With a few new and old developments selling quickly in Vancouver it is time once again to open up the hood and take a look at various techniques (dare I say “scams” which I will use interchangeably throughout this post — apologies in advance) used by real estate salesmen and marketeers to move their product. I am expert in neither salesmanship nor marketing but do have a gargantuan tumor of skepticism.
This is the first in a planned series of posts surrounding sales and marketing tactics used in the real estate industry, focused mostly on BC but many tactics are universally applied pretty much everywhere. Sales techniques generally involve establishing: the good for sale is scarce, trust with the customer, the product has value to the customer, and the product has value to others besides the customer.
This first post concentrates on condo presales.
The technique I saw in action in Toronto. What happens here is that many prime units are listed as “SOLD” in big red letters on a big wallboard. Customers are obviously disappointed with this but a sales agent takes their number and will phone them if one comes available. Of course within a day or two they get a call, either indicating the unit is back on the market or the owner of the presale is looking to sell it for a quick profit due to some cash crunch or whatever. This works well when the customer believes they have an inside track to the prime units through the sales agent. In many cases ethnicity or other commonalities are used to their full advantage to foster trust.
This line of salesmanship is particularly offensive — it comes across as a gambling house scene out of the movie The Sting. The atmosphere is loud, fast-paced, and it’s hard not to think “something bigger” is going on and you need in on it. Phone calls from salespeople are filled with background noise and conversations are fast and interrupted, giving further sense of urgency. Include the trusted “insider” shepherding the buyer to the till, and the fix is in.
Now or Never
This works particularly well if you’re in the middle of a lineup. Salespeople can be pushy and fast, “requiring” you to sign a thick and complicated contract quickly. If you don’t buy now, they say, there are dozens more waiting in the line. The sense of urgency is thick, and an ultimatum is often given. Luckily in BC there is a cooling off period after signing a contract, where you can renege if you get cold feet. One hopes the adrenaline and endorphins wear off before that period ends.
Don’t laugh. Salespeople will cry to get a sale. Remember Gil, the Glengarry Glen Ross-esque salesman from the Simpsons? Don’t fall for it. There are many things to cry about in life; walking away from a “hard up” sales agent doesn’t even come close.
Lineups and Media Hype
The idea here is to produce the appearance of impending scarcity by producing lineups in lengths far exceeding the number of units being sold. If successful — and it often isn’t — the media are often quick to pounce on the opportunity of an easy story, and the positive feedback loop is closed. Lineups beget lineups and the development sells out quickly. The same technique is used at night clubs. We witnessed this recently with the new Metrotown Bosa condo/hotel development and to a lesser extent with the Village at False Creek.
Pre-selling to Insiders
This technique was used most recently by condo marketing virtuoso Bob Rennie on the Village at False Creek, where he claimed 30 units were sold to a select few “insiders” who got first kick at the can. This technique is useful because it shows customers that industry insiders have confidence in the market so the investment is a good one. In the case of the Village at False Creek, the astute will have noticed it was unclear whether or not the 30 presales actually completed. The wording of the press is a bit ambiguous:
“Rennie said it’s his initial goal to try to sell 60 condos in 60 days and he might already be more than halfway there. Last week, he did some market testing and got offers on 31 units, he said.”
Hm. He got offers but did he close? You need to close, man.
Bait and Switch, Lost Leaders, and Discounts
This is simply offering specific units at discounted prices but only having more expensive or less desirable units for sale. This is pretty common everywhere. Discounts are, again, pretty straightforward: slap an “up to 50% off” sticker on a billboard and witness a feeding frenzy ensue. The obvious question, of course, is up to 50% off what, exactly?
I’ve never witnessed this first-hand but, if a developer has other projects on the go close by, they can temporarily inflate asking prices, giving the sense that a particular unit is priced to market.
Condo Fee Discounts and Other Incentives
This is where the developer will, through agreements and warranties (some legally required, mind), provide a lower strata/maintenance fee for buyers. This can sometimes be done through straight incentives (offering to pay a certain % of fees for N months) or through a prepaid warranty. When these incentives end and the strata is flying solo, fees can escalate significantly. Other incentives include discounted financing rates (0.5% APR or whatever), cars, additional parking spots, paying the HST, the list is endless.
This applies to condos as much as cars. The sticker price isn’t necessarily what you’ll be paying. Be sure to look at the bottom line.
This is where presale buyers are only given a very short time to do a walk-through to look for deficiencies. Often only one hour is allotted. Any deficiencies (mostly cosmetic; large deficiencies are usually covered under warranty) not noted are the responsibility of the buyer. Think about this for a second: you buy a $500,000 asset and are given only one hour to find deficiencies?!? Does that seem reasonable?
Often presale contracts are worded such that the developer has the ability to change suite layouts and this is laid out in the contract. CBC Marketplace did an exposee in early 2008 on this and other dirty tricks about 3 years ago. Make sure you know what you’re getting. If it’s ambiguous, well, I guess you know better next time. Go to the link for more useful tips on how not to get shafted. A derivative of this scheme is to produce showrooms with dimensions on the large side of what actual units will be. Vaulted ceilings and lighting are used to make a suite seem larger than it really is.
Forgetting about Parking
Many people incorrectly assume a condo comes with a parking spot. Not necessarily…
This isn’t necessarily a scam but some developers have agreements with financing outfits to allow buyers to obtain mortgages. This can be an advantage or a disadvantage but, given how much other hanky-panky could be going on, I would be cautious dealing with these outfits. It may turn out to be a good deal due to reduced overhead or the developer throwing in incentives (mentioned above), but it may not be as good a deal as you think.
How to Protect Yourself
So what are the methods available to bolster a defense against being taken to the cleaners? Some people suggest using a buyer agent to help guide you through the morass. To this I suggest, even then, it pays to tread carefully. If a buyer agent is paid only on a successful closed sale, there is an inherent and unavoidable conflict of interest to close the deal. I would even suggest using an agent on a fixed retainer, and use someone who you know well, if that’s possible. Additionally, if you have a trusted friend or family member who knows some of the pitfalls to avoid when buying, employ them and get multiple angles of advice. Friends and family, in my experience, have often been more lucky than competent so even that advice should be evaluated carefully. It should be self-evident to retain a lawyer who is working for you, and paid the same regardless of your end decision.
As an additional aid, I prefer to concentrate on the numbers and blatantly ignore sales tricks. It comes down to the price and what income (imputed or rental) I reap from it. If you know what you’re willing to pay beforehand, it’s dead easy to walk away. I haven’t been into a condo or presale sales room for a while now simply because the numbers don’t work for me and it’s doubtful the price could be negotiated sufficiently lower to where they do.
You can attempt to change clauses in the presale contract more to your advantage. Given the complexity of the contracts this is no small feat. If sales are slow, however, it can’t hurt to try crossing off every clause that is not to your advantage. Remember how much money is at stake: hundreds of thousands of dollars of your income, past and future. In the corporate world, a contract of that size typically go through several revisions, sometimes major, before they are signed, as well as many hours confirming the contract is in the best interests of the company. Why not with a condo purchase?
Condo sales and marketing is fraught with different techniques designed specifically for extracting as much money from you as possible. I have attempted to list a smattering of the usual tricks for your perusal. Check out the comments for more tips and warnings from our loyal readers. This is not to say that buying a presale condo is always a bad idea; this blog would simply encourage you to properly account for the risks and be cognizant of the sales tactics used.