What is Pre-Construction?
Real Estate Investor · Oklahoma City, OK · Member since 2008 · 126 posts · 2 votes
I have done a lot in other "portions" of real estate, REO's, flipping, wholesaling and a few other things but never pre-construction. I am not going to get into it but I know of a few people with Buildings that are in Phase 1 or 2 of construction and want to sell. Is that Pre-Construction? I had a friend tell me that is what would qualify as a pre-construction project but he is a little loopy sometimes so I would rather learn what it is from someone with experience in it. Thanks :mrgreen:
Here is what I found on pre construction:
When a developer plans to build a resort, one of the first hurdles he will need to overcome is the financing. Financial backers and banks want to know there is an interest in the project, and in most cases will require the developer to have reservations and deposits on a certain percentage of units before the financing is approved.
For the prospective real estate investor, this means the developer will usually offer a considerable deal for the “pre-sale†buyer in order to secure financing for the project.
Usually these initial preconstruction prices for condos will be lower for the first purchasers than it will be offered after the project is secured. Typically, the developer will ask the investor for a deposit of “earnest money†that is placed in an escrow account, and used as proof to the bank that the units will be sold. Although sometimes much higher in the Florida resorts, in Myrtle Beach, this deposit is often around $5000 to $10,000. This initial reservation fee is kept safely in the escrow account, and cannot be used or lost to the buyer.
The initial or first “phase†of the resort is typically sold at a deep discount, and to encourage further price increases a developer may plan increases at
scheduled intervals throughout the second and subsequent phases.
This encourages investors to buy condos early because prices are increasing,
and it works well. As buyers see the price of the properties going up, they want to benefit from the increases. This creates more demand, and thus will usually increase the value of the preconstruction investment condos or real estate.
Several buildings may be built, sold, and then more follow. The best opportunities have almost always been in buying the earliest condos, while the subsequent buildings lose this initial investment incentive. The older the project, the more this savings will usually decrease.
Property values in resort areas and for waterfront properties have increased
nearly 15-20 percent a year for the last 5 years, according to various sources and census bureaus. In today’s market, this constant appreciation adds even more to the potential equity.
Cool, thanks for the good reply, more than I could find lol.
Pre-construction is exaclty as it sounds, before construction. Generally speaking that means everything up and until vertical construction starts.
Developers buy tracts of land, subdivide, develop horizontally (build roads, install utils,etc.) and then put permits in place to build homes. They can either build homes themselves or sell the lots to individual builders to go vertical.
Everything up to this point is considering pre-construction.
This is the time when builders would typically solicit end buyers. In many cases their lenders would require that a buyer be in place and the property be pre-sold before the builder could get the financing needed to construct the home (go vertical).
In some states, massive tracts of land were developed and pre-sold, but before the homes could be built the developers went out of business. Buyers were stuck with undeveloped land, unfinished homes, or homes that are worth one tenth of what they paid for.
If you're considering pre-construction, make sure you do the following:
- check developer/builder/seller references
- check to make sure project is licensed, permitted, bonded, approved, etc. - if it hasn't been approved by city yet, walk away
- check to see if developer has skipped out on deals in the past
- make sure builder/developer has lined up financing for the entire project, not just your home. if they're counting on you to get financing for a custom home, make sure you're not the only one signed on yet in the development.
Good luck.