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
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 displays the
grit and tenacity to invest on mere paper and "air".
However, in reality, they are getting discounts because
the 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.
About
the Author
Chris Anderson is a leading authority on preconstruction
real estate investing. Get his 4 day e-mail course and
a 33 minute video free today! Visit http://www.GetPreconstructionProfits.com
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