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Real Estate Investing : Preconstruction Investment Last Updated: May 14th, 2012 - 22:24:01


$50,000 Equity Gain In One Week, or even 1 Day? By Chris Anderson
Chris Anderson
 
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There seems to be a lot of confusion out there about how time can be used to your advantage in a preconstruction purchase.  For those of you that have listened to our mini course 2 video, you know that when preconstruction purchases first started, they began as a way for developers to get their projects financed.

To recap, typically a lender for the developer will force them to presell 50-65% of a project before they will provide the first nickel of financing.  In the “old” days, this meant the developer had to hire a marketing firm that could entice people to buy units off nothing more than an artist rendition.  Before this concept really caught on, this was like selling ice to Eskimos because people could not touch and feel the project 

To motivate people to purchase, the developer would discount the sale of maybe the first 5% of the units to a level where they were quite attractive.  Astute investors and vacation home purchasers would come in and purchase those units in the very first phase: PHASE I.  These people would also start telling their friends and the developer would do a press release about how rapidly they have already sold X units; that would start getting some more buyers but they would be offered a different, PHASE II price; the people who had already secured their purchase in Phase I would now already have equity (at least on paper).

Once the Phase II people were in place, more advertising would be done about the success of the project and that due to demand, the prices were going up yet again to Phase III pricing.  Now the Phase I people have just received an additional bump in equity.  This process continues until the developer sells their 50-65% presales at which point they can go back to the bank and get started on the project.

How would you like to be the person in Phase 1?  Yes, you and everybody else in the world would as well.  As this process started becoming better known in some areas, then the exact same things played out but maybe on a faster time scale.  For example, I am aware of 1 project where the developer opened up on day 1 with a single FAX machine (on purpose).  The first 30 people got Phase I pricing……. Do you think there was a little inside knowledge required to get in on the first 30?  After about an HOUR, the next 30 were offered Phase II pricing.  The process was repeated until the building sold out in 1 day.  That was a very nice day for some people.

We have had a similar experience in our MasterMind Group which is all of one week old at the time of this article.  Because we had a little advance notice, the members of our group purchased where offered a price that was actually available to the public but not much noise was being made.  The announcement was then made a couple of days later to the public but the price bumped up about $10,000 for a 2bdrm unit.  Today, within 1 week, that price has bumped again to where they have about $50,000 in equity on that unit (on paper).  Lots of things still have to happen to turn that into real equity, or real cash depending on your use of the property, but it is a very nice start. 

In many locales these days, this concept has become so popular that when a developer “accidentally” mentions an upcoming project in a pre-release, they are likely to have 1,000 people signed up for 200 units.  To make it “fair”, they will hold a lottery to select who gets a unit.  Now the whole need for Phased pricing, or even reasonable pricing is a little different at this stage.  If a developer has this much demand for their product, there is really little need to offer incentives to purchase but rather see how much they can make. 

While so far, most of these lottery projects have worked for the purchasers, there will come a time when the market is overdone…..  At least for me, I am going to feel much more comfortable knowing that I am in at a price MUCH lower than other people rather than just selected in a lottery.  Of course, to do this, it means you have to go out and find projects and locales where the “old fashioned” approach is still being used. 



Chris Anderson, PhD
chris@GetPreconstructionProfits.com
GetPreconstructionProfit.com

 

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