Risk on new construction condos

[Perceptionist]

Lot's of new condos being built in Calgary right now and I'm curious to hear peoples thoughts on the risk of signing a purchase agreement on a new development that is still 2-3 years away from completion. Big banks offer capped rate holds for 24 or 36 months when you get approved, but the interest rates are significantly higher than current rates. Deposits are typically 5% but you can't just walk away from that if prices drop significantly during the construction.

What happens if we see a correction in real estate, say 20% over 2 years and the $400k condo you got approved on is now valued at $320k? Will the bank do an appraisal and only give you a mortgage based on the value of the property at the time of closing ($320k) despite the fact that you need to come up with $400k for the developer? or would the lender give you the mortgage amount for the purchase price of the property, even though you would now be underwater on it?

[thetransporter]

walk away -2-3 years you dont want to be a victim...


some of these builders even have dirty people working at the bank that even approve a dog for credit. (fake name)

they dont care about you. buy a SF home better. (better investment usually)

[dawerks]

No one can predict what's going to happen in 2-3 years, so there is some inherent risk, but, if this is the only way to buy a house in the foreseeable future for you, I would still do it.

If you have other means to buy a house, explore those avenues first! This should probably be your last resort unless you are an investor (then I think I would actually like the 2-3 year wait as it would secure me a spot for minimal/no expense).

We made a killing buying some condos 'on the finger' and re-selling them when they were finished.

[Disoblige]

Where are you looking in terms of condos? Are you looking at highrise downtown ones? They IMO are less risk than ones further from downtown.

Also, the interest rates are not "significantly higher". For example, a 24 months hold on a 3 year fixed rate is 3.65%, where most major banks now have it as 2.79% on a 120 day hold. Think of it as security. In 2 years time, if the interest rates go over 3.65%, you're covered. If not, then you get the best rate before you take possession. Easy.

20% correction in 2 years or anything close to that, I don't see that happening either.

Regarding about buying a house if you can, it depends on your lifestyle. What if you work downtown and want to live downtown? Clearly advantages/disadvantages to both a house or downtown condo.

[DeleriousZ]

I remember back when I was living in Kelowna, there was a huuuuuuuge housing boom going on, there were tons of condo complexes being built all over the westside. Then the crash hit, and I want to say a good half of them had to stop building completely because there just wasn't any money or any buyers to continue. Some complexes sat for a good 3 years before they got underway again.

[Perceptionist]

Originally posted by Disoblige
Where are you looking in terms of condos? Are you looking at highrise downtown ones? They IMO are less risk than ones further from downtown.

Also, the interest rates are not "significantly higher". For example, a 24 months hold on a 3 year fixed rate is 3.65%, where most major banks now have it as 2.79% on a 120 day hold. Think of it as security. In 2 years time, if the interest rates go over 3.65%, you're covered. If not, then you get the best rate before you take possession. Easy.

20% correction in 2 years or anything close to that, I don't see that happening either.

Regarding about buying a house if you can, it depends on your lifestyle. What if you work downtown and want to live downtown? Clearly advantages/disadvantages to both a house or downtown condo.

I'm looking at both inner city and downtown condos. I also understand that the long term rate holds are good security if interest rates shoot up, but what I'm more concerned about is what happens if prices drop. Not that I'm expecting a 20% price correction between deposit and closing but I don't want to be completely screwed if that happens. I'm trying to find out how the banks/lenders would handle that situation and whether CMHC has anything to do with it.

[BananaFob]

Originally posted by Perceptionist


I'm looking at both inner city and downtown condos. I also understand that the long term rate holds are good security if interest rates shoot up, but what I'm more concerned about is what happens if prices drop. Not that I'm expecting a 20% price correction between deposit and closing but I don't want to be completely screwed if that happens. I'm trying to find out how the banks/lenders would handle that situation and whether CMHC has anything to do with it.

If you have more than 20% down then you can ignore CMHC. If not then, CMHC's general point of view is that the selling price is the best comparable. That being said, they also have their own internal appraisal/valuation software called EMILI that will survey nearby area to achieve a value as well. It might actually be better to be CMHC insured in this case depending on your financing condition clause in your purchase and sale contract. If CMHC denies you insurance and subsequently your financing can't get approved, you may be able to get out of your sale at that point. Read that clause carefully though.

