Pre-Construction Investing
What are the Pros and Cons when investing in a pre-construction, planned-community development? Thanks.
What are the Pros and Cons when investing in a pre-construction, planned-community development? Thanks.
What kind of Pre-Construction investment are you looking to do? Single Family Homes, Condos, etc? For flipping, assignment, etc?
You may want to search the forums for Pre-Construction and enter the username GFous. He's done this in FL with condos I believe.
Thanks for the info. I'm looking at SFH and Townhomes.
Flip, assigning before completion, hold for rental?
Whether you are looking to flip or assign, be sure to figure in all your expenses and costs and see if you're profit margin is large enough to be a worthwhile investment. If you plan to list it with an agent, that's a chunk of it and short term capital gains is another. Pre-construction for flip investments are purely speculative and very risky. Make sure you do the numbers and do them again. Have outs just in case.
When a developer plans a waterfront high-rise he has many hurdles to overcome, not the least of which is financial. Whether the developer is WCI or Engle homes, financial backers want to gauge the interest in a project and in many cases require the developer to have reservations on a certain percentage of condos before the project is given the green light. This translates into savings for the real estate investor. The developer needs these presales to prove his project and secure his financing and he will give incentives to the early buyers.
In many cases the “first day” price will be lower than the price for the subsequent condo purchasers. Many times the waterfront developer will give an extra incentive to those that reserve a unit by placing a $10,000 deposit with the title company to hold a particular condo. To encourage further price increases he will program increases at scheduled intervals throughout the condo pre-sale stage. This does a few things. It encourages people to buy condos early – because prices are going up, and it is a self-serving prophecy – buyers see the price of the waterfront condo going up, they want to get in on the increases, it creates more demand – and indeed may increase values of the pre construction waterfront condos.
We like projects that are done in phases. These are normally condo buildings one, then condo building two, etc. In the past the best opportunities have been in buying the earlier condo buildings. Property values in Lee County, Florida have gone up an average of 17.1 percent last year, and as real estate investors know, waterfront condos much more. Over the last five years appreciation on real estate has been over 15% a year in Lee County. Couple this potential appreciation with the planned developer increases and price increase could be considerable. For example, when condo building three, unit 801 is ready for sale it may be priced at $880,000, when the same condo in building one sold for $714,000, less than one year earlier. The unit 801 in building one has not even closed yet!
There is a limited supply of buildable waterfront land. Developers can build golf courses and lakes, but it’s pretty difficult to create oceanfront or gulf front – or even riverfront - land. Many people move to Florida to be on the water. Over the next eight years the baby boomer flood will start to peak. Demand is expected to be even greater – and waterfront supply will be limited. If you want to fine-tune your opportunity, buy penthouses. There are certainly fewer of them and buyers will pay a premium to “be on top”.
Lets examine how this works. On December first you decide you want condo 504 in building two. You put $10,000 reservation deposit on the unit since it is a new development and the condo docs and permits are not ready. Three months later these items are ready and it goes to contract. You decide to proceed. (By the way, if you decide not to proceed, you can get your $10,000 back). On February first you put a total of 10% down to bind the contract. It will now take 18 to 24 months to build your condo (This will vary from project to project). This 10% is held with a title company – not the builder. (This is an important point. Your money will be secure and can be returned to you in the case of nonperformance by the builder/developer. You have, in effect, tied up this condo for two years with just 10% of its value. You still get two years of potential appreciation.
When it comes time to sell you condo:
The best way of marketing a contract for a preconstuction condo is within the community of the condo. This is why you need an "insider" By that I mean through the existing sales chamnels used for the new condos. Many time this must be done informally.
The first question I would ask is, "Who did you buy it from?" This should be your first line of marketing. They should help you sell it again. But let's assume the worst:
Let' s assume you bought it from a company rep that is no longer there. I would make a trip to the sales center of the comnnity and meet a few of the reps. Get a feel for what the market is like for resales. Are there a large number of resellers? How are they selling them? Have there been any resales? Ask an agent to check the multiple list. Are there any listed? How are they priced? etc.
Steps I would take:
1. Contact the seller that sold the unit to you.
2. Visit the sales team that is currently working the unit. Get to know them.
3. Establish a realistic price.
4. Pick a knowledgable insider to network with.
5. Get the unit listed on the MLS with an agent.
6. Make sure you are getting Web exposure.
Here is what I have done with one unit I am flipping so far.
-Designed a web site http://www.lascala304.com
-met with all agents selling in the colony
-Put up a placard in the model offering the unit for sale
-visit sales center one a week.
- box ad in the Wall Street Journal
- Condo featured in Florida Design magazine. ( http://www.floridadesign.com)
-put it on MLS
- offered to buy another pre-construction condo from any agent on sight that will sell this one.
Hope this helps. If you are not IN Florida, you need someone there helping you ( if that is where your opportunity is).
