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Preconstruction Real Estate Defined.
How it Works and Why Investors Like it.
By Kyle Dreier ~ Principal, Price Morgan
(February 19, 2005) Years ago when I first learned about preconstruction real estate investing I was taken back a bit and somewhat skeptical. My first response was "Why haven't I heard about this before?" For years prior I had used real estate as an investment vehicle. I'd owned rental property and had done the obligatory "fixer-upper". But one morning, over breakfast, I learned about a whole other level of using real estate for investing purposes. Now, as I introduce this process to others I find them in the same place I was in the beginning. All this being said, I outline the following to help you get past the initial questions I had, and you may have.
First, let me just say that investing in preconstruction property is easier than you might think.
And surprisingly, you can do it with minimal financial exposure. Best of all,
it’s a proven strategy that can yield a significant return on investment.
What is “Preconstruction”?
In order to secure bank financing for high-rise
condominium projects, developers offer individual units for “pre-sale” to
the public. First, they put together plans and renderings for the proposed
development. Then, working with real estate brokers and agents, they offer
buyers first right of “refusal” on specific preconstruction condominium units. Buyers then
follow a safe, clearly defined and government-regulated process to control
an interest in the project - and to choose one of three exit strategies to
realize potential profit from their preconstruction investments.
1. Reservation Period. (approx. 6 months)
The preconstruction reservation period begins when a developer secures a property on which to build
- and then creates floor plans, artist renderings and a brief description of the proposed project.
The developer then takes this concept to his or her network of real estate agents, who then pass
it along to their clients. During the reservation period, interested buyers “reserve” the units of
their choice by putting up a refundable deposit - usually from as little as $5,500 up to about
$10,000. The preconstruction deposit is fully refundable, and is held in an interest-bearing escrow account with
a title company. The Reservation Period ends when the project has “sold out” - at which the developer
can obtain funding and begin building.
2. Preconstruction Right of Rescission Period. (state mandated 15 days)
When the developer is ready to begin construction, he will prepare a set of
state-approved Preconstruction Condominium Documents. As a preconstruction investor, you would then have 15 days
to review the documents and choose whether to commit (Hard Contract) to the unit(s) you reserved,
or to request a full refund of your deposit. No obligation. No penalty. You can simply walk away
with your deposit to use as you see fit.
3. Hard Contract.
Should you choose to move ahead with the unit(s) you’ve reserved, then you can
simply complete the necessary paperwork during the Preconstruction Right of Rescission Period and arrange to put
up money in earnest toward your purchase. Typically, earnest money comes out to 10% to 20% of
the purchase price minus your initial deposit.
4. Closing. (approx 18 to 24 months after Hard Contract)
When the preconstruction condominium project is complete, you’ll receive a Certificate of Occupancy
(CO). From there, it’s a lot like buying any new home. And it’s an exciting time. You’ll walk through
your unit for the first time, work out a punch list, and oversee any necessary final adjustments. Prior
to closing, you’ll perform a final inspection. Then, it’s time for closing. By this time, you will also
have made arrangements to fund the balance - either with cash or by securing a mortgage.
Once you personally experience a full cycle from Reservation to Closing you'll be a seasoned veteran. Yes, there are nuances that you'll experience along the way that are similar and different from case to case. Each experience you encounter simply translates to the making of a keener and more refined preconstruction real estate investor ... and that's where you want to get, isn't it?
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