From
Buyincomeproperties.com
How to Invest in preconstruction
By Buyincomeproperties.com
Sep 21, 2005, 14:46
Recently, preconstruction investing has roused an enormous explosion in real estate investing, especially in resort real estate. The same self-proclaimed gurus, who hawked books and tapes about foreclosures, now turn to sell preconstruction investing "secrets."
Well, there is no secret to you amassing wealth by preconstruction investing and there is no magic. Multitudes have been there and done that for years. Have you ever gained a higher priced home after it was built from scratch than you paid to build it? There is your preconstruction investing. There is no magic to that. Demand in most real estate markets is generating unprecedented appreciation. When you buy today, throughout the US, such as in the Florida panhandle, within 1 year, you obtain major appreciation, often $100K-$300K. Generally, whether you invest in Florida’s resort gulf coast condos or rehab real estate homes 2 blocks from the beach, you enjoy the same appreciation rate in similar markets. The determining factor of investment strategy to use is simply that which best meets your circumstance and needs. Some REALITIES of PRECONSTRUCTION INVESTING:
1. 10-20% is held of the purchase price by your developing escrow agent during the appreciation period.
2. Your property remains vacant during the appreciation period.
3. BENEFIT -- you make NO PAYMENTS for monthly mortgage during the appreciation!
4. This article dispels the hype and fallacy about preconstruction investing so that you, the buyer can invest wisely. We also expose the misconceptions of high-rise resort investing options by noting that you usually will not see profits for 2-3 years.
Securing the Preconstruction investment
Preconstruction purchases prior to closing -- 2 of the stages:
1.) Preconstruction Reservation Stage - this stage requires a minimal amount, generally $5,000 to $20,000. The preconstruction reservation is a non-binding agreement on both the preconstruction investor and the condo developer.
2.) Hard Contract Stage - Generally, when the developer is ready to begin construction, the investor is required to put down 5%-25%, which secures a bilaterally binding agreement to purchase the property. The developer cannot raise the price and the preconstruction investor has to buy the property.
(NOTE- eliminate the reservation stage if possible}
Understanding the following compensation from different aspects of these 2 stages will help you determine which method of real estate investing you prefer.
1.) Preconstruction Reservation Stage - Lotteries: In recent Florida gulf condos preconstruction presales, many developers offer a "lottery". This marketing strategy helps secure serious buyers. For each of 3 to 6 units that you accept, you send in your reservation, in your order of preference. On Lottery day, one of your choices is assigned to you. Since many buyers may choose, you may get what is left, if not everything is "SOLD OUT IN 2 HRS."
Developers that accepted preconstruction reservations for months, now look like speedy experts in “just 2 HRS.” Sometimes this occurs at the expense of buyers who have their money unavailable for 2 years while developers obtain required approvals, the financing and permits. Also, the buyer’s "reserved" unit price sometimes is increased by as much as $200,000 during the final contract closing.
The bottom line is "don't count your preconstruction profit until it's deposited." In other words, the price may rise before closing, but the investor can also choose not to purchase the unit and get their deposit back. Thus, a preconstruction reservation is non-binding therefore may never materialize. Anyone attempting to assign or sell a reservation, should do so only with an attorney’s advice drafted in a contract that limits liability.
2.) Hard Contract Stage – Once again, eliminating the reservation stage if possible is usually recommended. Hard contract is the first and only step prior to closing, when purchasing preconstruction, such as a spec cottage, from speculative investors or builders. Thus, you often make a large profit much quicker and with a smaller down payment than when investing in Florida gulf condos in high-rise complexes or other resort real estate.
Many would-be investors may be scared of signing a “no turning back" binding contract. Yet, by signing your preconstruction contract, you now own something to resell. There's no free lunch, No "big profits" without your signature on the purchase contract. Can you make $150,000 per year investing in today's real estate market? Absolutely!
Choosing the Right Preconstruction Opportunity for your goals -- Now that you discern how there are often better ways to buy preconstruction real estate than by tying up 3 years in completing large-scale resort condos, let's look at your options:
You may purchase a preconstruction cottage that can commonly be resold for profits in 8-12 months with as little as 1% to 20% down. You can sometimes secure the cottage for as little as $5,000 earnest money deposit.
Or, you may choose to purchase a condo in a low-rise complex for 10-20% down and then resell it at a profit in 8-12 months with. Your profit often earns a year's appreciation that you may reinvest or hold the equity while you use it for personal use or rent it.
Finally, you may purchase vacant land, secure a pre-perm loan with 10-25% down, and then build your own preconstruction, which you in turn sell in about 8-12 months at a profit. Realize that often, master planned communities only allow approved builders with approved plans. Yet, the investor can often help choose the materials and conduct their walk-through just as in a preconstruction condo investing.
In summary, know your options. "Big profits" are very real for preconstruction investing. Ask questions and do your homework. Run off the starting blocks now. The first time you invest may be the hardest, but while you deposit your check from your first real estate investment, you’ll be overjoyed.
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