REMEMBER - Do not buy a precontstrution condo if you cannot afford to close on it. Use the sleep test. If you can sleep at night after making this reather speculative investment - then you are probably ok. ( Stay away from the Ambien)
Gregg
CT- Don't know what condo you were asking about - so can't help you. IN general the waterfront condos are pulling $300 to $1000 per square foot.
Gregg
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It was the LaScala304 site. It's over 5,000 sq ft, so that would make it somewhere in between $1.5M to $5M, right?
CT
Gregg,
Very informational post. A great education.
Thanks,
Matthew
Actually the La Scala unit was perhaps THE nicest condo I have ever seen. The seller eventually decided to keep it. He feels the price will be above $2.5 million very soon. Don't forget this is furnished. BTW, he bought this PRE construction and leased it back to the developer for 15 months. That is a great way to buy pre construction.
Gregg
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Very interesting. Why did the developer lease it back? Was he using it as the model/office? Or was he living in it?
In either case, it sounds like a good deal for the buyer.
=CT=
Gregg,
Great post. Thx for the details...confirmed my plan (sleep test).
Charlie,
Make no mistake, the developer will lease back to help sell the unit. I do it all the time. In an appreciating market it can be a very good deal for both parties.
Normal lease backs are 7% of the purchase price. Some will go 8%.
Rather than discount the unit, or pay a 6 or 7% broker commish - offer a lease back. My old partner use to say, "Give them the sleeves off your vest if you have to" In other words, give them something you do not have or does not cost you anything.
Sell them at a non disounted price, because you are leasing back, and then give them the 7% discount OVER ONE YEAR! What a deal. You as the developer sell a unit, you get a model to use for free, and the buyers gets 15 to 20% appreciation while leasing it to you. He has no mortage payments for a year and he can either flip of move in or rent aftr the developer is out.
I LOVE this country
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Gregg,
Took me a couple of times reading your post to understand it, but I finally got it. Very clever!
CT
If you are lookig for pre construction investing, My advice is to stay in the lower price ranges. These are less effected by rising interest rates and decreased home buying activity.
Gregg
i'm gonna have to agree with charlie on this one
gregg, thumbs up on the website!!
Quote:
On 2004-10-20 19:33, GFous wrote:
If you are lookig for pre construction investing, My advice is to stay in the lower price ranges. These are less effected by rising interest rates and decreased home buying activity.
Gregg
I'm not looking for those, because it's not really my thing, but most of all, because I'm afraid pre-construction investing is a bubble that's going to pop big time, and end badly. If you get out before then, AND, don't go back in, you could be OK, but I think a lot of people will get left holding the bag.
I like deals where the underlying fundamentals are solid, but that's me. You can certainly make money without meeting that requirement -- happens every day!
CT
You buy preconstruction condos for one or more of the following reasons:
1. The price. You feel appreciation will continue and you leveraged your deposit on a preconstruction condo so you could own a condo upon completion that was substantially lower in price that a completed condo sixteen months from now.
2. Personal use. The condo you bought is something you want to live in.
3. Getting on the escalator. You are encouraged by all the growth in Florida and you want to own something here that will appreciate so that when you do come down, you can sell it and put the realized gain in to the home you will eventually use yourself.
4. A parking place for some money. The rest of the investment vehicles for cash are not very exciting and you felt that Real Estate will not go down in value.
5. A rental property. You want to use this purchase as an investment vehicle to generate income and tax benefits.
6. Everybody else is doing it and you don’t want to be left out. (-;
7. You want to “Flip” you condo as soon as possible.
8. After you close you will refinance at the new higher values and pull money out for your next “deal”.
9. You bought the condo for your children or parents.
10. You like the idea that everything is warranteed and new and there is a condo association to “manage things”.
I belive, very strongly, that the UNDERLYING FUNDAMENTALS that are driving home prices up wil continure, by the way.
Gregg
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Gfous,
Great post so far! I have two questions hoping you can help with. Do you have any expertise in buying pre-construction SFH’s? Do essentially the same principals apply? I’m looking at getting into pre-construction homes in my area (Twin Cities Metro Area, MN). The builder is basically doing what you suggested in an earlier post. He needs these presales to prove his project and secure his financing and he will give incentives to the early buyers. He is offering a discount of 10-20% of what the completed price will be, lot included. My second question was, is a discount of 10-20% around the percentage that most builders will offer to investors?
Thanks for the answers. Those are certainly questions I will ask him. Right now all he is asking is $3000 down to secure the lots. Then I have the option of taking cash-back at the closing or keeping the cash in and having some cash flow per property. Is it better to buy and hold or do a quick flip or dose it depend on a case-by-case bases?
Try contacting real estate clubs by seraching Groups on TCI that are located in FL. Also on the www.NationalREIA.com
MT
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