Preconstruction Process and How You Profit
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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 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 display the grit and tenacity to invest on mere paper and "air". However, in reality, they are getting discounts because they 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.
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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 10-20% 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.
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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".