nvesting in risk as much as possible, they
pre-construction real require the developer to pre-sell
estate is one of the most a certain number of the units
profitable investing (usually 25%-50%) before they
opportunities available in the will lend money. In this example
market today. Even though it’s a a bank agrees to finance the
fairly old strategy, very few developer if 40% of the units are
investors have a good sold before construction
understanding of it. begins.
Preconstruction real estate
There are very few home buyers
investing can be best explained who are going to commit to buying
with an example: something without actually seeing
A developer is planning to build it with their naked eyes. So the
a 100 unit condominium developer has no choice but to
development in a very popular approach real estate investors
location. The developer has who understand the risk and
already worked out the numbers reward of such ventures. In order
and thinks that the project will to reward these investors for
make a handsome profit. Since he their risk, the developer gives
doesn’t have the required amount them a 10% discount off the
of capital to complete a project appraised value (after
of such magnitude, he approaches construction value) of the condos
banks to request financing.
if they sign a purchase agreement
But before banks lend out (contract).
millions of dollars to the
This creates a win-win
developer, they want to know that situation where the developer is
the project has the potential to able to secure financing and the
sell after completion. Since investors are able to get
there is no way to know the built-in equity by getting the
future and banks like to reduce property below appraised value.
The investors who buy these rental guarantee or lease back,
condos before the construction is paid property taxes, waive
completed are called assessments waived, management
pre-construction investors, and fees waived, etc. However, in
this investment strategy is most cases the developer will
called preconstruction offer a combination of a price
investing. discount and other financial
In this example it was a incentives in order make the deal
development from the ground up, sweeter for preconstruction
but the term “pre-construction investors.
investing” can be used for any
After the construction or
purchase made before the actual renovation is complete, pre
completion of a real estate construction investors’ have two
development. The development may options to exit. Either they sell
be from ground up or just a their property and make a quick
renovation project i.e. A condo profit, or they can hold the
conversion project where property as a long term
preconstruction investors buy investment and build equity.
before the renovation is complete Sometimes investors can also
is also an example of pre profit by assigning the contract
construction investing.
to a fellow investor for a small
In general, pre construction profit even before assuming title
pricing is 5% - 15% lower than to the property.
the market value of the finished
Below is summary of the
property. Sometimes the developer process of preconstruction
may offer other financial investing:
incentives instead of a price
The pre construction investor
discount. Some examples include buys a house, condo or townhouse
cash back after closing, closing from a reputed developer in the
cost credit, free upgrades, preconstruction phase at a price
discount and/or other financial
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assignments is also possible.
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Article Tags: investors, preconstruction, property
