Pre-construction Sales Info |
- What is Pre-construction? Pre-construction is the opportunity to purchase a property prior to the completion of the project.
- What are the benefits of buying Pre-construction? The buyer profits in several ways. First, the price is considerably lesser than the current value of similar property that is already complete. Second, while the building is still under construction the equity gain/ appreciation starts taking place. The significant increase has been very steady (some condos have doubled in value in 2004) Finally, the tax benefits and lack of out of pocket expense due to the financing methods available make this the best investment real estate has to offer.
- What is the letter of credit? LETTER OF CREDIT - A letter addressed by a bank, at the insurance and responsibility of a buyer of the condo, to a seller, authorizing him to draw drafts to a stipulated amount under specified terms and undertaking conditionally or unconditionally to provide eventual payment for drafts.
- What does the letter of credit cost? Typically, 1-2% annually is what the lending institutions charge.
- Must I use a letter of credit for reservation?No, generally cash payment may be substituted or some times an assignment of funds from a stock portfolio in replace of the letter of credit.
- Do I earn interest on my cash deposit?Possibly, if the funds are invested in a passbook account. Any interest paid on the account is applied to the purchase.
- Who holds the deposit money? An escrow agent of the developer or a Real Estate Broker’s escrow account holds the money. (Some times a title company)
- What format of the letter of credit is used?The developer generally provides a format for the letter that must be used according to the recorded documents of the particular project.
- How do I reserve a condominium?A simple reservation agreement can usually be signed with a letter of credit for 15-20% depending on the developer’s requirements.
- What is hard contract?When enough units are sold and the developer is applying for a construction loan, you will be asked to go to hard contract. A hard contract is the binding agreement that converts the reservation to a sale. When the contract is signed, generally you have 7-10 days to review the offering and make your decision on whether or not to proceed with the purchase. (Note) There will come a time, during the offering, that you will go directly to hard contract. This usually happens after some short time during the selling process.
- When does the construction start?Construction will commence once the developer has sold a number of units (usually 80-90%) and will fund the construction loan.
- What does need not be built mean?This means the developer is allowed to pre sell the condominium, which has not been constructed. It also means that it may not be built if all permits and approvals are not met. In this unlikely event, the purchaser is protected under law.
- What happens if the building is not built, at a fault of the purchaser?Your deposit will be refunded with interest or your letter of credit will expire and not be called.
- How long is the construction period?Generally, it takes 1.5 to 2 years to complete depending on the size and scope of the project.
- How much profit should I expect?It depends on the general market conditions, interest rates, and competition. In the past few years, profits have ranged from $50,000 to $100,000 on average, peaking at over $200,000.
- Can I sell before closing?Yes, in which case, the developer allows a new purchaser to take over your contract. The new purchaser must come under the same pre-construction purchase and escrow agreement as the first buyer.
- What happens if I sell my unit prior to closing?The developer will collect a deposit from a new purchaser to assume the existing contract. The new buyer then steps into place to close and your deposit could be returned with interest depending on the developer’s guidelines.
- Do I have to close on the unit if I have not sold it prior to closing?Yes, if you choose not to sell your unit, you are expected to close.
- Can I reinvest my 1031 into Pre-construction?Only if timing will allow, because of the length of construction for a condominium, the guidelines for the exchange might not be met.
- Are there any costs related to the sale?Yes, you will be responsible for some closing expenses such as title insurance, funding of the association, insurance, reserves, etc. These charges will be outlined in a Good Faith Estimate provided by the selling agency, and in the developers offering statement.
- Are there any other contingencies, such as financing?No, the sale is not subject to financing.
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