Pre-Construction and Investment Real Estate Info

A pre-construction investment is investing in a condominium unit of a proposed construction project before the building has begun. Buying a pre-construction condo can be a great opportunity, but you should proceed with caution.

There is a potential for unforeseen problems and setbacks with pre-construction investments because you are investing in a condominium that does not yet exist. Whether you are purchasing a pre-construction condo to live in or leveraging the equity by buying at the pre-construction phase price and selling the unit or an option in a short period of time as the appreciation quickly rises upon the completion of a construction phase, you can avoid complications and reap the benefits by understanding the risks and planning carefully .

•  - Who is the developer?  Reputation, Past performance.
•  - Area information, school information (when applicable), etc.
•  - When did sales begin?
•  - Have there been price increases? How many? How much?
•  - Comparables.  What other pre- and new construction are planned for the area, and how are they priced/selling?
•  - Will deposit be held in escrow account?
•  - When will construction begin?
•  - Are assignments of contract allowed?
•  - Will simultaneous closings be allowed?
•  - Can property be sold immediately after closing?
•  - What are the Rental Policies?
•  - What are the Pet Policies?
•  - What will Maintenance Fees amount to?
•  - What Amenities Will be Offered to Residents?
•  - Is there any information that is not OBVIOUS that may impact the buying decision?  (Example: train tracks near by, proximity to school (may be noisy), environmental, etc.)

When a developer plans a new development of any nature, the firm has many hurdles to overcome, not the least of which is financial. Whether the developer is a major group or a local contractor, financial backers gauge interest in a project based on pre-sale reservations. Both commercial lenders and private investors ascertain the buying public’s actual level of interest prior to funding a project. With adequate interest, funding has a strong potential for moving forward. This can translate into potential savings for buyers who are willing to reserve a unit or make a purchase at this earliest stage.

Although there is never a guaranty, in many cases the "first day" price will be lower than the price for subsequent purchasers. In some cases, developers even offer additional incentives when the opening bell rings. Of course, as the project progresses from imagination to reality, interest by end-users increases. Needless to say, with a more definite picture, pricing tends to increase. Again, although this has been the trend thus far, there is no guaranty that this will continue into the future.

Many projects are developed in phases, especially the condo towers. For example, the developer will build the first tower, followed by a second, and sometimes a third or even fourth. Of course, the first tower prices tend toward entry level and each new tower shows an increase, in some cases significant.

The economic rule of supply and demand certainly has been coming into play with South Florida real estate, especially waterfront and water access properties. At this point in time, the demand is very high. Due to restrictions by the various municipalities and counties involved, there are certain limitations in terms of the number of available properties. According to some analysts, over the next eight years, the baby boomer flood will start to peak. Demand may be even greater than it is now, and the overall supply will probably be more limited.

Reservation Agreements: First, a reservation is nothing more than a Right of First Refusal. You, as a buyer, are under no obligation whatsoever. For this position, you will place a reservation fee of anywhere from $10,000 to 10% of the proposed purchase price.  At the point where the developer is ready to sell the units, you elect to move forward with a purchase contract or to bow out. If you decide the purchase is not for you, the reservation fee is refunded in full. In other words, during the reservation phase, you have nothing to lose.
FYI: Though developers prefer to go directly to binding purchase agreement i.e. contract, Reservation Agreements are used when they choose to begin sales prior to having all permits in place, and prior to condominium documents approval by the Florida State Government.

If you decide to go ahead with the purchase agreement, payment of the balance of the first 10% will be required. You will then be granted a 15-day (calendar) rescission period (for CONDOS only) during which buyers may obtain an attorney to review the contract and condominium documents, or at the very least do so themselves. Once the rescission period is over, buyers are committed and any defaults will result in a loss of the deposit.

When the building site preparation begins, a second 10% deposit is generally required. From this point forward, the purchase remains on hold until the development is complete and the property can move forward to closing in which case either a cash payoff or mortgage will be required.

Whether purchasing a new construction single family home, town home, or condo, please be advised that to the price of your unit, developers add a fee at closing, ranging between .5% to 2.5% of purchase price.  Single family and town home developers claim those fees to cover "administrative" expenditures.  Condo developers actually use a significant portion of the fee to cover properties recording fees, title search, exam, and insurance, and the title company fees. 

In addition to the "builder's fee" buyer should expect to deposit 2 or 3 times the monthly maintenance fee into the Home owner/condo association reserves. 

In essence, in addition to financing (mortgage fees) it is sensible to expect approximately 2% closing fees. This information is not intended to dissuade purchase of pre-construction residences, rather to inform and prepare buyers, so they are not first made aware of these fees at closing.

There are two options in terms of selling out prior to closing.
Assignment of contract.  Nowadays, the majority of developers prohibit assignment of contracts.  It is a possibility, rare as it may be, in some complexes.   The second option becomes possible, when builders will “resell” units once the entire development is sold out.  If choices one or two are not offered, there is the option of a simultaneous closing.

With pre-completion re-sales, the units are made available to the public as the current pricing – as determined by the developer and/or original buyer. Buyers can list their properties with the developer who will then make them available for purchase. The exact percentage of price and costs involved vary. Buyers may also obtain the services of a real estate company to promote their unit, though as a rule, MLS listing before closing on property is prohibited by developer. 

A simultaneous closing occurs when the developer closes on the property with the original buyer who then immediately sells the property to an end-user.

If you are interested in investing in these kind of opportunites and would like to be informed when they become available, contact us and we will be happy to keep you informed when they arise. Tavolaocci Realty Inc.'s policy is putting clients' interests first! Our Clients benefit from the "Double Effort" approach! Ask us about it!