Developers sell initial units (10-25%) at lower prices.
Prices increase at "official" sales opening, and throughout construction with prices increasing
dramatically after the following:
- When model units become available.
- When the developer sells enough units to receive their loan to begin construction (usually
between 30%-40% sold).
- When a particular type of unit is 50% sold out in a building.
Example: South Michigan Ave Hi-Rise
Opened Sales Sept. 17, 2005
Sold out 60% in One Day
Real Estate Agents on Developer's Priority list were able to reserve units first before the
general public
Sale Prices for each unit have been raised 7%-15% within 4 months.
and features. It's also empty. However, a new home in the right location, right off the block, has
a fast running start at appreciation.
"Builders sell pre-construction homes at a reduced price, so they can bring in money and get
the rest of the project off the ground. That' works to the buyers' benefit in the form of
accelerated appreciation in the years immediately following the purchase.
And buying "sight unseen" is a gamble, much like gambling that an initial stock offering will net
you a return.
Some of the best preconstruction deals can be over within the first Fifteen minutes on the
opening day of release!
How preconstruction works:
1 - There is an initial VIP reservation list that usually the developer, and the marketing broker's
inner circle of family and friends are placed on.
POTENTIAL APPRECIATION
Although there is never a guaranty, in many cases the "first day" price will be lower than the
price for subsequent purchasers. In some cases, developers even offer additional incentives
when the opening bell rings. Of course, as the project progresses from imagination to reality,
interest by end-users increases. Needless to say, with a more definite picture, pricing tends to
increase. Again, although this has been the trend thus far, there is no guaranty that this will
continue into the future.
2 - A pre-grand opening or grand opening day is set up by the developer to sell units to the
public. Usually this is where others outside the first circle of influence have a chance to buy
preconstruction property.
SUPPLY AND DEMAND
The economic rule of supply and demand certainly has been coming into play with real estate,
especially waterfront and water access properties. At this point in time, the demand is very
high. Due to restrictions by the various municipalities 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.
3 - A first come, first serve reservation is set up so many times, brokers and investors are
waiting for hours before the sales door open - Red Pepper Investments have and will
continue to do this for our clients!
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 $1,000 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. In other words, during the reservation phase, you have nothing to lose.
FYI: Though developers prefer to go directly to binding purchase agreement i.e. contract,
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 State's Government.
4 - Once someone is able to reserve a unit, they must first sign a reservation agreement and
then put down a fully refundable deposit. (This amount varies depending on the developer)
If you decide to go ahead with the purchase agreement, payment of the balance of the first
10% will be required. 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.
5 - Once a developer gets the go ahead from the local government, you will be asked to enter
into a contract. After a short period of time (the rescission period) the contract becomes (hard).
Usually at contract the developer requires a down payment on your property that is being built.
This can range from $1,000 to 20% of the total purchase price of your unit. The deposit is
normally held in an escrow account and can not be touched by the developer unless stated in
the contract.
CLOSING COSTS
Whether purchasing a new construction 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.
6 - SELLING EARLY - Certain developers allow investors to assign their contract to another
purchaser, others do not allow assignments at all. Many developers offer resale programs that
allow investors to sell their property to another individual. If the property is not sold, prior to its
completion, the investor must close on the property and then can choose to sell it, rent it or
use it for themselves. Nowadays, the majority of developers prohibit assignment of contracts.
It is a possibility, rare as it may be, in some complexes.
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access to personal information to employees who need to contact the subscriber to perform their duties and services.
Red Pepper Investments, LLC is a service that helps brings developers, realtors and investors together to create
opportunities that can benefit all. We are competent only to provide information of a factual nature concerning properties
available. 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.
