How To Get Safety AND Discounts In Preconstruction
| | Monday, August 13, 2007 @ 09:39 AM EDT
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Contributed by: Mike Weiner
Mike Weiner Properties
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pre-construction. What is it?
Once a real estate developer has completed architectural blueprints, finalized a certain stage in the permitting process and hired a marketing team, most will proceed to sell “preconstruction contracts”.
A “Preconstruction Contract” is a contract signed between a real estate purchaser and a developer to provide the unit at an agreed-upon below-fair-market price. In exchange for that obligation, developers typically will require the purchaser to deposit a certain sum (10-20%) in escrow – conventionally inaccessible by the developer.
Negotiation Power
There is power in numbers.
It's a funny thing. When a single individual tries negotiating one or two units, they do not have any bargaining power. Standing alone trying to get a great deal is nearly impossible.
However, when you are part of a group of 400 buyers all sitting down at the same time negotiating, you get a better deal because of that strength. Now we have the same buying power as Costco or Wal-Mart.
Why Does A Developer Need To Pre-Sell Preconstruction Contracts?
Simply put, a bank won't loan construction money until it sees proof that people will buy the units. They will make their loan contingent on the Developer selling 50% of the total project before he can break ground.
Even though in many cases, developers are prohibited from accessing the deposit, the sale of preconstruction contracts provide developers with the requirements necessary to secure a construction loan from a bank to start construction.
Once a developer has sold 50% of a project in the form of these contracts, due to the amount of units sold, the sales provide banks with the reassurance that upon project completion, based on the sale of the contracts alone, the developer will have enough to repay the bank. The only caveat is that banks require the presales to be made to individuals, thus prohibiting an institution or affluent individual to purchase multiple contracts to shortcut the system.
The current challenge that most developers face is that the majority of real estate purchasers are end users. These purchasers are typically unaccustomed to purchase until a project is under construction or near completion.
So, What Do I Do If I Want To Buy Preconstruction?
Although you will always command much more bargaining power with a group of people trying to do the same thing at the same time, going it alone doesn't necessarily mean you shouldn't attempt it.
Some of the key things to ask for are:
1.Price Concessions- a discount of 10-15%, OR the developer selling the other 'retail' units at a premium price over your price.
2. Your earnest money in escrow, not in the developer's hands.
3. Assignability so the contract can be resold.
4. Ask the developer to resell your contract for you.
5. If the developer drops his 'retail' price, ask him to drop yours dollar for dollar.
6. Put a clause that says if the developer defaults you automatically get your money back.
7. Ask the developer to give you a further discount, pay your closing costs and carrying costs, if he should call you to close.
8. Ask the developer to resell your contract before he sells any other inventory.
If the developer won't budge, then you need to bring in the group. One great group doing the above, and getting it because of the purchasing power, has grown to 400 partners in just under 3 years, because of its strength in negotiating.
Note: Mike Weiner is President/CEO of http://preconstructioncatalysts.com, representing a group of 400 partners.
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