Pre-Construction 101January 21, 2017
Generally speaking, investing in pre-construction real estate lets you get in on the â€śground floorâ€ť of a development – then provides a number of potentially lucrative exit strategies. Best of all, the process requires a minimum amount of cash exposure.
Pre-construction investing also allows the buyer two opportunities at which to â€śsell outâ€ť of the property, as well as the ability to hold the asset for personal use or rental income.
Reservation period. Simply put down a small, fully refundable deposit (usually about $10,000), and reserve a home/lot/unit in a planned project. This entitles you to the first right of refusal on a specific property of your choice. While price, square footage and amenities are subject to change, they rarely – if ever – do. Either way, you always retain the right to recover the deposit at any time and walk away with 100% of your cash.
Right of Rescission. Once the developer has worked out the details of the project, then you will receive a package of documents (â€śdocsâ€ť) that define your unit/home/lot price, square footage, homeownersâ€™ association dues, and other details. At this point, you have 15 days to review the documents and – once youâ€™re satisfied – prepare to sign and fund a contract on the property.
At the time you decide to move forward and sign a contract, youâ€™ll be responsible for 20% of the purchase price. If you choose, you can furnish 10% of that amount in cash – and submit a Letter of Credit (LOC) for the remainder. A Letter of Credit is a document obtained from your bank that certifies your ability to cover the defined amount. It is neither a line of credit nor a secured note – so you wonâ€™t have to service it as you would a debt. Whatâ€™s more, during hard contract there are no other fees or payments due (such as HOA dues, maintenance or interest). You can simply sit back and wait for construction to be completed.
At the projectâ€™s completion (also known as â€śCOâ€ť for â€ścertificate of occupancyâ€ť), the process becomes very much like closing on any other property. Finally, you get to walk through your property for the first time. Once it meets with your approval, you then arrange for your own financing as you see fit. Once you own the property, itâ€™s yours to use as you like. Some people build and/or move right in and start enjoying beach living. Others furnish the property and make them available for rental through a management company. While some manage their rental assets themselves, you may also be able to choose from one of several qualified management companies.
Pre-construction is just that simple.
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