The preconstruction process is an innovative real estate investment opportunity where you buy tomorrow’s property at today’s price. Investing in preconstruction is a boon for the investor or buyer, as well as for the developer or builder. The biggest advantage of the pre-construction process is that you can reserve your purchase at reduced prices without spending a fortune. You just have to make a small investment of just 5% of the total cost to reserve a unit and pay the balance when you reach different milestones.
For the buyer, the preconstruction process provides an opportunity to seal a real estate deal with little money on margin and significant discounts off the tentative price of finished condos. For the developer it is an opportunity to pre-sell the entire property even without laying a single brick and obtain a construction loan with relative ease.
In the preconstruction process, developers place the construction plans of a proposed real estate company for presale. Architectural renderings and floor plans of the condominium, townhouse, or single-family residence are made available to the buyer only. The good news is that preconstruction prices are typically attractively discounted from the proposed sales price of completed units.
In theory, the buyer gets the discount because he shows the courage and tenacity to invest in mere paper and “air.” However, in reality, they are getting discounts because they are a crucial piece of the puzzle for the developer because the early sale of a particular percentage of the total units is a necessity in order to get a potential lender to finance the construction process.
If you are interested in investing in preconstruction properties, you can check the list of preconstruction offers available in your area in newspapers, on the Internet or with your real estate agent; that is if you have such projects in your locality. When you have the list, you can shortlist the offers that are suitable according to your budget and needs. After that, you have to do a thorough verification of the property and the developer in many aspects. Some key reasons are, the current and expected cost of similar units in that location; supply and demand factors; whether the units are assignable and the uniqueness of the property.
You should also check for future or proposed development plans nearby to protect your eyesight. This aspect is important because you can choose to buy an apartment in a pre-construction process at a premium price due to the perfect view of the lake or the coast. However, after a while, you might find that another developer is building a project, which can blind your eyes.
Once you are satisfied with the suitability and price of the condo, you can proceed to the reservation. Most preconstruction properties have a nominal reserve amount, which is typically 5-10% of the total cost and can be as low as $1,000. The reservation process has a simple “Intent to Purchase Agreement” in which you have the right of first refusal. At this stage, you are safe because your money is in an escrow account and you can terminate the agreement without any obligation. Of course, the developer isn’t really bound by any pricing yet at this stage, so both parties are on a loose deal.
Once the developer obtains the necessary licenses and permits and has the legal authority to sell the units, they can enter into a firm contract. At the time of signing the hard contract, you must make the payment of the balance in advance. The advance payment is typically 20% of the total cost of the entire unit, but it can be more or less. You can pay by direct deposit with the builder or by letter of credit. After you sign the contract and make an advance payment, you don’t have to make any further payments until the unit is ready and you close the deal and take possession.
However, before signing a firm contract, you should be careful that by signing it, you are making a binding commitment to purchase the unit, otherwise the builder may lose 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 obligation. Before signing the hard contract, you should check whether you have the rights to assign the property to a qualified intermediary. If you want to play it safe, take a professional opinion on the terms and conditions of the hard contract for preconstruction purchase.
The construction phase normally lasts from 6 months to 2 years (depending on the type of project) and has an expiration date in the hard contract. If the builder does not complete construction and relinquish possession, the builder can claim refunds and will have no legal obligation to purchase the unit. During the construction period, as the building moves towards completion, there are usually several price increases, but of course, you absolutely cannot count on that to happen. If you can find a suitable buyer before closing, you can resell the unit and claim your proceeds at closing.
If you have not assigned the contract to completion, you will need to close the unit. Closing in the preconstruction process is similar to all real estate transactions and you must pay off the balance with additional payments, such as the association fee, as described in the “Good Faith Estimate.”
There are a lot of things to consider when going into a preconstruction investment and we strongly recommend that you learn all the dos and don’ts. We hope this article has given you an overview of the process.
