It shouldn’t come as a surprise that I love real estate.
Whether you’ve been reading my thoughts on different aspects of real estate for a few months or a few years, I hope my enthusiasm for real estate comes through pretty clear.
It’s a great field to work in and the clients and the Realtors I work with (well, most of them) are a huge part of why I enjoy it. Helping people make important decisions, using my experience and skill to get them what they want and seeing real estate every day – I just love it.
If you ask me which types or real estate are my favourite, I can go on for hours about what I like about buyers, what I enjoy about sellers, why detached homes are really appealing, why I love seeing condos and so forth.
On the other hand, if you ask me which type of real estate I like the least, it puts me in a bit of an awkward position. Just like when my dad is asked which of his sons is his favourite, it is important to balance being honest with not hurting feelings. By the way, my dad handles that question by announcing that the son who is not with us at that moment is his favourite son. It really keeps me and my brother on our toes.
When I consider all of the different types of real estate, the one I enjoy the least is new construction. When I say new construction, I mean builder construction projects (condo buildings or freehold houses) that start with a big sign announcing “Coming soon!” and then a presentation office goes up at some point and eventually construction starts and goes on…and on…and on. If all goes well, the building or the development gets finished at some point and new housing stock has been added to the market.
Let me explain why new construction is my least favourite type of real estate. At the end, I’m curious if you’ll agree with me or not.
Without further ado, here are my three problems with new construction.
Buy in one market, move in another one.
For fans of buying pre-construction, the biggest appeal is often that they make a bunch of money by the time the project is built. Pay X now for your condo or freehold home and when it is built in two years, the same size place is selling for lots more. So you’ve made money by getting in early, right?
There are two points to consider with this aspect.
The first is that you can get the same appreciation over time with any long closing. I’ve had clients who bought a home where the sellers wanted a long (six months) closing. We agreed to it, put down a deposit equal to about 5% and when the house closed in six months, the average price for that home had increased about $150K.
Any pre-construction purchase that relies on price appreciation is essentially just a bet that the market will continue to rise, and by the time you get occupancy it will be worth more. This leads to the second point.
The above scenario only works in a market where prices are increasing. As we’ve seen in the last few months, real estate markets do sometimes go down. While short term fluctuations aren’t a concern when you have a multi-year building cycle, you are always buying such projects in one market and closing in another market. If you bought pre-construction last year when the market was crazy hot, developers sure as hell used that frenzy to charge more for their projects. When the construction is completed, will the market be in that same state? Will it have plateaued and the same size place is selling for the same price as it was a couple of years ago? Will prices have dropped and buyers have invested funds for a length of time and actually lose money on the current value? There are lots of questions and the answers won’t be known until the project is completed.
You get what you get.
With new construction, you are relying on the builder living up to what the marketing for the project says they will do. I’ve looked at a number of pre-construction agreements of purchase and sale and I can tell you that they have lots of loopholes for builders to change the project.
If we buy a resale condo or house, the paperwork will be about 10 or 11 pages. If we buy a pre-construction or new build, it will be a minimum of 5 times that, and possibly into 70 or 80 page length. These lengthy documents spell out in no uncertain terms that the builder has the right to change various aspects and the buyer agrees to that.
So when the marketing that shows direct access to the underground PATH system from the condo, it’s important to realize that’s marketing, not a legal agreement. Sure, the builder intended that, but it turned out to be too expensive so it didn’t happen. The buyers who counted on it were pretty distraught to find that their legal document states that the builder can make that change.
On a less critical basis, aspects like unit layout, sizes, balconies, parking, lockers and finishes can all be changed before completion. In most cases this can be done at no reduction in the price paid by the buyer who thought they were getting something else. This sort of thing just doesn’t happen with resale real estate. If you bought a 1100 sf condo with hardwood floors and 200 sf balcony and moved in to find that the seller had sold off part of the den to the neighbour, replaced the hardwood with laminate and chopped the balcony in half..well, I don’t know what you’d do – because it never happens. With new construction it happens all the time.
What’s today’s date? Ah..who cares.
The final problem with new construction is that builders have a vacation sort of mentality to time. You know when you go on an extended vacation and eventually get to the point where you don’t know what time or even day it is?
Builders are notorious (as a profession, not just a couple of bad apples) for promising an occupancy date or other milestones and then ignoring their own promises.
Put simply, with new construction, a deal closing on time is very rare. With resale construction, a deal closing late is very rare.
Again, the paperwork for builders specifies the closing date, but then they specify a later closing date and finally an outside closing date. That’s right, three dates they plan on being done by. You’d be forgiven if you think that outside closing date isn’t a plan but a guarantee. In fact, builders regularly blow by all three anticipated closing dates. I know building a large condo building or housing development is difficult but I don’t think expecting them to hit one of those three deadlines is unreasonable.
This laissez faire attitude to deadlines applies to commissions as well. Ask any brokerage administrator the worst people to deal with when it comes to agents getting paid and they will tell you “developers”. Despite written agreements specifying when commissions will be paid, these agreements are treated the same as promises to buyers about completion dates.
If you or someone you like is considering a new build or pre-construction project, make sure you work with a Realtor that helps you go into it with eyes wide open. If this sort of real estate is the right fit for your situation, I’d hate to see you do it without a great Realtor on your side. Whether it is me or a referral to a trusted, knowledgeable agent for the project, I’d love to be responsible for what comes next.
Regards,
Jeff
WINDOWS WHICH OPEN WIDE
Decide which windows will be opening windows. Pick those which are easy to get to, and choose the ones which open onto flowers you want to smell, paths where you might want to talk, and natural breezes.
A window is your connection to the outside and ones which don’t open at all or barely open are serving at best half a purpose. Double-hung windows cannot ever be fully opened and sliding windows often end up stuck due to paint or shifting in the casement. Side-hung casement windows, or french windows, offer a pleasing, practical way to allow fresh air in and connect you to the outside world.