Why a pre-construction condo should not be sold at occupancy?

4 years ago

A lot of investors investing in pre-construction condos often have the option of selling a condo through an assignment. Yet, there are many reasons why pre-construction condos should not be sold at occupancy and rather be given on rent.

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Toronto is unique, in many aspects: being the only Canadian city home to franchises across Major sports leagues in the United States and Canada, the financial and cultural hub of the country, and of course, the colloquial gateway to Canada.

Why a pre-construction condo should not be sold at occupancy?

Other than that, the city is renowned for mixing apartments and vertical housing with open spaces in curbing suburban sprawl. Hence, it has earned an unofficial nickname of Condo town. With the city’s lakefront undergoing extensive redevelopment, it has seen the construction of numerous entertainment places and condos (especially Etobicoke Condos), giving the city a whole new modern look.

Every Canadian in Toronto dreams of owning a home (like their American neighbors). Torontonians are often interested in acquiring condos as they are in areas close to downtown and are situated in unique locations in these areas.

When purchasing a pre-construction condo, a lot of real estate agents include an assignment clause in an investor’s purchasing agreement. That agreement states the following in most instances, Buyers or property can sell their property before or during the occupancy phase without the need of closing the register for a nominal fee.

This is an assignment clause and it often seems like a good back up plan. However, from an investor’s perspective, there are some reasons why this pre-construction condo assignment clause should not be put into force because renting out a pre-construction condo for at least a year post-occupancy is the most sensible option.

Key reasons why no pre-construction condo should be sold at occupancy

1.Reduced profits because the building being incomplete

When a pre-construction condo finishes first and starts taking occupancy, the building will likely remain a work in progress. Despite the fact its ready for taking in residents, it will be having elements throughout the building needing completion.

There are chances that the elevators won’t be working, halls and corridors need painting, electrical finishes, etc., unfinished common spaces, some amenities (like pool, gym, sports court, etc.) needing finishing and the like.

An incomplete building is not a good thing for buyers to see as it does not exhibit its complete potential. This will result in buyers offering lower bids and builders hence cannot maximize profit when selling a condo unit.

2.Due to an upward surge in inventory, the competition increases

After construction, it is normal for investors to sell their pre-construction condos at occupancy. They are often misguided by the realtors they consult as they make them cash out their investment prematurely. This creates a large inventory in the condominium complex. This also results in the building having more available choices in an unfinished state.

Hence, it results in an upward surge in inventory which then reduces bids and reduces the selling price. Thereby, the investor incurs a large loss.

3.It results in a high rate of taxes due to challenges in HST

If investors decide to cash in on their incomplete condo without renting it out upon completion for a year, then not only will they be rebating their HST but also must pay an HST of 13% on the deposit they have already paid to the condo’s builder, and from the net profit on their sale.

Why a pre-construction condo should not be sold at occupancy?

For instance, an investor pays a deposit of C$ 200,000 to the builder and sells the condo for an amount bearing a profit of C$ 200,000. When their tax rebate is forfeited, they then need to pay $52,000 in HST. That would result in a net loss of C$100,000.

To top it off, when investors sell their pre-construction condo unit on assignment, they also face the risk of being termed a trader instead of an investor. Here, the government can charge 100% of all the gains they made in income and that results in another large loss.

Why the assignment clause is bad?

The assignment clause can seem to be a good idea during the time of occupancy but in the long run, investors should keep a hold on the property for a year at least before they negotiate a sale. At this point, the building will be in a good form with a really good reputation with less inventory.

This results in investors having a rental income of a year and will also cash in on well-deserved tax rebates and cuts. The money they will gain by holding on to their property for another year approximately is worth the money.

Hence, investors should be wary of various strategies set out by real estate agents and always consult honest realtors who can always guide them in the best possible manner.

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