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How does pre-construction investing work?

Question:

What is pre-construction investing? How does pre-construction investing work?

Answer:

The concept is fairly simple. 2 key factors:
  1. it must be done in a place going up on the appreciation curve. So you have to really understand the market dynamics of a place.
  2. try to pay as little earnest money as possible. Maybe only 1% of the purchase price.

The beauty of this scheme is that many builders price their units low initially in order to sell units, which enables them to get more financing from the bank. You want to buy as early as possible in the building process-preferrably when a new condo or townhouse complex is just starting. Then , put down a small amount to gain control of the property and if you've done your research well the unit should gain in value as the builder builds out the complex.

Then, a year later, when your unit is completed, you take a look at the value of your home:
Did it go up by 10%? In that case you close escrow and you can immediately sell.
Did it stay flat or decline? Maybe you will want to walk away from your earnest money. Or look at your finances and the rental market in that area. Maybe you can still close escrow and use it as a rental property.

In the first case, at this point you are competing with the builder for buyers. Some builders don't like this and will not allow you to sell for 1 year or a similar period. Some will just make a verbal agreement, some will put it in writing. Take a close look what they write / what you sign.

For this reason, some builders do not sell at all to 'investors'. They may require that this will be your primary residence and they will want to see proof that you really want to live there. It'll be difficult to convince them that you move into their new development when at the same time you try to get financing based on your full time job in another state (where you really live).

As the market is a little tight for sellers now, builders have become more flexible and are willing to sell to investors where 2 years ago they would have turned investors down as buyers.



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