Pre-Construction Investing
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.
Once someone buys a condo as an investor, is that person able to keep the condo and rent it out for as long as she wants?
Christine, generally yes, though individual condos may have a limit on the number of units which may be rented. Also, a number of the new construction developments are implementing stricter investor caps and restrictions. For example, several new projects are limiting investors to 10%. For individuals purchasing as owner-occupied, after the cap has been reached, there may be limitations in the contract prohibiting rentals for a specified time period should they subsequently decide to rent the unit. The rules will vary with each individual project.