The Process & The Pitfalls
of Buying Townhouses at the PreConstruction Phase

Buying Townhouses at PreConstruction

  ◊ Price
  ◊Potential Appreciation
  ◊Ongoing Appreciation
  ◊ Supply and Demand
  ◊Upfront Carrying Costs
  ◊Closing Costs
  ◊ Selling Early
  ◊Disclaimer

PRICE
There are several hurdles for developers to overcome when planning a new development. Whether the developer is a major group or a local contractor, financial backers gauge interest in a project based on pre-sales. Both commercial lenders and private investors ascertain the buying publics’ actual level of interest prior to funding a project. With adequate enthusiasm, funding has a strong potential for moving forward. This can translate into potential savings and returns for buyers who are willing to make a purchase at this earliest stage.

POTENTIAL APPRECIATION
Although there is never a guaranty, in most projects the "first day" price will be lower than for subsequent purchases. In some cases, developers even offer additional incentives when the opening bell rings. Of course, as the project progresses from blueprint to reality, interest by the end-user increases. Needless to say, with a more tangible investment, pricing tends to increase.

SUPPLY AND DEMAND
The economic rule of supply and demand certainly has been coming into play with real estate in South Florida; especially with waterfront and water access properties. At this point the demand is excellent. Due to restrictions by the various municipalities and counties involved, there are limitations in terms of the number of available properties. According to several analysts, over the next eight years the baby boomer flood will begin to peak. Demand may be greater than it is now, and the overall supply will probably be even more limited.

UPFRONT CARRYING COSTS
Reservation Agreements:

• First, a reservation is nothing more than a Right of First Refusal. You, as a buyer, are under no obligation. For this position, you will place a reservation fee of anywhere from $10,000 to 10% of the proposed purchase price.  At the point where the developer is ready to sell the units, you elect to move forward with a purchase contract or to bow out. If you decide the purchase is not for you, the reservation fee is refunded in full. In other words, during the reservation phase, you have nothing to lose.
• FYI: Though developers prefer to go directly to binding purchase agreement i.e. contract, Reservation Agreements are used when they choose to begin sales prior to having all permits in place, and prior to condominium documents approval by the Florida State Government.
  
  
• If you decide to go ahead with the purchase agreement, payment of the balance of the first 10% will be required.
  
  
• Once the rescission period is over, buyers are committed and any defaults will result in a loss of the deposit.
  
  
• In purchases requiring a 20% deposit, typically an initial 10% is required up front and when the building site preparation begins, a second 10% deposit is required.
  
  
• From this point forward, the purchase remains on hold until the development is complete and the property can move forward to closing, in which case either a cash payoff or mortgage will be required.

CLOSING COSTS
Whether purchasing a new townhome or office condo please be advised that added to closing costs there is an additional fee that developers charge at closing, ranging from 1.5% to 2.5% of the purchase price.  Townhome and Office Condo developers charge these fees to cover administrative expenditures including but not limited title search and examination, title insurance, doc stamps, property recording and title company fees. 
In addition to the builder's fee, buyers should expect to deposit 2 or 3 times the monthly maintenance fee into the Home-owners/condo association reserves. 
In summary:
In addition to financing (mortgage fees), it is sensible to expect approximately 2% closing fees. This information is intended to inform and prepare buyers so that they are not first made aware of these fees at closing.

SELLING EARLY
There are three options in terms of selling prior to closing (flipping).

• Assignment of contract.  Nowadays, the majority of developers prohibit assignment of contracts.  It is a possibility, rare as it may be, in some complexes.  
• Builders  “resell” units.  Once the entire development is sold out. 
• Simultaneous Closing.

With pre-completion re-sales, the units are made available to the public at the current market pricing, which is determined by the developer and/or original buyer. Buyers can list their properties with the developer, who will then make them available for purchase. The exact percentage of price and costs involved vary. Buyers may also obtain the services of a real estate company to promote their unit, though as a rule, MLS listing before closing on property is prohibited by developer and may be a breach of contract. 

PLEASE NOTE: In the rare events when assignments are allowed, most developers keep the initial deposit of buyer number one until closing.  The reason for holding these funds,  is that buyer one's (the assigner) liability does not stop with the assignment. In the event that buyer number two (the assignee) does not go through with the purchase, buyer number one (the assigner) would be required to close on the property.  In addition, please be aware that there are assignment fees that range from .25% to 7% and up.  Brixen Grosch Associates, Inc.  recommends that when purchasing property, read your contract carefully, and feel free to ask questions!!

A simultaneous closing occurs when the developer closes on the property with the original buyer, who then immediately sells the property to an end-user. To ascertain availability and costs for either of these programs, contact Brixen Grosch Associates, Inc.

DISCLAIMER
Brixen Grosch Associates, Inc. is a Florida licensed real estate brokage firm and is competent only to provide information of a factual nature concerning properties for sale. Nothing in this document or website is intended as investment, legal, or accounting advice, nor should the information contained herein be construed or understood as such. Only licensed professionals as investment counselors, accountants, and attorneys are qualified to provide counsel with regard to these other areas.