What Is Pre Construction And How Does It Work?
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Pre construction, in a nutshell, is buying a condo before it's built. The advantage is that your cost is locked in. The average construction time is 2 - 2.5 years. The values in the condo's appreciation during the construction phase. It's an opportunity to get in on the ground level and be the first owner. You can, at any point, sell your contract before completion (flip) and when the new or end buyer closes on the condo, the previous buyer(s) collect their proceeds. You can sign up for notifications at the bottom of this page.
- 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 during an average economy. 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 typically ranging between 20% - 30% .
- What is the letter of credit? A letter from the bank stating the recipient is capable of buying said condominium. The L.O.C. can be collateralized using most anything of value.
- 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.