The Ins & Outs of PreConstruction Condo Investing
PreConstruction Investments can be tremendously rewarding from a financial viewpoint. The key is to locate a vibrant market and seek out those projects who are pre-selling in a quiet pre-public Friends & Family of the developer style launch.
The advantages to the developer of permitting VIP clients to select units prior to the public are that he can determine which units are the most sought after so that he can adjust his unit mix and pricing accordingly. This will help him maximize his profits later on & balance his building unit-wise as it is released.
If an investor can locate a true friends & family release – he or she will benefit from a real increase in pricing once the public phase of units are released. How is this accomplished & what should an investor watch out for?
Developers often times have solid relationships with realtors who specialize in preconstruction condos. These realtor usually have a solid clientele base who participate in pre-public launches and readily are prepared to convert their reservations which are typically refundable, into “hard contracts”. Friends and Family releases are small pools of units – sort of a test market for the developer – ans units are often allocated to realtors who have proven track records of representing solid clients – familiar with the process.
What to watch out for? You should make sure that the realtor has a true relationship with the developer & access to “ground floor – first phase pricing” – not just unit access or you will be paying retail rather than wholesale so to speak. A realtor should be able to provide you with info on what the developer has built in other markets, who is financing the project, and whether a contractor is in line to actually build the project. It is important to know if the developer owns the land he plans to build upon.
In a vibrant market such as Las Vegas, there are several “newbie” developers – unfamiliar with construction costs – who have not lined up financing nor contractors and are trying to jump on the high rise condo craze that has developed in this area. Oftentimes – the projects are cancelled, all reservation monies returned, and the purchaser/investor has lost opportunities to particpate in the early launch of a viable project. The cost of such a mistake? Lost opportunity.
How does the preconstruction investment work? Typically, a reservation is made – Sometimes non unit specific.
This is usually accompanied by a refundable deposit. Once you have been assigned a specific unit & estimated price, the contacts are available along with a public offering statement & condo docs for your review & your attorney’s review. If you decide to proceed & sign the contract – you will be required to return the contract with the balance of the deposit amount – Typically the balance of 10% – and other 10% or 20% is usually due along the way.
Developers usually increase pricing during the public release based upon demand. It is not unusual to experience a “paper profit” appreciation of 10%-20% or more during the release process.
No other monies are due until you take possession of the unit in a few years time. A large advantage is that once you have made your initial deposit- you are not required to pay any mortgage or service any debt. In a great project in a vibrant economic area – the demand for the units increase and the likelihood of being able to sell your unit upon completion to someone who wants to live there is quite good – all the while the unit has appreciated in value.
In the case of condo-hotels – once you take possession of the unit – oftentimes you will have a fully furnished condo in a great city – and a wonderful vacation home while the debt incurred is offset by the unit’s rental potential – the hotel-condos being operated by a major hotel chain. These units can be placed in a rotational pool & the condo owner shares in the revenue with the operator.
Examples of such projects are The Cosmopolitan Resort (next o the Bellagio), Trump Tower Las Vegas, Las Ramblas Las Vegas, and Starwood’s new W Las Vegas. The Friends and Family launch of the new W Las Vegas Condo Hotel is underway.
Las Vegas Hotel occupancy in the luxury resorts is at an all time high of about 97%. And Las Vegas has 5000-8000 people moving in each month. There is no state income tax. No inheritance tax.
And so much to see & do. It has become a world class city with the best restaurants, shows, museums (even the Guggenheim has opened on the strip) and the finest of dining.