Most people have heard the term “Pre Consrutuction” but when asked, don’t really know how to explain it, Take heart because it is really very simple. You don’t even need a working knowledge of exactly what is meant by “preconstruction” investing, All you need to know is that it means buying real estate before it is built in the hopes that it will appreciate in value rapidly and then you sell it to another party before it is finished.
Pre-construction are units that have been planned by a developer, but have not yet been built. When you purchase a pre-construction unit, you are putting money down before construction begins.
Buying pre construction can be a great opportunity, but you should proceed carefully. You’re buying something that is not there yet, there are larger possible for unexpected troubles and difficulties before you move in. If you understand the risks and plan carefully, you can avoid difficulties and come out on top.
The main benefit to buying before construction starts is that you often get a lesser price than if you buy when construction is over. Developers usually need pre-construction sales of anywhere from half to almost all of the units in a development before they can have a loan of funds to begin building.
Step 1. Reservation agreement
You give a deposit (usually between five and ten thousand) to reserve the unit and set the price (although some builders reserve the right to change the price in the contract). The deposit is held in escrow and you can cancel the agreement at any time with a total refund.
The initial or first "phase" of the resort is typically sold at a deep discount, and to encourage further price increases a developer may plan increases at
Scheduled intervals throughout the second and subsequent phases.
This encourages investors to buy condos early because prices are increasing,
And it works well. As buyers see the price of the properties going up, they want to benefit from the increases. This creates more demand, and thus will usually increase the value of the preconstruction investment condos or real estate.
Step 2. Condominium documents
When a development is accepted for building, the developer submits condominium documents (including budgets, association rules, unit descriptions, materials and other important information) for approval by the state. Once the documents are approved, they are sent for you to look over. Read them vigilantly to make sure that you will be comfortable living by the association rules as stated.
Step 3. Right of rescission
In some states, once you receive the condominium documents, you may have a specified period (usually 15-30 days) to decide whether you would like to continue into a binding contract. If you don't want to proceed, you can exercise your right of rescission and pull out with a full refund. Consult your lawyer to find out if the right of rescission applies to you.
Step 4. Hard contract
If you don't pull out, you'll provide the balance of the required down payment, usually 15 to 20 % of the purchase price, and sign a binding contract agreeing to purchase the condominium. You generally have seven days after that to cancel. This is your final opportunity to walk away with no consequence. Though it is up to the developer, some projects allow the condos to be "flipped", or sold on paper even before the project is built, and this is where large profits have been realized
Step 5. Closing
When construction is nearly finished, the developer will obtain a Certificate of Occupancy on your behalf. A closing date is set when you will hand over the balance of the purchase price and sign the final documents. If all goes according to plan, your closing will correspond with your move-in date and you will be ready to enjoy your new home.
Delays can have an effect on:
1. The interest rate of your loan. As your closing date approaches, you may want to lock in an interest rate. If a construction delay affects your closing date, find out whether your lender is willing to extend the lock-in period.
2 The market value of your home. Check your contract to ensure that you pay the presale price even if your home increases in value before closing. While developers can reserve the right to raise the price, it's considered unethical.
3 Your move-in date. A delay in occupancy can affect the money you spend on an interim rental property, the date your children change schools and more. Try to remain flexible about your exact move-in date. Also, make sure that the delay of your occupancy date is reflected in your closing date, and notify your lender of the change. You don't want to start making mortgage payments before your home is completed.
When a developer plans to build a project, one of the first hurdles he will need to overcome is the financing. Financial backers and banks want to know there is an interest in the project and in most cases will require the developer to have reservations and deposits on a certain percentage of units before the financing is approved.
For the prospective real estate investor, this means the developer will usually offer a considerable deal for the "pre-sale" buyer in order to secure financing for the project.
It often works out that the reservation can be "sold" on paper even as the project is being built, and the new buyer can then be required to put up the 10% deposit, freeing up the first buyer's cash. Any extra profit is still not realized until closing, however.
Pre construction condos can also get you in early with an investment that will hopefully appreciate in the next few months. The pre-construction market generally goes up during the 1 to 3 years it takes to construct a development, so the unit may be worth more before you set foot in the place.
