Pre-construction Condos
Does it make sense to walk away from a high end condo project when - on paper -the builder has sold a similar unit to yours for 150K above your price?
I was in at the beginning- 80 of 100 units have sold in under 2 weeks.
~400K condo with 20K deposit (not refundable)
No
You did well. These are the type of pre constrcution condos to invest in.
The reasons to buy pre constructio are:
Price
When a developer plans a development he has many hurdles to overcome, not the least of which is financial. Whether the developer is WCI or Engle homes, financial backers want to gauge the interest in a project and in many cases require the developer to have reservations on a certain percentage of condos before the project is given the green light. This translates into savings for the real estate investor. The developer needs these presales to prove his project and secure his financing and he will give incentives to the early buyers.
Price Appreciation
In many cases the “first day” price will be lower than the price for the subsequent condo purchasers. Many times the developer will give an extra incentive to those that reserve a unit by placing a $10,000 deposit with the title company to hold a particular condo. To encourage further price increases he will program increases at scheduled intervals throughout the condo pre-sale stage. This does a few things. It encourages people to buy condos early – because prices are going up, and it is a self-serving prophecy – buyers see the price of the waterfront condo going up, they want to get in on the increases, it creates more demand – and indeed may increase values of the pre construction waterfront condos.
Further Price Appreciation
We like projects that are done in phases. These are normally condo buildings one, then condo building two, etc. In the past the best opportunities have been in buying the earlier condo buildings. Property values in Lee County, Florida have gone up an average of 17.1 percent last year, and as real estate investors know, waterfront condos much more. Over the last five years appreciation on real estate has been over 15% a year in Lee County. Couple this potential appreciation with the planned developer increases and price increase could be considerable. For example, when condo building three, unit 801 is ready for sale it may be priced at $880,000, when the same condo in building one sold for $714,000, less than one year earlier. The unit 801 in building one has not even closed yet!
Limited Supply / Increased Demand
There is a limited supply of buildable waterfront land. Developers can build golf courses and lakes, but it’s pretty difficult to create oceanfront or gulf front – or even riverfront - land. Many people move to Florida to be on the water. Over the next eight years the baby boomer flood will start to peak. Demand is expected to be even greater – and waterfront supply will be limited. If you want to fine-tune your opportunity, buy penthouses. There are certainly fewer of them and buyers will pay a premium to “be on top”.
No Carrying Costs
Lets examine how this works. On December first you decide you want condo 504 in building two. You put $10,000 reservation deposit on the unit since it is a new development and the condo docs and permits are not ready. Three months later these items are ready and it goes to contract. You decide to proceed. (By the way, if you decide not to proceed, you can get your $10,000 back). On February first you put a total of 10% down to bind the contract.
It will now take 18 to 24 months to build your condo (This will vary from project to project). This 10% is held with a title company – not the builder. (This is an important point. Your money will be secure and can be returned to you in the case of nonperformance by the builder/developer. You have, in effect, tied up this condo for two years with just 10% of its value. You still get two years of potential appreciation.
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