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Buying Pre-Construction - Condos
The Process & The Pitfalls
◊ Buying at [Condos] Pre-Construction
◊ Potential Appreciation
Supply and Demand
◊ Limited Upfront Carrying Costs
◊ Closing Costs
When a developer plans a new development of any nature, the firm has many hurdles to overcome, not the least of which is financial. Whether the developer is a major group or a local contractor, financial backers gauge interest in a project based on pre-sale reservations. Both commercial lenders and private investors ascertain the buying publics actual level of interest prior to funding a project. With adequate interest, funding has a strong potential for moving forward. This can translate into potential savings for buyers who are willing to reserve a unit or make a purchase at this earliest stage.
Although there is never a guaranty, in many cases the "first day" price will be lower than the price for subsequent purchasers. In some cases, developers even offer additional incentives when the opening bell rings. Of course, as the project progresses from imagination to reality, interest by end-users increases. Needless to say, with a more definite picture, pricing tends to increase. Again, although this has been the trend thus far, there is no guaranty that this will continue into the future.
Many projects are developed in phases, especially the condo towers. For example, the developer will build the first tower, followed by a second, and sometimes a third or even fourth. Of course, the first tower prices tend toward entry level and each new tower shows an increase, in some cases significant.
SUPPLY AND DEMAND
The economic rule of supply and demand certainly has been coming into play with South Florida real estate, especially waterfront and water access properties. At this point in time, the demand is very high. Due to restrictions by the various municipalities and counties involved, there are certain limitations in terms of the number of available properties. According to some analysts, over the next eight years, the baby boomer flood will start to peak. Demand may be even greater than it is now, and the overall supply will probably be more limited.
LIMITED UPFRONT CARRYING COSTS
First, a reservation is nothing more than a Right of First Refusal. You, as a buyer, are under no obligation whatsoever. For this position, you will place a reservation fee of anywhere from $10,000 to 10% of the proposed
At the point where the developer is ready to sell the units, you elect to move forward with a purchase contract or to bow out. If you decide the purchase is not for you, the reservation fee is refunded in full. In other words, during the reservation phase, you have nothing to lose.
Due to the housing bubble crash that preceded the revival of new
construction projects in South Florida, most pre-construction condo
developers require down payments in installments, usually 10% at
reservation, an additional 10% at contract, and at different
milestones, such as ground breaking, and topping off the roof,
anywhere between 30% to 60%, with the balance of 50%-20% due at
FYI: Though developers prefer to go directly to binding purchase
agreement i.e. contract, Reservation Agreements are used when they
choose to begin sales prior to having all permits in place, and prior
to condominium documents approval by the Florida State Government.
If you decide to go ahead with the purchase agreement, payment of the balance of the first 10% will be required.
You will then be granted a 15-day (calendar) rescission period (for CONDOS only) during which
buyers may obtain an attorney to review the contract and condominium documents, or at the very least do so
themselves. Once the rescission period is over, buyers are committed and any defaults will result in a loss of the deposit.
The real estate crash of 2006-2008 left many developers and banks
holding the bag. As a result, requirement are much more
stringent these days. Though there are developers who still
accept a 10% or 20% down payment until closing, it is primarily in
the single family and town home communities. If you wish to
purchase a condo in its pre-construction stage, deposits requirement
range from 50% to 80% with the balance at closing. The
deposits are due at specific milestones of the building process.
With 20% at contract signing, followed by additional installments
due at groundbreaking, foundation, top-off, and so forth.
Whether purchasing a new construction single family home, town home,
or condo, please be advised that to the price of your unit,
developers add a fee at closing, ranging between .5% to 2.5% of
purchase price. Single family and town home developers claim
those fees to cover "administrative" expenditures. Condo
developers actually use a significant portion of the fee to cover
recording fees, title search, exam, and insurance, and title
In addition to the "builder's fee" buyer should expect to deposit 2
or 3 times the monthly maintenance fee into the Home owner/condo
In summary, in addition to financing (mortgage fees) it is sensible
to expect approximately 2% closing fees. This information is not
intended to dissuade purchase of pre-construction residences, rather
to inform and prepare buyers, so they are not first made aware of
these fees at closing.
In the rare events when assignments are allowed, most developers
keep the initial deposit of buyer number one until closing.
The reason for holding these funds, claim the developers, is that
buyer one's (the assigner) liability does not stop with the
assignment. In the event that buyer number two (the assignee) does
not go through with the purchase, buyer number one (the assigner)
would be required to close on the property. In addition,
please be aware that there are assignment fees that range
from .25% to 7% and more. Mazor Realty recommends that
when purchasing property, read your contract carefully, and ask
A simultaneous closing occurs when the developer closes on the property with the
original buyer who then immediately sells the property to an end-user. To ascertain availability and costs for either of these programs, consult your Mazor Realty associate.
Mazor Realty, LLC is a Florida licensed real estate broker and is competent only to provide information of a factual nature concerning properties for sale. Nothing in this document or website is intended as investment, legal, or accounting advice, nor should the information contained herein be construed or understood as such. Only professionals licensed as investment counselors, accountants, and attorneys are qualified to provide counsel with regard to these other areas.
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