Welcome, friends. Today we will explore the world of pre-construction real estate, exploring key considerations for selecting and evaluating these opportunities. When approached correctly, pre-construction projects can offer a robust option for building your real estate portfolio.

What is Pre-Construction?

Pre-construction involves purchasing property from a builder or developer when it's still in the planning stages, essentially buying it on paper. This often presents cost-savings opportunities for the consumer, as you commit to a purchase before the physical structure is built.

Condo Projects

The pre-construction realm encompasses both high-rise and low-rise condos and low-rise freehold developments, each presenting unique benefits and challenges. High-density condo projects are typically located in transit-friendly and accessible areas, zoned by municipalities for a denser population. These locations often come with the convenience of amenities and transit options. However, the living spaces in high-rise condo projects tend to be more compact, which can be a drawback in terms of both livability and rental appeal. Additionally, these properties often incur monthly condo maintenance fees, impacting the overall yield from rental income if you consider them as investment properties. On the upside, their smaller footprint and associated fees can result in a lower entry price point. In the Greater Toronto Area, condominium projects may take anywhere from 3 to 4 years to complete, though this timeline can vary depending on the builder and the efficiency of their supply chain and subcontractors.

Freehold Projects

As an alternative, there are freehold subdivisions and builder projects, typically found in low-density neighborhoods. These developments might include exclusive detached subdivisions or mixed communities with detached, semi-detached, and townhome dwellings. Such properties usually offer limited transit and accessibility options, often necessitating a vehicle for commuting and errands due to less frequent transit services. However, the rental yield on these properties tends to be higher, thanks to their larger living spaces, leading to potentially higher rental rates. 

The trade-off is a higher price point due to these advantages. The timelines for freehold builder projects are generally shorter, ranging from 1.5 to 2 years, but, as with condos, it can vary from builder to builder.

Condo Project Evaluation

To determine if a builder's pricing offers value and qualifies as a sound investment, consider an example: a builder launches a high-rise project with a 2-bedroom, 2-bath unit measuring 760 sq ft, priced at $680,000, with occupancy scheduled three years hence. To evaluate, compare this to similar units in the 700-800 sq ft range within newer buildings (0-5 years old) which were sold in the same community within the last 90 days. If the median sold price for these units is around $610k, the project may not offer the expected value. Conversely, if the median price ranges between $660k-$700k, it would represent a fair opportunity, considering the potential for market growth over the three-year period before occupancy begins.

Freehold Project Evaluation

Similarly, for a freehold project where a 3-bedroom, 2.5-bath, 2-storey semi-detached home measuring 1,450 sq ft above grade is priced at $650k with completion in 18 months. Your broker can help to pull all comparable Semi-Detached properties in the community which got sold in last 90 days. If the median sold price for similar semi-properties is around $580k, the project might not offer the best value. However, if comparable homes are priced between $640k-$675k, it could be a worthwhile investment.

In our examples for price analysis, we explored the sales which took place in the last 90 days. This timeframe could change based on the market behavior. If the market is saturated and balanced, it can be increased to even six-months to get even better handle on similar spec properties. On the other hand, if the market is very dynamic or is in a declining or inclining state, the duration of sales data potentially would be shorter between 30–45 days to capture the correct median price of comparable units. Maintaining objectivity in property valuation is crucial when investing in real estate at any time.

Legal Due-Diligence and Review

It's also vital to have your contract reviewed by a lawyer, especially given Ontario's 10-day cooling-off period. This would help to ensure the agreement aligns with your interests and would also help to review the development charges capping, assignment considerations, delay mitigation, and any other charges which you can expect at the time of completion.

In addition to pricing analysis, conduct thorough research on the builder's background, considering their past projects and reviews to ensure their reliability and quality.

Thank you for your time today. If you find this information useful, please share it with friends and colleagues. Our dedicated team at Elixir is always here to offer personalized real estate advice. 

Wish you all the very best! Reach out to our dedicated team at Elixir for any queries you have in Real Estate, and we will do our best to help.

Mudit Mehta 

Broker of Record

ELIXIR REAL ESTATE INC.

Off: 416-816-6001 | [email protected]