1. Why Pre-sell?
Most developers are unwilling or unable to place all their funds into the construction of a development which is not yet assured of success. Also most construction lenders (Banks) feel the same way and want to be assured that the construction loan can be repaid in a timely manor. The answer for the developer is pre-selling the development. If for some reason it does not sell then the developer is out only a small investment. Pre-selling of buildings and resort condominiums have become a standard process and virtually every resort condominium is pre-sold today. Once the required pre-sales have been reached and construction has begun it is a sure sign of a successful development.
2. What does "need not be built" mean?
This is a question we get quite often and the answer is really quite simple. During the marketing period of a pre-sale and before the developer knows if the project will be successful the "need not be built" disclaimer gives the developer protection from suits of nonperformance if he does not proceed with the construction. A very small protection for what sometimes is a very large investment risk.
3. As a purchaser, What protection do I have buying a pre-sale?
While we can't speak for every location in the country, here in Alabama and Florida the purchaser of a pre-sale condominium is protected in several ways. The most important protection under Alabama & Florida law is your money or deposit is held in escrow until the condominium is completed and only released at a proper real estate closing where the completed unit is transferred to you.
4. What is a Public Offering Statement?
A Public Offering Statement is all the pertinent information on the pre-sale and includes condominium documents, association by-laws, the pre-construction purchase and escrow agreement, and other documents that may be required by each state. Under Florida and Alabama law purchasers have a set number of days from receipt to review and complete or rescind any pre-sale purchase and escrow agreement.
5. Why buy a pre-sale when I can buy one already completed?
Two basic reasons:
(1) Limited location and availability of existing units.
(2) In most cases purchasing at pre-sale you are able to buy at a reduced price, and coupling this with the appreciative expectations upon completion can make it a very wise investment. Past years have shown this to be the rule rather than the exception. However, you should never make your sole buying decisions on this expectation alone.
Many people have purchased pre-sales for reason number 2, and many of these people have sold their units for the profit even before the building was completed. Know the market in the area of your choice! Our RE/MAX Agents are well versed on the market in our area and can supply you with any facts or history you may need.
6. How much money do I need to contract a pre-sale condominium?
With most pre-sale developments all you need is 20% of the pre-sale price to hold the unit until completion. Some developers require that you act as the construction lender and pay the entire purchase price over predetermined construction stages, which can be somewhat limiting for some people to purchase, and is not allowed in some states. Many developers will allow an irrevocable Letter of Credit or ILOC to stand in place of cash in contracting a pre-sale condominium. The ILOC enables a purchaser to keep his money working in other investments during the marketing and construction period. The cost of an ILOC is 1% to 2% of the amount of the ILOC. Example: Needed 20% of $400,000 unit price for the deposit = $80,000 deposit or ILOC. If your Bank charges 2% it would cost you $1,600 a year to hold and control the condominium unit. Remember an ILOC is the same as cash to the developer. If you should default on the purchase and escrow agreement the ILOC is presented to the issuing bank and paid as cash. The bank looks to you for the money.
7. What is the difference between a Reservation and a pre-sale Purchase?
Most, but not all developers will begin a pre-sale by letting purchasers reserve a unit or units under a non-binding reservation agreement rather than a binding purchase and escrow agreement. This is a viable way for the developer to line up sales while he is still working on the building construction plans and the condominium documents. Typically a reservation agreement allows you to tie up a unit location and price with a small amount of cash ($5,000 to $10,000). There is no binding agreement between you and the developer and either may cancel this agreement at anytime, and all reservation deposits are refunded. When the developer is ready he will present you with the full public offering statement including the pre-sale purchase and escrow agreement. This is when you must make your decision to purchase or not to purchase. While the reservation agreement is not binding the purchase and escrow agreement is a binding agreement on both parties. When this stage is reached and construction starts the condominium development is pretty much assured to be completed and the "need not be built" is a thing of the past. In 25 years of condo sales on our Gulf Coast we have never seen a development under construction which was not completed.
8. To purchase a Pre-Sale unit how much money will I need ?
You can contract most pre-sale condominium units by depositing in a designated escrow account an amount equal to 20% of the pre-sale purchase price. This in most all cases is an interest bearing escrow account which earns interest for you while the funds are on deposit.
You may also use an ILOC from a federally insurance bank with most pre-sales. This ILOC usually must be in a format designated by the developer and the developer's construction lender. A copy of this format can be obtained from us or the developer on request.
