The preconstruction process is an innovative real estate
investment opportunity in which you buy tomorrow's property
at today's price. Preconstruction investing is a boon for the
investor or buyer as well as the developer or builder. The
biggest advantage of preconstruction process is that you can
reserve your buy at discounted prices without investing a
fortune. You simply have to make a small investment that is
as low as 5% of the total cost to reserve a unit and pay the
balance on achievement of different milestones.
For the buyer, preconstruction process provides an opportunity
to seal a property deal with little margin money and achieve
sizable discounts over the tentative price of the finished
condos. For the developer it is an opportunity to presale the
entire property even without laying a single brick and to
procure a construction lending with relative ease.
In the preconstruction process, property developers place
the building plans of a proposed real estate venture for
pre-selling. Only thing made available to the buyer are
architectural rendering and floor plans of the condominium,
town house, or single-family residence. The good news is that
preconstruction prices are normally at an attractive discount
of the proposed sale price of complete units.
In theory, the buyer gets the discount because they display the
grit and tenacity to invest on mere paper and "air". However, in
reality, they are getting discounts because they are a crucial
piece of the puzzle for the developer because pre-selling of a
particular percentage of the total units is a need for getting
a prospective lender to fund the construction process.
If you are interested in investing in preconstruction property,
you can check out the list of preconstruction offers available
in your locality in the newspapers, on the Internet or with
your real estate consultant; that is if you have those types
of projects in your locale. When you have the list, you can
shortlist the offers that are suitable according to your budget
and needs. After that you must run a thorough check on the
property and the developer on many issues. Certain key reasons
are, the going and expected cost of the similar units in that
locality; demand supply factors; whether the units are
assignable and uniqueness of the property. You must also check
for the future or proposed development plans in the vicinity to
protect your view. This aspect is important because you might
choose to buy an apartment in a preconstruction process at a
premium due to the prefect view of lake or waterfront. However,
after some time you may find out that another developer is
building a project, which may blind your view.
After you have satisfied yourself with the suitability and
pricing of the condominium, you can proceed for the reservation.
Most preconstruction properties have a nominal reservation
amount, which is normally 5-10% of the total cost and can go
as low as $1,000. The reservation process has a simple "Intent
to Purchase Agreement" in which you hold the right to first
refusal. In this phase, you are safe because your money is in
escrow account and you can terminate the agreement without any
obligation. Of course, the developer is not really bound to any
prices yet at this stage either so both sides are in a loose
arrangement.
Once the developer gets the needed licenses and permissions and
has the legal authority to sell the units, you can enter into
a hard contract. At the time of signing the hard contract, you
have to make balance up-front payment. Usually, the upfront
payment is 20% of the total cost of completed unit but can be
more or less. You can pay by a direct deposit with the builder
or through a letter of credit. After signing the contract and
making an up-front payment, you do not have to make any other
payment until the unit is ready and you close the deal and take
possession.
However, before signing a hard contract you must be careful
because by signing it, you are entering into a binding
commitment to purchase the unit, failing which the builder can
forfeit your deposit. In some states like Florida, you have a
15-day rescission period during which you can withdraw from the
hard-contract without any obligations. Before signing the hard
contract, you should check to see if you have the rights to
assign the property to a qualified intermediary. If you would
like to play safe, take a professional opinion on the terms
and conditions of hard-contract for preconstruction purchase.
The construction phase normally lasts for 6 months to 2 years
(depending on project type) and you have an expiration date
on the hard-contract. If the builder fails to complete the
construction and handover the possession, you can claim for
refunds and will have no legal obligation to buy the unit.
During the construction period as the building would move
towards completion, there is typically several price increases
but of course, you cannot absolutely count on that happening. If
you are able to find a suitable buyer prior to closing, you can
resell the unit and claim your profits on closing of the deal.
If you have not assigned the contract until the completion, you
will have to close the unit. Closing in preconstruction process
is similar to all real estate deals and you have to make the
balance payment with additional payments like the association
fee as disclosed in the "Good Faith Estimate".
There are a lot of things to consider when entering into a
preconstruction investment and we strongly encourage you to
learn all the do's and don'ts. Hopefully this article has
given you an overview of the process.
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