Why Would a Developer Pre-Sell a condo at a discount?

Why Would a Developer
Pre-Sell Condos at a Discount?


	Why Would a Developer Pre-Sell Condos at a Discount?
	Why wouldn’t the developer build the complex and sell off all the units when they are ready for people to move in, thus realizing all the profits? Many investors have a hard time understanding why sometimes they can purchase real estate at a discount when they buy during the pre-construction phase. Theoretically, the pre-construction investor receives a discount because they are willing to invest in an architectural rendering and floor plans of the condominium or town house and a developers dream. In reality they are getting discounts because the developer needs to pre-sell a certain percentage of his units before their lender will fund their project. For the real estate investor this means extra savings immediately. The key to why developers pre-sell real estate at a discount is to understand how important this process is for the developer. The developers will sell units at pre-construction prices in order: 1. to prove to their lenders that their units will sell. 2. to have peace of mind knowing that they have a winner and their personal funds are at minimal risk. When a developer plans to build a 40 story all glass resort complex they need a lot of money, usually in the hundreds of millions of dollars. Most developers are unwilling to take the risk (or in most cases unable) to finance the project without some assurance of success. Financial backers (lenders) also want to evaluate the demand for the project and will usually require the developer to have purchase reservations on a certain percentage of the units before they commit to fund the project. Financing is the most crucial issue that decides the success of a project. By making arrangements to offer their property to pre-construction investors, the developer now has a simple system in place where his risk will be minimized and he will have lending institutions going out of their way to help finance his project. Lenders will feel confident that their loans will be repaid in a timely manner since money will be coming in when the pre-sold properties close. The developer’s job is to give early buyers great incentives (lower price) to buy their project while it is still nothing but a sketch and a dream… before a single piece of steel or concrete ever sets foot on the job site. Pre-selling has gradually become a very common technique for developers with nearly every new condominium complex having a pre-construction sale program. A developer has two choices: 1) They can try to get full value for their projects when they sell but have enormous difficulty getting financed or 2) Sell at a discount to pre-construction investors and then simply keep doing deals after deals after deals.¹ ¹ Chris Anderson, PhD
	Monique Parido Realtor® 858-272-5510 Gar C. May Broker/Realtor® Lease Purchase Solutions gmay@san.rr.com