Quote:
Originally Posted by bomberjet
They offer a "discount" for purchasers who are willing to come into a project early and wait for 2-3 (or 4) years while the rest if the units and sold are for building construction. The people coming in at the end will pay the premium because most of the leg work is completed and they will have a shorter wait time until possession. I think is fairly standard practice throughout the market. And exactly what the sales agent at dCondo told me, straight up.
But adding in the whole low estimate thing, it's a bit of a different dynamic now.
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Yeah, this is a pretty good summation of things. Those purchasing upfront are shouldering a ton of risk. They're also 100% necessary for getting the building financed, so you need to incentivize them in some capacity. The danger in these cases can be manifold, but a developer can be his own worst enemy in a lot of ways.
Generally speaking, one would begin to pre-sale with drawings at somewhere on the order of 35% completion along with a fairly good breakdown of what the unit and building will look like. Actually, the new condo act says you have to disclose precisely what a 'standard unit' will be comprised of all the way down to the branding on all fixtures. So to actually
cost drawings at about 35% is quite difficult to do. That would be considered a Class C estimate which is thought to be somewhere on the order of +/-20% of actual costs, so you're really throwing darts at the board at that point. So you have the choice: how optimistic do you want to be? If you're really optimistic, you're unlikely to account for true costs. A lot of people also fail to account for accuracy in their costing. In other words, if it takes you three years to sell units and construction inflation is moving at 2% per year, it's irrelevant how accurate your pricing model is, you've discounted 6%. Anyway, these numbers are what are going to set your prices for pre-sales.
Then think about what can happen down the line. Your drawings become more fleshed out, your costing is more accurate - usually higher - and now you have to continue to sell units. If you've skewed way to the low side of your costing all along and now reality has just set in, you're not only at the whim of the market, you're at the whim of your risk tolerance; you need to generate a certain sale price in order to sleep at night. But this is why I say one can easily take a bath on a project like this - oftentimes the market just simply won't bear the costs when they're finally in.
A good example of this would be One Wellington. There are still two units left unsold because the costs just spiraled.
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