Details on the Preconstruction Real Estate Investment Process
Below you will find an overview of the preconstruction process as well as advice and information pertaining to safe investment in the preconstruction market. Feel free to contact us for more information by filling out the form below or view our other real estate investment guides.
Preconstruction real estate investment is a relatively new field in the real estate industry, allowing a buyer to purchase real estate of the future at prices of the present. For just a fraction of the price of a finished unit, a buyer can reserve a preconstruction property and make small payments during various phases of completion while still getting a significant discount on the finished property.
There is a sizeable amount of risk involved in the preconstruction real estate investment transaction as the investor is buying into an abstraction, an architectural rendering on paper, rather than a tangible structure. The investor and the developer operate on the principle of mutual trust, a reciprocal relationship in which the developer depends on sparking the interest of enough investors to pre-sell half the units, thus receiving bank loans, and the investor gets a finished property for far less than the going rate. The initial reservation agreement is an informal “Intent to Purchase Agreement” and a small deposit of only 5-10% of the total cost of the unit. This deposit is kept safe in an escrow account and the buyer has the option to end the agreement legally, but the same informal agreement allows the developer to raise the unit costs without contractual obligation to keep them set.
The hard, binding contract doesn’t come into play until the developer has obtained licenses and legal authority to sell the property. During this phase, the buyer makes a deposit covering approximately 20% of the total unit cost—the final payment until the unit’s completion. Soon after, the developer is ready to commence the construction phase that can last anywhere from six months to two years depending on the completion date set in the contract. If the developer fails to complete the construction within the allotted time period, the investor can terminate the contract and file for deposit refunds. As the project moves closer to completion, the unit prices rise and the investor has the option of selling the partially built unit to a buyer for profit.
Like in any smart investment, researching the market and the process of preconstruction investing is key to making the most money. The savvy investor knows the industry and how to ask the right questions about a development to assure that it will be a profitable investment. And the preconstruction investor knows that good opportunities come around rarely, so it is necessary to jump on them when they do occur. The novice investor will seek advice from people in the real estate industry on why a preconstruction property has potential for high profit while an experienced buyer will weigh the risk relative to the reward himself. Like any other field, experience is key to accumulation of knowledge and success. The savvy investor always has a contingency plan if the development falls through and is constantly seeking more information on the preconstruction real estate market through conversations with others in the industry.
Several professionals claim that a novice investor should get a mentor, an acquaintance with experience in the industry who can will give honest help that will not be found from the broker or developer involved in the actual investment. But, having friends in the industry is a luxury that not every new investor has, so several professional associations are currently making the insider information readily available via websites and supplemental resources such as tele-seminars and home study courses. Experts recommend Google searches for “preconstruction investment,” “preconstruction condo,” “preconstruction real estate,” etc. The incorporation of the mechanics of the market found on the internet and the advice from seasoned professionals should give any new preconstruction investor a good base of working knowledge of how to spend money wisely.
Once the novice starts thinking like an experienced professional—making his own decisions without relying on a third party—he will find that not many preconstruction investment opportunities fit his specific needs. But when an opportunity arises, it is important to act quickly and decisively. Several preconstruction professionals recommend joining a preconstruction investment group of like-minded investors who increase their buying power as a massive entity rather than an individual buyer with little influence. The group is an important tool for the invaluable advice from the collaborators, along with its ability to move quickly with a significant amount of leverage in the ever-changing preconstruction real estate investment industry.
Just like the stock market, the real estate industry runs in cycles of about 7-10 years with prices rising, staying steady, then bottoming out and growing back up again. Smart investors buy at the bottom of the market and wait for the market to rise and sell for a high profit. Those who are just looking for a quick buck, however, will buy high when the market is up and hope it goes even higher, generally a less advisable strategy. Single-family homes have been popular investments for years, as owners have started renting them out to tenants for profit or reselling. Vacation homes and condo hotel properties have become significant in the preconstruction market in recent years as developers keep building luxury condo resort complexes in hot vacation areas like Miami and Orlando, Florida.
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