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| Preconstruction Explained |
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Preconstruction is a process in which developers offer certain individuals the opportunity to purchase units in a building that is being developed before the construction begins on the project. As a result buying during preconstruction can offer substantial savings over what buyers will pay when the building is completed. |
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A beautiful new condominium building is a major project and construction lenders want to see that a project will attract enough interest before deciding to finance it. By selling a certain percentage of units in the building during the preconstruction phase developers are able to secure the best financing from construction lenders and can usually move the project ahead far more quickly than if no preconstruction commitments had been made. The preconstruction process results in a substantial advantage for the developer because he can acquire necessary funding and gauge the prospects for the success of the project without investing too much capital. Because developers realize buyers are making a commitment without even seeing a physical unit they will offer very attractive preconstruction pricing to lure interested buyers. |
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So the preconstruction process also results in several advantages to the buyer of preconstruction units whether they are buying for themselves or for investment purposes . The developers offer the ability to "reserve" a particular unit in the building about 2 -3 years before the project is completed. This money is held in an escrow account and is not transferred to the developer until the official closing upon project completion. Once the building is completed, the buyers that have reserved the preconstruction prices will then close on their purchase of the unit at the original preconstruction price. This often results in further profits for the buyer because the prices in a building almost always appreciate from the time construction begins. In the hottest markets such as Florida, Dubai and India yearly appreciation averages over 40%. That is a sizeable 100% return on investment over a
3-4 year period. Very few investments, if any, can match that kind of return. |
Basically, purchasing or investing in preconstruction real estate can be an extraordinary opportunity for those who are patient and knowledgeable enough to take advantage of it.
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| Preconstruction Financing |
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As with any major investment preconstruction involves many financial considerations. Preconstruction is unique though as an investment in real estate because you do not need to come up with the majority of the purchase price until the completion of the project, which can be anywhere from 6 months to 3 years. If you are looking to flip this is typically enough time to resell your unit before needing to close and secure complete financing for the unit. However, it is important to always be able to close on your purchase should it not sell or if you decide to use it for yourself or as an income property.
To that end we offer the ability to Pre-qualify for financing. Contact our Loan Help department, and we will forward you information on our network of Mortgage Brokers and Banks who will review your application and contact you. |
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| Preconstruction Process |
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Here are the basic steps in the Preconstruction Process |
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- A developer decides to build a condominium or mixed-use project.
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The developer acquires initial funding to begin research, planning and development as well as preliminary marketing efforts.
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The developer offers select individuals the first preconstruction deals at the lowest prices that the units will sell for. These deals are usually only offered to those who have established relationships with the developers as buyers willing to invest in a project that has not even broken ground yet.
- Now that the developer has generated solid interest in the project they will need to acquire sufficient financing to complete the entire project.
- To increase the chances of acquiring financing at the best possible rate, the developers will now offer preconstruction deals to the general public.
- A buyer places approximately 20% of the total price of the preconstruction unit in an escrow account.
- About 1-2 years later when ground is broken on the project, approximately another 10% is due to the escrow account.
- Very often units can be sold before the construction actually completes, allowing the buyer to "flip" the property without ever setting foot in it.
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Approximately 3-4 years later when the project is completed, the buyer will need to come up with the remainder of the preconstruction purchase price either with cash or financing. At this point the buyer owns the unit and can decide to occupy it, sell it or rent it out in most buildings.
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Preconstruction Investment |
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Investing in Preconstruction opportunities has become the hottest topic in Real Estate investment over the last few years for good reason. Investing in Preconstruction is one of the most lucrative investments one can make because of the following reasons:
- There is limited capital investment, in reserving preconstruction units.
- There is no need to open a mortgage right away as you would with an existing property. You simply put your down payment and wait while equity in the unit appreciates with little additional investment.
- The potential appreciation of a good preconstruction project in a hot area can reach the hundreds of thousands of dollars in only a few years.
- Investors can substantially increase their potential profits by buying early when prices are very low
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The red hot housing markets in Florida and Las Vegas as well as several other parts of the world have created numerous opportunities for investors to capitalize on this profitable investment vehicle. |
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Investors can incorporate their existing investment strategies and style to the preconstruction market. For example, if you prefer to flip properties without holding them for a long time you can tie-up a unit or units in a building and resell them 2 different ways: |
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- Many times the preconstruction developer will allow units to be assignable once the project has been sold out. This can happen in only days or it can take months, depending on the popularity of the project. If the project sells out quickly you could potentially earn tens of thousands of dollars within a few months!
Developers want to know if you are planning to flip
There are some requirements though, the developer may take a percentage commission from the sale, each building and developer is different, Also, you will often get your deposit back in full but you won't realize your equity gain until closing.
- If the preconstruction developer does not allow you to assign your unit before the construction is complete, you can still technically flip the property by doing a simultaneous closing when the building completes construction. Or a back-to-back closing. This does require that you have a ready, willing and able buyer available in a specific time period. Also some states have regulations on simultaneous closings, so you should speak with a Specialist before making your decision.
Take advantage of Preconstruction
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