Lenders will most likely still give you your max loan of up 95% of purchase price even after a price correction I believe.

[skandalouz_08]

The way I look at it is why pay for a new condo that isn't finished being built yet as most of the condo's I've been looking at that are in the building stage require anywhere from 5-15% within the first 6 months of signing the purchase contract. If you're already fronting that much cash why not buy something that's just finished being built or renovated?

Also, you have to pay GST on a new build, if you buy something that was just finished or through a private purchase you can avoid paying that extra 5% in taxes.

With the number of condo's going up and slated to be finished in the next 12-24 months it's a valid concern that condo prices could come down drastically if a correction were to happen. If this is a condo you want to flip then that is a valid concern, but if you are holding onto it long-term then don't worry about the value as much in the event of a correction.

[Disoblige]

Originally posted by skandalouz_08

Also, you have to pay GST on a new build, if you buy something that was just finished or through a private purchase you can avoid paying that extra 5% in taxes.
If you buy a place that's just finished, but still new (unsold), you don't have to pay GST?

[CapnCrunch]

Originally posted by Perceptionist


I'm looking at both inner city and downtown condos. I also understand that the long term rate holds are good security if interest rates shoot up, but what I'm more concerned about is what happens if prices drop. Not that I'm expecting a 20% price correction between deposit and closing but I don't want to be completely screwed if that happens. I'm trying to find out how the banks/lenders would handle that situation and whether CMHC has anything to do with it.

If it drops 20%, you should walk away. What could possible motivate you to still buy it?

[Perceptionist]

Originally posted by CapnCrunch


If it drops 20%, you should walk away. What could possible motivate you to still buy it?
The purchase agreement that you sign doesn't allow you to just 'walk away'. The developers protect themselves in these contracts so they can come after you for the difference in price if the contract is terminated.

[skandalouz_08]

Originally posted by Disoblige

If you buy a place that's just finished, but still new (unsold), you don't have to pay GST?

That was phrased poorly. If you buy from the builder you will have to pay GST as far as I know, even if it is new/unsold. If you buy from someone who no longer wants the condo but its unlived in you won't have to pay GST.

[BananaFob]

Originally posted by skandalouz_08


That was phrased poorly. If you buy from the builder you will have to pay GST as far as I know, even if it is new/unsold. If you buy from someone who no longer wants the condo but its unlived in you won't have to pay GST.

There's a new construction gst rebate so I believe this brings down the gst rate to around 2.7%

[Disoblige]

Originally posted by BananaFob


There's a new construction gst rebate so I believe this brings down the gst rate to around 2.7%
I thought it depends on how much your condo costs?

-The rebate reduces the GST and the federal part of the HST paid from 5% to approximately 3.5% for homes valued at $350,000 or less.
-The rebate is gradually reduced for homes valued from $350,000 to the maximum value of $450,000.

http://www.servicecanada.gc.ca/eng/goc/gst_new_housing.shtml

[Perceptionist]

Originally posted by skandalouz_08
The way I look at it is why pay for a new condo that isn't finished being built yet as most of the condo's I've been looking at that are in the building stage require anywhere from 5-15% within the first 6 months of signing the purchase contract. If you're already fronting that much cash why not buy something that's just finished being built or renovated?

Also, you have to pay GST on a new build, if you buy something that was just finished or through a private purchase you can avoid paying that extra 5% in taxes.

With the number of condo's going up and slated to be finished in the next 12-24 months it's a valid concern that condo prices could come down drastically if a correction were to happen. If this is a condo you want to flip then that is a valid concern, but if you are holding onto it long-term then don't worry about the value as much in the event of a correction.

There doesn't seem to be many desirable new condos on the market right now that have already finished construction and are priced at the same level as the pre-construction developments.
Also for me personally I see the construction period as a time to save for a larger down payment without having to worry about mortgage payments. If I can do this while getting the place I want (floorplan, finishings, location) and get some price appreciation in the process, it seems like a smart decision. I just want to make sure I understand all the risks going in. I'm also looking at this as a place I want to live when it's finished, not just an investment.

[Sugarphreak]

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[max_boost]

^^^

Did you make money on the Arriva unit?

[Sugarphreak]

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