For those of us who were around for the mid-2000’s real estate boom and the following bust, real estate investing might come with a few nightmares. There was a time when pre-construction condos equated to lines out the sales door of real estate investors wanting to purchase with the hopes of a great return on their money. By the time the development was complete, many of these investors were left with the decision to walk away from their 20-30% deposit or to move forward with the purchase. Most walked away leaving the developer holding the tab for multimillion-dollar projects. Financially unsound developers went bankrupt, and the properties went into foreclosure.
That memory is probably not how you wanted to start this article, but it is important information to determine if now is a good time for you to invest in a pre-construction condo. What’s changed and what questions do you need to ask to determine if purchasing a pre-construction condo is a good investment for your portfolio?
Let’s face it, the main goal is return on your money – a.k.a. Return on investment or ROI. Investing comes with risk. The bigger the gains; the bigger the risk. Helping you understand the pros and cons of investing in pre-construction condos will be detailed below.
What makes this market different from the last boom and bust?
In the blog post, “Is now a good time to sell my home in Tampa Bay”, I outlined many factors of today’s real estate market that are uniquely different. Supply of housing and the Millennial demand is one that cannot be ignored. The most significant difference however is the change to the financial industry. No longer can you fog a mirror and get a home loan. Tighter restrictions on lending helped stabilize the housing market over the past decade. But is it enough to prevent a real estate bust?
Do your homework and look at housing supply, construction starts, inflation, interest rates, rental rates, land availability, and new jobs coming to the area. It is important to look at the updated local information. News coverage of the housing market typically lags 2-3 months and covers national trends, which might not be the same for your area.
Pros of investing in a pre-construction condo
Typically, developers will start the sales process before their condominium documents have been approved by the state. The agreement between the purchaser and the developer is called a “reservation agreement”. Reservation fees can range from $10,000 – 10% and are often fully refundable.
Once the condominium documents have been approved, the developer will request all reservations to move to a contract status. There will be another deposit required at this time. However, in accordance with the rules of the Division of Florida Condominiums, purchasers will have 15 days to review the condominium documents. If for any reason you do not agree with the terms of the condo docs, you can cancel your contract and your deposits are still fully refundable.
Depending on the scale of the projects, many condominiums take 2-5 years to complete. During that time, you will only need to make total deposits of 20-30% of the purchase price. Deposits are made over the course of construction and the timeframes are determined by the developer.
Developers will have price increases as they move closer to selling out the project. This could take a few months or a few years. Regardless, if you reserve your condo early, your price is locked and protected from the price increases, creating instant equity.
Example: Early pre-construction pricing might be $1,000,000. Your deposit of $200,000 – $300,000 reserves your condo (and your price). Over the pre-sales cycle the price might be increased as much as $1,250,000. That is a 25% increase in value but an 83% gain on your original $300,000 investment.
This is the major benefit of investing in a pre-construction condo – invest a smaller portion upfront with significant future gains.
Cons of investing in a pre-construction condo
With any investment, there are risks. Investing in a pre-construction condo means you are investing in the future of the real estate market and the economy. Local changes over the 2 to 5-year development period could create a significant impact on your investment.
When doing research, you will want to analyze the following:
- Strength of the location. Is the development in a highly desired location or an up-and-coming location?
- Comparable prices in the area. Does the pricing of the development match the area? If pricing is out of range for the area be very cautious.
- Job growth and market conditions. What businesses are in the area? Do they support the price point and demographics targeted for the complex? What businesses are moving into or out of the area?
- Strength of the Developer. What other projects has the developer completed, where and what was the result?
Warning: Be careful of herd mentality. When everyone is doing it, it doesn’t mean it is the right choice for you and your financial plan. This is key.
Questions to ask before purchasing a pre-construction condominium
- When does the developer intend to break ground?
- When is the expected completion date?
- How much initial deposit is due?
- What is the total deposit due?
- Are the contracts assignable?
- What percentage of investor purchases are allowed?
- Is there a predetermined time for price increases?
- What are the projected price increases?
- What are the expected monthly maintenance fees per sqft?
- How is the HOA capital contribution being funded?
- How many parking spaces per unit?
- Does it include a storage unit?
- What are the rental restrictions?
- Are there pet restrictions?
- Is the commercial space for sale?
After you determine if investing in a pre-construction condominium is right for you, contact YES-Homes to help you find the best development that fits your real estate investment goals. Call now (727) 308-1669