9. When I reach the decision to purchase a presale what is my 1st step?
Once you have reached the decision that you want to purchase a pre-sale condominium you need to contact your real estate agent. As a RE/MAX Realtor we can answer your questions and clarify matters to your satisfaction. If at this time you wish to proceed with a purchase we can assist you in finding the development of your choice, help you with availability, contract the unit you decide on, and send you all the documentation for purchase. One of us will then be your contact person through completion of the Condominium. We will also keep you informed during the construction period, help you prepare for closing the completed condominium cash or finance, and accompany you at the closing.
10. Can I sell my pre-sale purchase before completion?
In short, yes! You must have written permission from the developer in some cases, which generally is not a problem. Even in early stage construction we have seen quite a few re-sales by pre-sale purchasers for an appreciative profit.
There are two basic ways to re-sell.
(1) Selling your rights to the condominium unit by transferring or assigning the contract to a subsequent purchaser. This in reality is not selling real estate, you are selling contractual rights. In some cases profits may be smaller than the second option, and is always taxed as ordinary income, but it has the same results of making money! Selling your contract and rights to the condominium may or may not require that you close as real estate simultaneously at completion. This depends on the developer and his lender. The difference in your purchase price and what you have sold it for is of course profit and can still be paid at the time of contract according to the agreement between you and your buyer.
(2) Selling your unit and pre-sale contract under a real estate contract to be consummated upon completion of the condominium. Two real estate closings occur simultaneously, your purchase from the developer, and the sale to the subsequent purchaser, "your buyer".
* Note: I have seen a single unit close 4 times simultaneously. Meaning the original purchaser was the beginning of the chain, and the unit was sold 3 additional times prior to completion. In other words three people (purchasers) other than the developer sold and made a profit, of course the last kept the unit. This is not a rarity!
11. What is leverage and why is it so darn great with a pre-sale?
Leverage is a word we have all heard at one time or another in dealing with investments of all kinds. Basically leverage is where you use a little money to control a larger amount of money. This is done in the stock market, and many other kinds of investments, but the most common is when you buy a home and use a mortgage. You generally will pay 20% in cash and finance the rest of your home which is worth 80% more than the cash you paid. Even while your paying interest your home can go up in value allowing you to reap the benefits of what leverage is used for.
Return on investment using leverage to purchase a pre-sale beach condominium. Here is where leverage can look awfully good. In fact, we have seen percentage returns on re-sale sales of pre-sales by purchasers as high as 10,000%. How can this be you say? Easy, you purchase a $300,000 condominium which is a pre-sale. You are required to place a 20% deposit, but rather than using cash of $60,000 you use an ILOC which cost you 2% of the deposit or $1,200 a year. The project is completed in 2 years and your cash investment is only $2,400 total. You sell prior to closing the completed unit for $540,000, which is a profit of $240,000. This would equal to 10,000% return on your investment, and 5000% return on an annual basis. While this is only an example, it does happen. Of course a mere 100% return on this type of a deal would not be worth your while, but believe you-me the majority who do this do very good and find it's well worth their effort. We hope that now you should have a good general understanding of leverage and how you can work it to your advantage in purchasing a pre-sale beach condominium.
12. How do I pay for my Condominium at completion?
You have two choices as in any real estate purchase. First would be to pay cash at closing. Secondly a mortgage from a mortgage lender of your choice. Remember there is no pre-sale agreement that allows a subject to a mortgage clause, all pre-sale agreements are written as if you will be paying cash at closing so you need to know you can afford it if you plan to close. You can always go to any mortgage broker and have them qualify you as to what you can afford. We have also known many people who have bought pre-sale who could never afford to close. These people are gambling that they can re-sale their pre-sale purchase before they are called on to close. The risk is less than you might expect. If a new purchaser is not found before closing, in most all cases someone can be found on short notice to simply take your position at closing. In this case there would be no money made, but you would be off the hook, and you would get your deposit back. We have had this occur only a very few times in the last 20 years and in most cases a replacement is found in just a few hours.
13. Where do I find a Mortgage for my condominium?
If you plan to use a mortgage you will need to make arrangements starting a couple of months prior to completion. Most lenders in the Gulf Coast area are very familiar with pre-sale condominium closings, and can advise you accordingly. They also know the ins and outs of getting an approval on a condominium which was not in existence prior to your closing. I strongly suggest you use a mortgage-broker in the area of your purchase. Your RE/MAX Agent can point you to several mortgage brokers in the area that have many years experience in providing money for pre-sale condominium mortgages.
