• Pre-Construction deals are located in the most exciting areas of the country.
• Vacation spots
• Found where the weather is nice most of the year.
• Can buy a unit in a condominium complex that doesn’t exist yet at a nice discount.

If you are driving around and you notice a small 2-5 unit development of townhouses that are partially framed and the contractors are doing electrical and plumbing work, this is NOT a true pre-construction deal. At this point the developer doesn’t need to offer any pre-construction pricing deals because he already has his financing in place.

1. The price of real estate can fall.
1. Since the 1930’s the average price of homes have increased by about 5% per year. Some years the value has increased more than 5% and sometimes less.
   
   
2. You can pay too much for your unit.
1. People get caught up in the “hype” (just like at an auction) and end up paying more than Fair Market Value for the property.
   
   
2. For investing in Florida ( Miami ), we want to see between 70% and 100% of the units sold within the first 15 days of the initial offering or it is time for us to walk away. This is being very conservative. If we see between 70% and 100% of the units sold during the initial offering we will feel confident that the project will be successful.
   
   
3. We want to tie up the property at the beginning of the first round and then wait to see how much the other units similar to the one we have sell for so we know by the end of 15 days (17 days in California) if we are going to go through with the deal.
   
   
3. You may actually have to buy the unit.
1. Our goal is to put a contract on a condo in the pre-construction phase and flip it to an end user without actually having to buy it.  
   
   
2. However if we can’t flip it we need to be prepared to close on the unit. (Get loan approval, be prepared to pay closing costs etc and make monthly mortgage, taxes and HOA payments)  
   

Note: If you can’t qualify for a $1 million dollar loan, then it is too high of a risk to put a contract on a million dollar + condo. You may lose your deposit if you are unable to purchase the unit.

Do not go out next week and put a contract on $5 million dollars worth of condos with just the idea of flipping them within the usual 24 months it takes to build the complex. If you can flip them you can make a fortune. If you can’t you will not only make nothing but you will lose all of your deposit.

Closing on a unit is not necessarily a bad thing, it just is not our plan. We are still buying the unit at a huge discount (hopefully) so we can always sell it later for a profit or Lease Option it for even more money.  

Look For A Market That Will Make You Extremely Wealthy In A Very Short Period Of Time.

If you follow some simple guidelines your risk will be minimized.

1. Use common sense
   
• Target cities that have entertainment appeal
  
  
• Cities where it is pretty much pleasant and sunny year round.
  
  
• Cities right next to the ocean
   
  
• Cities where properties are appreciating in value
  
  
• Cities where the number of sales per year are increasing
  
  
• The trend of a city is your friend.
  
  

For Example: Miami Florida

·         The city has international appeal

·         Miami is portrayed as a “party city”, a place for good times.

·         It is also the capital of the world of “Spring Break”

·         It is an entertainment city.

·         There is a huge demand for housing

·         Compared to San Diego and San Francisco , Miami is way undervalued.

Other Cities to invest in

·         San Diego , San Francisco , Las Vegas .

·         Las Vegas is not next to an ocean but it has the other necessary ingredients. And the condo market is untapped. (Donald Trump is building there.)

Criteria:

1-      The Realtor® has to be a Pre-Construction specialist.

a.       Go to Google and type in “San Diego Pre-construction Realtors®

2-      The realtor who knows the market will know if it is possible for the developer to make a profit at the $ per square foot he is offering his units for.

Note: If the developer sets his price per square foot too low, later down the process when he finds out that he can’t make a profit, he will not build the complex.

What Questions Do We Ask The Realtor®?

1-      Do you specialize in pre-construction condos?

2-      How long have you been doing this?

3-      Do you have any units available where I can get first round pricing?

·         It is very important that we get first round pricing on all units that we buy.

·         First round pricing simply means we get in early (the first day) on the buying. We don’t want second round pricing after the initial public sale or we are going to pay a lot more for the condo. Perhaps $50,000 to $100,000 more.

·         Some investors tie the property up under contract during the first round and have the developer sell their unit on the 2^nd round and make $50,000 to $100,000. (i.e. They flip the properties on the 2^nd round which is about 30 to 90 days later.)

4-      Do you have any developments in mind right now?

5-      Which ones are you investing in?

·         If the Realtor® is not investing his own money in the project why should we? Invest in a complex where our Realtor® is investing.

6-      Ask the Realtor® to fax or email us a list of condos they have that are available.

7-      Who is the developer? And what has he done in the past?

·         We need this information. We don’t even want to look at a developer whose last three projects never made it past the pre-selling of the units.

·         We need someone with a track record of making things happen.

·         When the Realtor® tells us about a developer, go to the developer’s website (if he has one) and see if they have a section about the developer and his track record.

8-      Where is the project going to be located?

9-      What’s going on in the surrounding area?

·         This is what we really want to know. With pre-construction investing we are concerned with the future not the past or the present. Perhaps the developer has bought a piece of land in the warehouse section of the slum section of town. We want to know if there are plans for downtown renovation, are their plans for new retail space, restaurants, bars, parks etc going in the area near the complex we are interested in. Or we need to make sure our target complex is close to these amenities because people who choose to live in a city want a more active lifestyle.

Pull up a map of the proposed complex location. Go to Google and search for: San Diego + map or Miami + map

Note: If we are buying luxury penthouses then school systems aren’t that important. Why? These people usually don’t have kids in school and if they do, they usually go to a private school. Most people are not buying ocean front condos in the biggest party town in the World to raise their families there.

10-   When did the sales begin?

·         We want to hear…”They haven’t started yet.”

Note: In California the law states that the buyer can back out of any offer within 17 days. ( Florida 15 days) This is a great advantage when we are buying and selling pre-construction units because we’ll know within a few days if we have a good buy or not.

