What Does "Buying at Preconstruction" Mean?


What you need to know about buying "Preconstruction".

Preconstruction sales are those real estate transactions that are initiated prior to a particular project being constructed.

Preconstruction prices are generally lower than those of existing like-kind resales of existing real estate. The prices are discounted to give the buyers the incentive to buy something they can't see, touch nor feel. Sky and paper are harder to sell than concrete and steel. Developers sell preconstruction at the lower prices because they usually need pre-sales in order to secure their construction loan. Lenders may require that 50%-80% of a project be sold before construction can begin.

There are four phases to preconstruction. Let's take a look at how each phase works ...

1. Reservation Agreement: The developer has preliminary floorplans, amenities and prices. All are subject to change. Buyers reserve units with a nominal "intent to buy" deposit - usually 5% or less of the purchase price. The deposit is made to an interest bearing bank trust account. It does not go to the developer. Buyers can get their money back at ant time. THERE IS VIRTUALLY NO RISK.

2. Right of Recision Period: The developer will deliver the state approved Condominium Documents. The "condo-docs" contain the final, exact details of the project including the site plan, floor plans, amenities, rules, by-laws, budget, etc. The buyers then have 15 days to decide whether to go ahead with the purchase or to get their money back.

3. Contract for Sale: Buyers put up the balance of the required earnest money - usually 20% of the contract price. The contract then becomes binding on both parties. Not all of the reservation agreements will convert to a contract for sale. There are always a few people who fail to plan and are caught short of funds. If enough of them convert the developer gets the needed construction loan. If the developer comes up short on conversions, he or she will have to obtain more sales before construction can begin.

4. Closing the Sale: The condominium is completed and a Certificate of Occupancy is then issued. The buyer(s) does a walk-thru inspection and then goes to closing where they put up the balance of the purchase price plus closing costs. This is the happy day when they finally get to move in.

REMEMBER ... planning and patience pay off when buying preconstruction property. You need to plan so that you have the necessary funds when it comes time to convert the Reservation Agreement. And, you need patience waiting for the documents to be delivered and for the condominium to be built.