Pre-Construction Investments
What Donald Trump Won't Teach You

© 2007 by Justin Ryan and Wendy Patton of Investing Tours, Inc

Pre-construction investments are one of the hottest and quickest ways to make money in real estate today. So why aren't people sharing this information more readily? Most don't know about it yet! The experts and the wealthy have been buying pre-construction homes and condos for years and not teaching anyone about them. Why? Pre-construction investments are very lucrative and profitable. Experienced investors prefer limited competition.

The Basics

What are pre-construction investments? Pre-construction investments happen when you purchase a property, either a home or a condo, before it is built. You are actually purchasing the dirt and the plans of a home or condo unit. (visit www.InvestingTours.com)

When developers decide to develop either a subdivision or a high-rise condo they need capital in order to start construction of their large project. In order to raise this capital, they need to pre-sell a certain number of sites or units. When they have sold a certain number of units or sites, they can then approach their lender or banker to get a construction loan. This loan serves as the capital they need to begin construction of the entire development.

Most savvy investors know getting into the pre-stages or the first phase of a development is less expensive than getting into later phases. It is also a lot more lucrative! Remember that pre-construction investing is buying before phase I of the development has even started. At this stage the prices to the end user may not have even been established yet, and therefore, the pre-construction prices are substantially lower than the prices which are established during the latter phases of development.

What you Need to Know

Here are just a few of the many things to consider when doing pre-construction investing:

1. Is the builder experienced and reputable?
   1. Has the builder done other large projects?
   2. Do they have references?
   3. Are they a reputable builder or are they considered "small time?"

      Check them out by asking around. You might want to make a call to the Better Business Bureau. Realtors in the area who work with new construction will certainly know any big builder and their reputation. Your best source, however, is to talk with investors who have successfully worked with the builder in the past. You want to make sure this builder will stand behind their work in the long run, and will be in business for the duration of the project.

2. Is there financial backing behind the project?
   1. Who is financing the project?
   2. Is it a local lender or financial institution?
   3. Make sure the lender is capable of handling a project of this magnitude.
3. When considering an area for pre-construction investing, you should only invest in emerging markets. To find out more about emerging markets, read our new book - How to Make Hard Cash in a Soft Real Estate Market, available now on our website. You will want to make sure that you are purchasing properties in strong markets, where the property values are increasing and not average or flat.
   1. You will want to look at some market indicators like: Average time on the market Employment rates Foreclosure and defaulted mortgage statistics New housing starts
   2. You need to know what is driving the market; if it is just investors, be cautious.
4. Are there other projects going up that will compete with this project?
   1. Find an area that does not have too much new construction, but has a need for the project you are considering. (There are a few exceptions to this rule - i.e. the Gulf Coast after Katrina)
   2. If there are other projects in the area, make sure the economy or influx of people can pick up the units coming on the market.
   3. Be cautious if there are too many units coming on the market, then the opportunity for your pre-construction investment to increase is diminished due to supply and demand.
5. How much will the builder require that you put down?
   1. There is a wide range of what a builder will require you to put down. We have seen anywhere from $1,300 for a $400,000 home to 20% of the final sales price.
   2. As an investor, most deals will require you to pay a down payment of between 5% and 20% of the final sales price; however, you can find deals that require less money down.
   3. We feel you should put 10% - 20% down. It makes the project easier to cash flow and finance. Lenders have done away with most low down investor loans for pre-construction investing.
6. Are you permitted to assign the contract prior to construction?
   1. See if you can assign the contract prior to the home or unit being completed.
   2. Some developers will not allow any assignment of the contract and you will have to purchase the property with a mortgage or cash in order to sell it.
   3. Most developers will require a small fee to allow you to assign your contract to another buyer.
7. Does the contract allow for you to rent the property to others or does it only allow for owner-occupants?
   1. Some developments will not allow investors to rent out your new home. Instead, these developments require you to live in the house for up to one year!
   2. You really want to check this out if it is important to you in your buying decision.

These are some of the most important things you should consider when doing pre-construction investments. Follow a system and check things out before purchasing pre-construction investments.