How? Supply and demand. For Example: If a complex in South Florida doesn’t sell at least 70% of the units within the first 15 days we should back out of the deal. In San Diego property does not sell that fast.

If 70% to 100% of the units are sold out in the first week, that means the demand is there and the supply is not. Result? The price will increase.

If the sales have already begun, we want to know if we can still get first round pricing on the units. Not the developers resale program pricing which is significantly higher.

Sometimes a complex will sell out completely the very first day or so but have some cancellations during the following week or two. This is OK for us to get in on if we can still get good pricing.

If our Realtor® says the complex has been for sale for the past six months we need to LOOK Elsewhere.

11-   Ask our Realtor® how many buildings are going up in this specific development.

·         If there are 3 buildings and building #1 and #2 sold out the first few days then we can bet that building #3 is going to do the same thing if the pricing is not way out of line.

12-   Has there been a price increase? How many? How Much?

·         Sometimes developers get too greedy and jack the price way up in the 3^rd building for example. We want to know what the 1^st two building sold for on a per square foot basis. We can expect the 3^rd building to go up a bit if the other two sold quickly. We need to make sure the price is still in line with the other projects in the immediate area.

13-   Ask what comparable properties offered in pre-construction are going for?

14-   Where will our deposit be held?

·         We need to put up a deposit on pre-construction deals. Make sure the money is being held with a title company or escrow company (some times attorney’s hold the money)

·         Why? We want to keep the money out of the hands of the developer just in case he goes bankrupt.

15-   When will construction begin?

·         Make sure the estimated project completion date is within 24 months of when we put our unit under contract. Most buildings take one and one half years to build.

16-   What is the average rent in this area?

·         Find out what other high rise complexes close by are renting their units for. The old apartment complex across the street that is going to be torn down to be replaced by a new building is not a good rent comparison.

·         Compare the rent amount to the amount of money we will have to spend on PITI plus HOA fees.

·         This information is important just in case we have to take possession of the unit.

                                                                           i.      If we do have to take possession we can sell the property on a lease option.

                                                                         ii.      We get under contract fast, we get top dollar for our unit, we get up front option consideration of 2.5% to 5% of the lease option sale price and premium monthly rent.

                                                                        iii.      With Lease Options, premium rents plus the up front option consideration usually will allow us to break even with the PITI + HOA fees for expensive condos.

                                                                       iv.      Lease Options work great for people who have a good income but do not have the credit to buy right away. They need time to fix their credit or get established if they are new in town.

17-   How much money do we need to secure one of the units?

·         In some cases it will take 10% to 30% down whereas in other cases it may be a flat fee like $10,000 to $30,000 or just a letter of credit.

Note: We need to find out the exact procedure the development company requires from us to buy their condo.

There are three types of investors:

1.      The Treasure Hunter:

a.       Looks for high price, high risk, high profit deals

b.       Go for it all or nothing.

c.       Capitalize on any and all opportunities that come their way.

                                                                                       i.      Donald Trump or Bill Gates

d.       They look for rare units such as the best penthouse or “Townhouse” units. Townhouse units are called “duplex” units in Florida .

                                                                                       i.      Townhouse or Duplex means there is an upstairs and a downstairs in the same unit. Duplex do not mean two units.

e.       These expensive units take longer to sell so why does the treasure hunter focus on them?

                                                                                       i.      Profit is usually about 20% to 30% per unit so the higher the price the more money they make.

f.        The Treasure Hunter asks his agent:

                                                                                       i.      How many penthouse units are available?

                                                                                     ii.      Which is the best unit in the complex?

1.       Which one of these penthouses have the best amenities?

a.       View, square feet, design, etc.

g.       Treasure Hunters have no competition for their unit because they own a “one-of-a-kind” condo.

2.      Bargain Hunters

a.       They look for the cheapest units available in the building.

b.       They don’t care about view, price per square foot, etc.

c.       They usually end up with a studio or one bedroom with a “remnant”floor plan.

                                                                                       i.      The builder uses the “left over” space in the complex to put these units together.

d.       These people have very little competition. They can sell their condo cheaper than 99% of the other condos.

e.       This is also HIGH risk because there is not much demand for this type of unit. Usually only one or two people can live in them.

f.        If we want this type of condo then we must tell our agent right away.

                                                                                       i.      Agents will think when we tell them we want a “basic cheap unit” that we are talking about price per square foot, which in this case we are not.

                                                                                     ii.      We need to tell them that we want the cheapest units in the building, the design remnants, but ones that are functional enough so people can put their stuff in the unit. However not the ones with only 7 foot ceilings.

3.      The Investor

a.       He is not looking for the “mega-penthouse” (unless the deal is too good to pass up) and not the cheapest unit in the building (unless the deal is too good to pass up.)

b.       We need to be ready to act fast because good projects sell out quickly, sometimes in a matter of hours.

                                                                                       i.      Suggest: Give the realtor a blank check from our checking account that we plan to give the down payment on the unit from but only have about $100 in it.

c.       Just tell our agent “We are looking for a great deal” and let him go to work for us.

Note: Let’s say we put a nice 2 bedroom unit under contract. It has a lousy view but is the lowest dollar per square foot. A few days later we call our agent and ask if there are any more units like the one we got still left in the building. We want to determine supply and demand.

If the complex is located in Miami and if 70% or more of the units are sold then find out what the average of the other two bedroom units have sold for and compare them to the one we have under contract. If there is a big enough difference for us to make a nice profit, we will keep our unit. (We have 15 days in Florida , and 17 days in California , to cancel and get our deposit back.)

Cancel our Contract If:

a-      Only 30% of the units are sold.

b-      For example, the average of the other two bedroom units sold for $200 per square foot and we bought ours for $240 per square foot.