The Seattle Condo Blog

When purchasing a home, whether it’s a presale condo or a resale single-family house, you should be pre-approved for a mortgage. The pre-approval lets the seller or builder know that the buyer can afford the amount and complete the transaction. It will strengthen your offer. For many presale purchases, it’s often a requirement that buyers be pre-approved when making an offer.

At the time of signing the purchase & sale contract builders want to know that a buyer has been pre-approved for the amount of the home they’re buying. Otherwise, the builder may tie up a unit for up to two years with a buyer who can’t afford to purchase it. Now, virtually all builders have teamed up with a preferred lender who’ll assist buyers with the mortgage pre-approval process.

One benefit of using a builder’s preferred lenders is that they often provide long-term rate locks, and potentially, a good rate and incentives. With many condo projects taking up to 2+ years to complete, getting a long-term rate lock can be a good thing especially with rates starting to rise. Though, buyers should be diligent when working with the builder’s lender.

Buyers do not need to use the builder’s preferred lender. In fact, they should reseach and consider alternative options. A few companies offer long-term rate locks directly to the buyer, in this area they’re predominantly Wells Fargo and Countrywide. Countrywide, for example, provides a rate-lock for up to 24 months through their Premier Builder Rate Cap Program and does not have a minimum pre-sale requirement to close.

Here’s some of the information the lender will need in order to pre-approve a buyer:

• W-2 forms for the past two years
• Copy of pay stubs for one - two months
• Copy of bank statements
• Copy of tax forms
• Copy of any asset statements, such as 401(k) & stocks
• Documentation of additional income sources such as pension or child support
• Current & past employment information

Difference between pre-qualification and pre-approval:

• Pre-qualification provides a ballpark estimate that a buyer can afford based on income and debt.
• Pre-approval is based upon an in-depth review of a buyer’s finances that includes credit check, income and employment history verification.

In this article I’d like to take a look at pre-construction investing. In the past few years, pre-construction investing became increasing popular in places like Florida and California where they experienced condo booms. Seattle is on the verge of its own condo boom which has spurred interests from professional investors and individuals alike. Florida especially has seen unmanaged growth leading to a near collapse of their real estate market. Fortunately for Seattle, according to Matthew Garnder of Garnder-Johnson, LLC, Seattle should be able to absorb 2,000 to 2,400 new housing units per year. He projects new units will be built at a rate of approximately 1,500 units per year, thus leaving room for growth. However, anyone considering real estate investing should do their due diligence and study the market.

Generally, there are two common types of investors. One type are those looking for income producing properties; they hold the property long-term and rent it out. These investors are interested in maximizing the market capitalization rate - the ratio of yearly net income to the property value. The other type, which have increased in number, are the flipper investors. These investors look for the best opportunities to buy low then flip it upon completion of the project’s construction for a net profit.

Investing in pre-construction presale can be a lucrative opportunity. However, it is imperative that the investor study and anticipate the market forces and select the choicest projects, and then, the most appealing units within those projects. Investing in just any project may not maximize an investor’s return and may even result in a loss.

Here are some factors to consider:

• Anticipated economic and job growth
• Overall soundness of the local and regional economy
• Location - central to services, transportation and protected air rights
• Building amenities - fitness centers, guest suites, entertainment facilities, room service
• Uniqueness - does it stand apart from other properties, is there added value

A few words on Contract Assignment

A quick way some buyers have been profiting from presales is to assign the purchase & sale contract. At the time of making an offer, a stipulation is added allowing the buyer to assign the contract to another entity. Before the original purchase & sale contract closes, the buyer hopes to realize a profit and looks for another buyer to purchase the property at the appreciated value without having to remarket it. The assignment is between the original buyer and the new buyer, not between the new buyer and the developer. The developer is still selling the property to the original buyer at the presale price and that buyer is flipping for a profit. Because of this scheme, many developers are no longer accepting contracts with assignment clauses.

Restrictions on Investors

A project with an over abundance of investors could actually hurt the development by adversely affecting property values as well as the project’s cache. As a result many builders are instituting actions to discourage or limit the number of investors, both in urban condominiums and suburban projects.

A few ways they are doing this is to include restrictions or penalties into the sales contract. For instance, a builder may place a lien on a property if the buyer/investors sell within a certain time frame, which may consume a good deal of the proceeds. Another practice is simply to state in the contract that if a buyer/investor sells within a certain time frame, they forfeit a percentage of the gain. If you are considering investing in presales it is imperative that you understand the contract and restrictions.

Though developers are increasing looking at ways to limiting investors, there are many projects that openly welcome investors.

This article focuses on the pre-construction presale process. The presale process is composed of four distinct phases - Reservation, Examination/Contract, Construction and Closing.

Reservation

The Reservation phase is the first offering to the public. Developers will provide preliminary renderings, floor plans and prices of the project. In Seattle, many high-end developers will host a presentation event. During the reservation phase buyers can make a reservation to purchase a unit at a significantly discounted price. A deposit will be required at the time of reservation, which can range between $10,000 to 10% of the purchase price.

The Reservation phase is necessary for the project developer. In order to obtain financing, the developer must show there is a demand for the project. The reservation is revocable; therefore, there is little risk, though it is important to check the requirements of each development.

Examination & Contract

During the Examination & Contract phase the developer will provide the buyer an opportunity to review the public offering statement & contracts. The public offering statement includes final renderings, floor plans, by-laws, covenants, restrictions, budget, etc. Generally, the buyer will have a specific number of days to review the information in order to decide whether to purchase or not. If the buyer chooses not to purchase, their reservation deposit will be fully refunded.

If the buyer chooses to move forward and purchase the unit, the reservation will convert to a purchase and sale contract. An earnest money deposit will be required which may range between 1% to 10%, though requirements will vary by development.

Construction

Once the developer has sold enough units, they will move forward to construction of the project. Construction can range from 1 to 2 years depending on the size and scope of the project. Typically, prices rise and units sold during the construction phase are higher than the pre-construction price. By the time the project is complete, buyers may realize an appreciation in value. Any appreciation is dependent on market conditions at the time of completion.

Closing

The final stage is closing. Closing on a pre-sale is similar to the closing of any other real estate transaction. The buyer will have a walk-through inspection, provide the remainder of the down payment, the loan will be funded and escrow documents will be signed.

Many developers may provide financing options through third parties (e.g. banks) providing long-term rate locks. However, buyers are responsible for obtaining their own financing, whether utilizing the developer’s recommended lender or your own lender.

1. What is a pre-sale?

Before a new project can be built, developers are often required to sell a percentage of the available units in order to obtain construction financing. As a result, pre-sales provide you an opportunity to purchase a unit before the project is built.

2. How can I benefit from purchasing pre-sale?

Because developers must sell a percentage of the units before they obtain financing, they are made available during pre-sale at a discount. Not only do you save initially, you’ll also realize an increase in value as a result of post-constructing pricing and benefit from Seattle’s strong market appreciation.

3. How much do I need to put down?

The amount you need to put down depends on the developer. Generally, 10-20% of the purchase price is required as down payment.

4. What projects are currently pre-selling?

Seattle is undergoing a condominium renaissance with many luxury and high-rise projects under development. Here are a few:

Belltown / Denny Triangle / Lake Union

• The Martin
• Veer Lofts
• Rollins Street Flats
• Enso
• Equinox
• Gallery (ground break est Summer 2006, Occupancy 2008)

Downtown

• 5th & Madison
• Stewart
• Escala Midtown
• Second + Pine (25% reserved as of 5/16)

5. How do I find out more about pre-sales?

Please call, email or IM. Click here for my contact information.