|
|
Frequently Asked Questions
What is a Preconstruction Contract?
A preconstruction contract is a legally binding contract committing both the developer and a purchaser to a specific unit per completion of the project. Ex: Buyer purchases unit #101 from Developer and signs a preconstruction purchase contract. The Buyer would provide the Preconstruction Developer with a deposit of 20-30% and when the project is completed, the Buyer is required to provide the remaining 70-80%, via cash or mortgage.
Why do developers sell preconstruction contracts?
Developers sell preconstruction contracts, because once they have sold 50%-70% of the project in the form of these contracts, they can approach a bank or a major financial institution and request a construction loan. Ex: Joe has 500 units to sell at $1mil each. His cost of construction is $240mil. Once he has sold $250mil of units, he can approach a lending institution and state the following, “I have $30mil of my capital in this project and I have sold $250mil of product. If I were to complete the project today, these buyers would be required to provide the balance and I would have sold enough inventory to cover the loan and then some. Please provide me with a construction loan for $210 mil.”
Most Lending Institutions will lend as long as the units have been sold to individual purchasers. For example, let’s assume Warren Buffet purchased the 250 units, the lender would state that his purchase only counts as 1 unit - “Go and get 249 more individual sales contracts.” Banks want to see diversification to minimize risk on construction loans.
What are the advantages for Developers to work with a bulk buying group?
Many people ask, "Why would a developer allow a buying group to purchase units in bulk?" In order to properly address this question its important to understand the Developers needs. Obviously developers need to address a shopping list of performance milestones in order to experience a profitable and successful development. Because the real estate market has softened significantly developers are struggling to satisfy there performance benchmarks and satisfy construction loan requirements. In today's market it can take a developer up to 2 years to pre-sell 50% of his development depending on the size of the project. Two years of marketing expenses can be very costly for a developer to pay property taxes, marketing costs, real estate commissions etc...
The following is a list of benefits for a developer to use a bulk buying group:
If you have any additional questions we have not been able to answer for you, contact one of our advisors at (954) 703-2692 or fill out the form below and one of our advisors will contact you.
|
|
