If the Amazons haven’t been too rough Saturday night (I heard something about nylon rope and vegetable oil), then I’ll be posting my 2012 outlook on NY day. This will include some thoughts on financial markets and taxes, as well as real estate and the economy. I’m confident it will irritate everyone.
Where we’re going is, of course, always critical. When it comes to the future, most people screw it up. Like Trang from Tranna:
Wife and I (in our early 30s) are living in a mortgage free 1 bedroom condo from our parents. We are making 150K plus and saving about 50K/yr. Bought a pre-construction 3 bedroom condo in 2009 ($430,000), which was suppose to be done in 2012. We put down 15% ($64,500). We had planned that when we close the deal we would only have about 200K mortgage and it would take us 6 yrs to be completely mortgage free. Now it’s delay until January 2014. My wife is expecting and the little one is coming this summer so we’ll need more space. We are thinking of a house in the next few years but we are stuck with this pre construction condo deal. I heard that it’s expensive to get out of a condo deal like this… but really don’t know much about it.
Any thought/advice on our situation would be greatly appreciated.
This note raises more questions than it answers, of course. Like why did the parents give the kids a condo, and what’s expected in return? If these thirtysomethings have no mortgage, earn $150,000 a year and save a third of that, where’s the rest going? Why would anybody in their right mind buy a condo in 2009 that won’t materialize until 2014? Did they not have the agreement lawyered? If so, don’t they have the right to walk on a deal that’s delayed by years?
This whiny little note teaches us a few things.
First, never buy a pre-build. Not a house nor a condo. Real estate is, after all, supposed to be real. You need to see it, inspect it, touch it and experience it, especially when this is going to be a home. Buying something from a brochure, a floor plan and a salesguy means you’re entering into a real estate futures deal, paying money now for the right to buy a commodity at a later date when it’s delivered. It might be worth more or less at that time. It may or may not be what you expected. The market may have advanced or tanked. One thing’s for sure – you just bought a heap of risk.
So, never sign a one-sided contract which allows the builder/developer to (a) make changes to the floor plan at his discretion, (b) substitute materials without your prior approval or (c) delay delivery of the unit without specific consequences, or your consent. Of course, there ain’t a developer in Canada who will ink a fair pre-construction contract giving the buyer equal rights, which is why this is a bad idea. At the least, ensure you have your lawyer read the agreement before signing it (or before expiry of the cooling-off period), so she can laugh and tell you what an idiot you are.
Now, what of buying a condo in Toronto, especially one that won’t exist for another two years? Another boatload of risk. There are some 43,000 new condos being marketed, going up, in the pipeline or in approvals in the GTA. That just about guarantees an oversupply. Additionally, about 80% of existing deals are being done by speckers and flippers. That means demand can evaporate in weeks if interest rates rise, mortgage rules change again (watch out for F in March) or the economy takes a dump. Speculators are like flies. When they move in, you know things are too ripe.
The urban condominium market is a dangerous place. In the last few weeks most big bank economists have made this point. Hell, even Brother Carney raised the alarm. We all know if it weren’t for Canada’s own subprime mortgage rules (if you don’t have 5% down the bank will give it to you) all those glass towers would not be populated with people with student loans and bicycles. And speaking of glass, about ten years from now when the building skins need replacing, condo and strata fees will look like mortgage payments.
In short, there are a hell of a lot better places to be spending $430,000.
Finally, what’s this thing about needing a bigger place to live when you have a kid? Where did that come from?
Financially speaking, starting a family is a major event all on its own. It now requires a full year of maternity leave for the mother and the loss of an income for 12 months, at the same time all that baby stuff is purchased. And I have yet to meet a father who didn’t see little feet emerging and immediately feel the need to run out and throw himself at an insurance salesman. This is apparently man’s guiltiest moment.
Succumbing to an emotional nesting instinct at the same time can be the financial coup de grace. And so unnecessary. I hear children (unlike puppies) are not even ambulatory for about a year. And they sure don’t need a pony or a swing set in the backyard. So what’s the rush? Why heap on more risk and economic burden at a fragile time?
The bottom line is that Trang needs to grow a set, get out of the condo deal by threatening a hideous law suit, pay his parents some rent and stay where he is for a year until the real estate market takes the inevitable slide.
And stop reading this blog. It’s depraved.