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So You've Invested in a Condo That No Longer Exists

08/14/2012 12:02 EDT | Updated 10/14/2012 05:12 EDT
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Pick up any newspaper or log into any media outlet and the term "real estate bubble" is a phrase that's impossible to escape. Some days you'll read a major bank is claiming prices are going to correct up to 25 per cent and some days you'll read that real estate is headed for continued growth in the coming future. Despite the rumours, there is one thing that is certain; lenders are tightening their belts and imposing greater restrictions on both consumers and developers.

For those that aren't aware of how the process works for a new construction condominium, here's a quick lesson: Developers in Canada need to sell 75 per cent of a project in order to get their financing. This is massively different from our U.S. counterparts where financing was given in advance of any sales; hence why after the market collapse, constructed buildings sat almost empty. In Canada, basically, not enough sales means no money therefore in some circumstances, no project.

What happens if you purchased a unit in a building that doesn't ever get built?

Depending on the deposit structure from the developer, you have probably put down between 5-20 per cent of the total purchase price. If you purchased from a reputable developer, these funds are held by a lawyer or brokerage "In Trust" and the money doesn't go to the developer until final closing. Only then are the funds released. There are development scams out there so make sure you do your research.

Before a project gets cancelled, it will most likely be delayed multiple times before it's officially shut down. Each time, the occupancy date, or date which you can move in, is pushed back accordingly. In your purchase and sale agreement, there are clauses letting you know that delays in construction are common and are not valid reasons to rescind the contract.

Eventually the developer will let you know that the project has been cancelled. If they have other buildings they are trying to sell, you'll most likely get a call from a salesperson trying to get you to transfer your purchase. This is completely up to the purchaser so don't let any developer or sales staff tell you that you're obligated to roll your down payment into something else.

When you get the call there are a few things you should go over with the developer. Find out the process and how long it's going to take for your down payment to be returned. I have heard of repayments taking anywhere from one to three months depending on who the builder is and the scope of the project. If you are interested in another project, ask for incentives or discounts to roll over your purchase and to compensate you for having your money tied up.

Although the market has been strong and we haven't seen any sort of downturn yet, signs of a cooling market are starting to pop up. Throughout the next six to 12 months, I believe there will be a shift from new construction sales to units that are ready to be occupied. Only time will tell, but if you are a pre-build condo speculator (pre-construction is not an investment in my opinion because the purchaser is relying solely on market appreciation for profit), I would start revising your strategy moving forward. Just my two cents worth.