Pre-Construction Due Diligence for the Investor

Preparing to invest in preconstruction realty requires the real estate investor to either do their own due diligence or join a real estate investment group.  Historically it’s been shown about four in ten preconstruction projects will go bust - leaving the individual investor not making a single penny or losing their deposit altogether.  Preconstruction investing cannot be left to the vagaries of chance.  Rather, a consorted effort must be made to lessen risk and increase return. 

By joining a professional real estate investment group, an investor can mitigate the risks associated with pre-construction by having the research completed for them.  By their nature, bulk real estate contracts represent power in numbers so there is an incentive on the part of the developer to answer pertinent questions to prove the viability and sustainability of their project.

Researching a Pre-construction project prior to investing requires foresight and strenuous study, including incisive investigation and follow through to obtain a complete picture of the future project on the drawing board.  The methods used may include a financial feasibility analysis, market examination with probability studies, and even on-line research to locate permits and project status.

The Developer who chooses to work with a dynamic investor group receives a quick turnaround on signed contracts; often resulting in getting the green light for project funding - in addition to gaining a strategic national and international marketing partner for re-sales.

Due Diligence Techniques

Below are some of the due diligence questions the prospective purchaser would have compiled  when joining a bulk purchasing group.

1. Who is the Project Developer, Architect, Marketing Group, Escrow Agent?  There is a need to identify all the entities involved in the endeavor and their related experience and character.
2. What is the Scope of the Project? - Specifically, product type, price points, number of units, amenities etc.
3. Who Owns the Land and Has the Developer Invested His Own Money? How much equity has the Developer set aside to fund the project?  Is the land owned outright by the development group, funded, or an option to purchase?  Has the developer secured a lender commitment for the project itself?  What are terms required by the bank to secure the loan?
4. What other Completed Projects and References Can the Developer Provide?  We must know past history and completion record on previous projects.
5. What Do We Know About Project Location? – It is necessary to identify demographics, market trends, competitive product, planned growth including job opportunities, and population expansion.
6. What is the Status of Permitting on the Project? – Essential to ascertain what permits have been issued in order to gauge progress of the project –whether in planning or development phase. 
7. Can We Obtain an Overview of the Project Budget?
8. What Due Diligence has the Developer Performed?
9. What are the Most Current Appraisals?

An Analyst has many resources to verify information.  For example, to find out the latest statistics on population and job growth, most cities have an economic development report that provides data for the area.  The county websites will make available planning meeting overviews, number of permits issued, sales reports, general property information, redevelopment, zoning and long-term plans for the city.  The Chamber of Commerce is happy to provide summaries of local area businesses, activities, and upcoming events. 

The web is also a great resource to verify corporations, research products such as condo hotels, fractionals, or international law.  The more knowledge the investor gathers on any given project, the better choices they will make in choosing the right product for market conditions.

After gathering all the facts, the decision has to be made as to whether the project is viable.  Does the developer have a finance commitment, permitting in place, expertise in the type of development project and, most importantly, a market for the end product?  Are there any recorded liens, lawsuits, IRS problems or bankruptcies against the Developer or associates?  When these questions and the aforementioned are answered satisfactorily, the project is a go. 

Some of the tangible benefits passed on to investors who purchase as a group are assignable contracts, discount pricing, interest-bearing escrow deposits, developer re-sale of contracts, and unique negotiated terms not available to the average buyer.  Savvy investors can leverage their money by using Letters of Credit.  All these elements are terms a single investor could not typically obtain by themselves. This combination of concessions for the purchaser and benefits for the developer creates a win-win scenario for everyone involved.