As developers try to raise capital through the building process, they often pre-sell properties, whether condo units or homes, at a discount when compared to the prospected market value. While this can be a great opportunity to get into a property at less than market value, it also carries risks. To learn how to minimize those risks, keep reading.
Know the Rules
Because most developers don't want to sell pre-construction units at a discount and then wind up competing against owners while trying to sell their own units, they may put rules in place that either restrict the sale price or even your ability to sell the unit within the confines of a certain timeframe.
Before you invest in a pre-construction property, make sure you understand whether there are limits, like being unable to sell the property within one year of construction completion.
Consider Buy-to-Rent
If your builder's don't allow you to sell the unit within a certain period after construction is completed, consider using the property as a rental unit. This option will provide you with rental income and cover your carrying costs while the property appreciates in value.
Remember though, being a landlord can be hard work. If your rental income allows it, consider hiring a property management company to oversee the screening of tenants and maintenance. Also, some condominium buildings have rules about renting out units to other tenants, so make sure you understand these before you start banking on rental income.
Buy the Smallest or Least Expensive Unit
Typically, the smallest or least expensive house or unit in a complex or community is the one that will appreciate at the fastest rate and provide the greatest return on your investment.
You may be tempted to splurge on that extra 15 feet of backyard or 200 square feet of space, but the cost may not yield the return you're looking for. You must resist the temptation to buy based on your personal preferences and instead think like an investor.
Be Careful in a Slow Market
If the local real estate market is sluggish, you could wind up trying to sell your unit for a price that's higher than what builders are offering. If the developer or builder can't sell units, even after construction, they may reduce the price and effectively undercut you as your competition. Subsequently, you may wind up reducing your own asking price and actually losing on the deal or netting less than you expected.
Watch Out for Wholesale Pre-construction Investment Deals
Wholesale pre-construction investment deals work by grouping together a large number of investors and purchasing a block of units from developers at a discount. Most wholesale investment companies offer professional service done with due diligence, but there are firms out there that don't live up to their word. For example, Axiom Realty Capitol was recently handed a class-action lawsuit for defrauding investors.
Wherever lies your area of pre-construction investing, you must take sufficient time and effort to understand the market and risks you face. Armed with practical knowledge, this can be a lucrative investment opportunity.
