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Pre-construction Sales Info
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- What is Pre-construction?
Pre-construction is the opportunity to join a fellow group
of investors in an effort to finance the development of real estate.
- What are the benefits of buying
Pre-construction? The buyer benefits in several ways. First, the lack of mortgage payments while the building is under construction will constitute a profit. The developer offers incentives because sky and paper are harder to sell than concrete and steel. Second, the appreciation that takes place while the building is under construction constitutes profit ( a condominium assembled is worth more than condominium not yet assembled). The property appreciation that takes place while under construction is also significant (16% for condominiums in 2002) Finally, the tax benefits and lack of out of pocket expense due to the financing methods available make this the best investment real estate has to offer.
- How do I reserve a condominium?
A simple reservation agreement can usually be signed with
a letter of credit for 15-20% .
- What is the letter of credit?
A letter from the bank stating the recipient is capable of buying
said condominium.
- What does the letter of credit
cost? A lending institution will generally charge 1% annually
for the amount of the letter.
- Must I use a letter of credit
for reservation? No, cash payment may be substituted for
the letter of credit.
- Do I earn in tersest on my
cash deposit? Yes, the funds are invested in a pass book
account. Any interest paid on the account is applied to the purchase.
- Who holds the deposit money?
An escrow agent of the developer holds the money. (Usually
a title company)
- What format of the letter
of credit is used? The developer generally provides a format
for the letter that must be used.
- What is hard contract? When
enough units are sold and the developer is applying for a construction
loan, you will be asked to go to hard contract. A hard contract
is the binding agreement that converts the reservation to a sale.
When the contract is signed, generally you have 7 days to review
the offering and make your decision in proceeding with the purchase.
(Note) There will come a time, during the offering, that you will
go directly to hard contract. This usually happens after some
short time during the selling process.
- When does the construction
start? Construction will commence once the developer has
sold a number of units (usually 80-90%) and will fund the construction
loan.
- What does need not be built
mean? This means the developer is allowed to pre sell the
condominium, which has not been constructed. It also means that
it may not be built if all permits and approvals are not met.
In this unlikely event, the purchaser is protected under law.
- What happens if the building
is not built, at no fault of the purchaser? Your deposit
will be refunded with interest or your letter of credit will expire
and not be called.
- How long is the construction
period? Generally, it takes 1.5 to 2 years to complete.
- How much profit should I expect?
It depends on the general market conditions, interest rates,
and competition. In the past few years, profits have ranged from
$10,000 to $50,000 on average, peaking at over $100,000.
- Can I sell before closing?
Yes, in which case, the developer allows a new purchaser
to take over your contract. The new purchaser must come under
the same pre-construction purchase and escrow agreement as the
first buyer.
- What happens if I sell my
unit prior to closing? The developer will collect a deposit
from a new purchaser to assume the existing contract. The new
buyer then steps into place to close and your deposit will be
returned with interest.
- Do I have to close on the
unit if I have not sold it prior to closing? Yes, if you
choose not to sell your unit, you are expected to close.
- Can I reinvest my 1031 into
Pre-construction? No, because of the length of construction
for a condominium, the guidelines for the exchange are not met.
- Are there any costs related
to the sale? Yes, you will be responsible for some closing
expenses such as title insurance, funding of the association,
insurance, reserves, etc. These charges will be outlined in a
Good Faith Estimate provided by the selling agency, and in the
developers offering statement.
- Are there any other contingencies,
such as financing? No, the sale is not subject to financing.
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