Preconstruction Real Estate Investing A Solution For The Uncertainties Of New Construction

By Phyllis D. Huguenin

Dated: 2007-03-14 14:29:25

Savvy Bridgepoint Ventures has established a real estate business platform that enables developers to quickly get projects financed through volume purchasing of pre-sales needed to secure a construction loan.

An Innovative Solution to Triumph at Real Estate Investing

Due to wild fluctuations in the stock market for the past several years, many investors have gravitated to real estate as a perceived safer haven for their money. Preconstruction contracts became attractive tools to achieve potential double-digit profits that could sometimes be realized in a year’s time. Due to basic economic rules of supply and demand the pendulum has swung back and a red-hot seller’s market has changed to a buyer’s market with an oversupply of inventory. When the market softens, there are two groups that stand to lose; developers who depend on pre-sales to get their projects off the ground and investors who like the fact that they can participate in a project for as little as 20% down and realize potential gains of hundreds of thousands of dollars upon project completion. So the current slow-down has the possibility to negatively affect a myriad of individuals currently invested in real estate. Likewise thousands of development projects are slated to commence in the next few years and the lack of a viable market conducive to financing spells trouble on many fronts.

The premise of Preconstruction

To understand the basics of how preconstruction contracts are utilized, let’s break it down: In order for a developer to build a condominium project they must initially sell 50 - 70% of the project in the form of preconstruction contracts. This is a contractual agreement to purchase a specific unit at a stipulated price upon completion of the project. Deposits of anywhere from 10 – 30 % are typically required to reserve the unit. Preconstruction contracts have to be pre-sold because once they reach 50 – 70% of a specific project these are used to secure the construction loan from the bank.

There are some inherent risks associated with financing in this manner; one of the biggest could be that the developer cannot sell the units at the current price and it becomes necessary to lower the unit price after the contract has already been locked in at a higher one. The builder/developer gets into financial trouble midway through the process, or if the project fails what happens to the investor’s deposit?

The issue becomes the following: how do both real estate developers and purchasers mitigate risk in an uncertain marketplace? BridgePoint Ventures, LLC offers the solution with its “Preconstruction Syndication” concept. Instead of having to market units over the course of several years incurring construction delays, perhaps selling at a loss, developers can sell up to 33% of a project’s units within a 21 – 40 day period to BridgePoint’s Joint Venture Partners. So this fulfills the number of units needed to secure a construction loan right away. By leveraging relationships and using volume purchasing, the company is able to offer preconstruction contracts with favorable terms seldom available to the general public. BridgePoint currently offers two separate programs which contain the same elements; contract deposit amounts remain in an FDIC insured interest bearing escrow account (unless otherwise agreed), participants are shielded from losses in the event of a market downturn or developer default and buyers have control over decisions related to their contract. “BridgePoint Ventures has relationships with a wide range of real estate purchasers who are prepared to purchase preconstruction contracts as long as the developers are willing to meet certain terms” according to CEO Eric Jafari. The majority of financial opportunities are subject to outside market conditions. “Preconstruction Syndication” through BridgePoint Ventures provides tactical and resourceful ways to increase the profit potential beyond the “educated gamble” of traditional real estate investments. An invitation from BridgePoint or a referral from an existing BridgePoint Joint Venture Partner or Affiliate is required for consideration to participate in opportunities.

Category Preconstruction, Real Estate Investing