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One of the hottest areas of Florida real estate is
the preconstruction and new construction markets. Developers across the
state are building at a fantastic rate. In order to qualify for the
various stages of their construction financing, many developers offer
discounts to early buyers. These discounts often result in
better-than-average appreciation for buyers and investors.
Overview (hypothetical
example):
- ABC Development is
preparing to build a 20-story highrise with each unit expected to sell
for $500,000 at completion.
- ABC's Bank requires them
to sell 50 units prior to the release of their first construction loan
installment.
- ABC may discount initial
unit purchases at 20% off the expected price in an effort to receive
their first construction loan installment and commence
construction.
- In an effort to continue
as scheduled, ABC may discount the second group of 50 units at 15% and
so on until the building is completed.
- As each unit is sold, the
developer is under less pressure to discount their pricing as units
usually sell faster than the building can be completed.
- Of course, once the
building is completed and owners close on their prospective units,
they can immediately sell them with a guaranteed profit equal to or
greater than their original discount.
The Basic Process
- The developer announces
that pre-sales begin on a particular date at a particular price range.
- Investors typically
'reserve' their spots in line by placing a $10,000 - $25,000 earnest
money deposit in escrow.
- Investors then have a
15-day right of recision to cancel the contract without penalty.
- After the 15th day, the
investor is usually required to increase their deposit to an amount
equal to 10% of the value of their prospective unit.
- Investors are usually
required to escrow an additional 10% once construction begins or
within 6-8 months.
- The investor may finance
the remaining 80% at closing (up to 3 years later).
- Depending on the
developer, investors may be able to sell their contracts prior to
actually taking possession of the unit, realizing potential gains
before the building is actually complete.
- Other developers require
investors to actually close on the unit prior to reselling.
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