Before a developer can begin construction on a real estate project, financing has to be secured from lenders. Of course lenders need to know that the project they are backing will be profitable. That is why the developer is usually required to have deposits on a certain percentage of units before their financing is approved. This opens the door for a great opportunity to investors. The developer usually offers a substantial discount “pre-sale” price to procure enough buyers in order to obtain financing for the venture to begin.
Most of the time the pre-construction prices offered before financing is secured are much lower than afterwards. So the investors who buy into the project the earliest get the best deals. A pre-construction investor normally gives the developer a deposit called “earnest money” and the developer places this deposit into an escrow account which is safe for the buyer. This is shown to the banks to prove that a certain amount of the units have buyers waiting. When the required amount of deposits is met then the builder is given the financial backing needed to start the project.
Throughout the construction process the developer has price increases at scheduled intervals to promote investment at earlier stages and to also increase demand, which then increases the value of the development. As the prices go up for the units, buyers want to get in before the price continues to increase so that they can profit from it. Usually the developer’s plan to strategically raise prices works as intended and benefits both the developer and the early investors. A pre-construction investor can actually see financial gain even before the project is completed. The older the project the less the discount, so buying into the earliest condos, resorts, apartments, etc., will have the best investment incentive. More buildings may be built and sold after the initial project but they will not offer the same savings.
Pre-construction does not just apply to condos, resorts and apartments; keep in mind that it also is used with other types of real estate. For example, single-family homes can also be bought at pre-construction stages. Many times a builder will have land subdivided into lots and have the building permits ready but they need to have a certain number of homebuyers before they can gain financing to start building. This can benefit pre-construction buyers in several ways; a price discount, choosing the lot you want to build on, and customizing the house.
No matter what type of pre-construction real estate you intend to invest in there are always some guidelines you need to follow to make sure that it is a legitimate investment. Here is a quick list of things you should check into:
● ask the builder or developer for references and make sure to check them
● make sure the project is licensed, permitted, bonded, or approved-see the documentation yourself
● check to see if the builder or developer has walked out on any projects or deals before
● make sure the builder or developer has financing lined up for the full project