Key Considerations In Deciding Whether To Buy A Preconstruction Or Resale Condominium

Condominiums are attractive to many real estate buyers for a number of reasons.  They typically offer luxury amenities, prime location, sweeping views, concierge service, and around-the-clock security.  Condominium sales continue to account for a large portion of real estate transactions.  There are generally two types of purchase scenarios when it comes to condominiums – preconstruction and resale.  This article will discuss the difference between and the advantages and disadvantages of preconstruction and resale condominium purchases.

As the term suggests, preconstruction condominium sales are those sales that are directly from the project developer and are made before the condominium is built.  In fact, the majority of the preconstruction sales are made before “ground breaking” and the beginning of construction.  Resale describes purchases of condominium units, that have already been completed, from a seller other than the project developer.

Preconstruction sales bring some advantages but can also pose certain risks.  One advantage of preconstruction sales that is attractive to many buyers is the fact that the property is brand new and has never been occupied.  The downside of this is that the property has not been lived in, so sometimes latent defects or issues are present, that would have otherwise been discovered and rectified had the property been previously occupied.  Another upside in preconstruction sales is the potential for appreciation in value of the property between the signing of the contract and closing.  In a strong real estate market, preconstruction prices can potentially be lower than the value of the property after completion and closing.  However, if the property values decline during project construction, then, at closing, the market value of the condominium could be less than the purchase price and the buyer will still have to pay the original purchase price.  Other risks are that the project may not be completed or be subject to delays and not be completed on time.  It may take several years for a condominium project to be completed during which time the purchaser’s funds are tied up in escrow.  Although often buyer’s deposits are returned if the project fails or is otherwise not completed, the buyer will have lost out on the benefit of the use of the funds deposited with the developer and may have also lost an opportunity to purchase a different property.

Resales also present their own unique advantages and disadvantages.  One advantage of resales is that the purchase price may more accurately reflects the current market value.  Since there is not typically a large amount of time between contract execution and closing in the resale context, there is little chance that the market will fluctuate significantly.  A downside of resales is that, unlike in the preconstruction scenario, there will likely only be a few units available in a particular building and the buyer will not have the option of picking custom finishes and fixtures.  Another disadvantage is that the property has been lived in and may show some age or wear and tear.  A positive of buying a resale unit is that defects or issues have already been discovered and there is less risk of discovering a latent defect down the road.  Closing costs for resales are often considerably less than for preconstruction.  In preconstruction, in addition to the purchase price, the buyer must pay a developer’s fee that is usually 1.75% of the purchase price, pay at least a month of condo fees in advance, and make a capital contribution to the condominium’s reserves.  Depending upon the type of project this could amount to several thousand dollars of additional costs.

 When buying any type of real estate there are many factors that must be analyzed.  It is always prudent to consult the appropriate professionals and advisors to determine the right type of transaction that fits one’s individual needs.