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The Preconstruction Process Explained
PRICE
When a developer plans a new development of any nature, both commercial lenders and private
investors ascertain the buying public’s actual level of interest prior to
funding a project. With adequate interest in the preconstruction phase, funding has a strong potential for
moving forward. This can translate into potential savings for buyers who are
willing to reserve a unit or make a purchase at this earliest stage of
preconstruction.
POTENTIAL APPRECIATION
Although there is never a guaranty, in many cases the "first release"
or first phase preconstruction price will be
lower than the price for subsequent purchasers. In some cases, developers even
offer additional incentives such as furniture packages or closing cost rebates.
When the
project progresses from planning to reality, interest by end-users increases.
Needless to say, with building in progress, flashy brochures and marketing in
place pricing tends to increase. Although this has been the trend thus far, there is no guaranty that this will
continue into the future.
ONGOING APPRECIATION
Many projects are released in preconstruction phases, for example,
the developer will release for sale 50 units, followed by additional releases of
20 homes each. Of course, the first release tends toward entry level
and each later release shows an increase, in some cases significant.
SUPPLY AND DEMAND
The economic rule of supply and demand certainly has been coming into play with
central Florida real estate, especially properties close to the attractions. At
this point in time, the demand is very high. Due to restrictions by various
cities and counties involved, there are certain limitations in terms of
the number of available properties. According to some analysts, over the next
eight years, the baby boomer flood will start to peak. Demand may be even
greater than it is now, and the overall supply will probably be more limited.
RESERVATION AGREEMENTS
Reservation Agreements: First, a reservation is nothing more than a Right of
First Refusal. You, as a buyer, are under no obligation whatsoever. For this
position, you will place a reservation fee of anywhere from $10,000 to 10% of
the proposed purchase price. At the point where the developer is ready to sell
the units, you elect to move forward with a purchase contract or to bow out. If
you decide the purchase is not for you, the reservation fee is refunded in full.
Basically, during the reservation phase you have nothing to lose and everything
to gain. Though developers prefer to go directly to binding purchase agreement , Reservation Agreements are used when they choose to begin sales prior
to having all permits in place, and prior to condominium documents approval by
the Florida State Government.
If you decide to go ahead with the purchase agreement, payment of the balance of
the down payment will be required, typically within 30 days. You will then be granted a 15-day (calendar)
rescission period (for CONDOS only) during which buyers may obtain an attorney
to review the contract and condominium documents, or at the very least do so
themselves. Once the rescission period is over, buyers are committed and any
defaults will result in a loss of the deposit.
When the building site preparation begins, a second 10% deposit is generally
required. From this point forward, the purchase remains on hold until the
development is complete and the property can move forward to closing in which
case either a cash payoff or mortgage will be required.
CLOSING COSTS
Whether purchasing a preconstruction single family home, town home, or condo,
please be advised that to the price of your unit, developers add a fee at
closing, ranging between .5% to 2.5% of purchase price. Single family and town
home developers claim those fees to cover "administrative" expenditures. Condo
developers actually use a significant portion of the fee to cover property
recording fees, title search, exam, and insurance, and title company fees.
In addition to the "builder's fee" buyer should expect to deposit 2 or 3 times
the monthly maintenance fee into the Home owner/condo association reserves.
In summary, in addition to financing (mortgage fees) it is sensible to expect
approximately 2% closing fees. This information is not intended to dissuade
purchase of pre-construction residences, rather to inform and prepare buyers, so
they are not first made aware of these fees at closing.
SELLING EARLY
There are two options in terms of selling prior to closing (flipping).
Assignment of contract. This has rapidly become almost impossible to find, as
most developers do not allow assignment
of contracts. It is a possibility, rare as it may be, in some communities. The
second option becomes possible, when builders will “resell” units once the
entire development is sold out. If choices one or two are not offered, there is
the option of a simultaneous closing.
The exact percentage of price and costs involved vary.
Buyers may also obtain the services of a real estate company to promote their
unit, though as a rule, MLS listing before closing on property is prohibited and may be a breach of contract.
A simultaneous closing occurs when the developer closes on the property with the
original buyer who then immediately sells the property. To learn more about availability and costs for either of these programs, consult your
MBT Homes Real Estate associate.
Preconstruction pricing can give the best opportunity for equity growth, and
"cash on cash" profit.
In the Orlando area, preconstruction Real Estate has been an excellent way an
investor can gain equity through builder price increases. If you can buy 1st
phase preconstruction, the builder will increase his prices each phase, until by
the time your property is built, the builder should be selling the same second
home for more. Preconstruction coupled with a qualified buyer's agent who can
find the best locations, floor plans, and builder, can show a great appreciation
for the savvy second home buyer.
Preconstruction vs. Resale, which Second Home Option Fits
Your Needs?
Why some people buy preconstruction, and reap the benefits, and why others
prefer their second homes with an already cultivated rental stream.
(PRWEB) March 3, 2005 -- Most investors realize that the best time to buy is
when the prices are low, and sell when high, and for this reason, first release
preconstruction pricing is the “holy grail” of second home investors. With
builders in the Orlando / Disney area typically increasing their prices by $5,000 every
ten homes, the lucky few who use buyer’s agents to lock in the first one or two
releases, ensure an almost forced equity raise during the construction of their
property. For example: Emerald Island, a resort community a short distance from
Disney World, releases their four bedroom house May 2003, at $226,900. The same
property was selling for $378,900, in October 2004. This property showed a 39%
increase on the total value of the property. If you assume the buyers had put
10% down, they would have leveraged $25,000, for a net gain of $152,000. This
sort of return, although not typical, shows the potential for equity growth
inherent with preconstruction pricing, so the obvious question is: Why doesn’t
everyone buy preconstruction?
To answer this I will need you to imagine buying a product for $350,000, but I
cannot show you a picture of it. I cannot guarantee you will make money with it,
and I can’t guarantee it will sell immediately if you do not want it anymore.
Sounds like a great deal doesn’t it? This is just an example of the obstacles to
marketing preconstruction. Although there are many examples of success stories
in the Orlando area with preconstruction, people still like to see the “bricks
and mortar”. Many still have images of the swamp land sales in the middle of the
last century, and Florida real estate will always live with that stigma.
Even if the trust issue is not a factor, most buyers will rent out their
property to vacationers visiting area attractions, and depending on the build
out of the community, your house could have construction vehicles in close
proximity, making your rental home less desirable for the first few months after
closing. This coupled with the ability to buy an existing furnished home and
keep any future bookings that the property owner has, allows buyers to
essentially buy a turn-key second home replete with income source, which they
can fly down and see before closing.
If all the buyers in Orlando wanted preconstruction, who would they sell their homes to,
and make the profit they seek? If all the buyers wanted completed houses, how
would the builders in Orlando generate income to build the houses? Thank goodness there is
still a good mix of the two, and as long as people visit Disney, there will be a
booming second home market in Kissimmee & Orlando.
DISCLAIMER
MBT Homes Real Estate is a Florida licensed real estate brokerage and is
competent only to provide information of a factual nature concerning properties
for sale. Nothing in this document or website is intended as investment, legal,
or accounting advice, nor should the information contained herein be construed
or understood as such. Only professionals licensed as investment counselors,
accountants, and attorneys are qualified to provide counsel with regard to these
other areas.
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