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What is Pre-Construction?

Below you will find all the answers to the most frequently asked questions about pre-construction. These answers come from the coast condo mall website.

• What is Pre-construction?
  Pre-construction is the opportunity to join a fellow group of investors
  in an effort to finance the development of real estate.
• What are the benefits of buying Pre-construction?
  The buyer benefits in several ways. First, the lack of mortgage payments
  while the building is under construction will constitute a profit. The
  developer offers incentives because sky and paper are harder to sell
  than concrete and steel. Second, the appreciation that takes place while
  the building is under construction constitutes profit ( a condominium
  assembled is worth more than condominium not yet assembled). The property
  appreciation that takes place while under construction is also significant
  (16% for condominiums in 2002) 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.

• How do I reserve a condominium?
  A simple reservation agreement can usually be signed with a letter of
  credit for 15-20% .
• What is the letter of credit?
  A letter from the bank stating the recipient is capable of buying said
  condominium.
• What does the letter of credit cost?
  A lending institution will generally charge 1% annually for the amount
  of the letter.
• Must I use a letter of credit for reservation?
  No, cash payment may be substituted for the letter of credit.
• Do I earn interest on my cash deposit?
  Yes, the funds are invested in a pass book account. Any interest paid
  on the account is applied to the purchase.
• Who holds the deposit money?
  An escrow agent of the developer holds the money. (Usually 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.
• 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 days to review the offering
  and make your decision in proceeding 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 no 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.
• 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 $10,000 to $50,000 on
  average, peaking at over $100,000.
• 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 will be returned with interest.
• 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?
  No, because of the length of construction for a condominium, the guidelines
  for the exchange are not 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.

This entry was posted on Tuesday, June 26th, 2007 at 4:27 pm and is filed under Home Buying, Real Estate Investing, Pre-Construction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.