing $10,000 today hurts, how will you feel if that number grows to $20,000 later?
- Do you want to be a landlord? Being a landlord is a job and isn’t always glamorous. If you want to outsource it, it’ll cost you 1 month’s rent to hire a REALTOR to find you a tenant and 6-8% of the monthly rent in ongoing property management (FYI, we can help with both!).
- When you eventually sell, keep in mind that tenanted units are harder to sell. Make sure to read our Guide to Selling Your Investment Property for all the applicable laws and obligations.
One of the most important things you can do if you find yourself in this position is talk to an experienced agent…like us. We’ll give you the straight goods on your options.