Pre-Construction Due Diligence Save & Exit
In today’s market, the importance of the pre-construction due diligence in choosing a right project is more important than ever. The chronic weak dollar, risky stock market, zero prime and low return on investments are the defining elements of the post real estate market crash. As we go through the recovery period we are slowly entering the new era of construction with developers facing tight lending practices and the dilemma of how to sell pre-construction units to qualify for construction loans.
While the pre-construction home buyers and investors are being ever so cautious a new wave of potential pre-construction buyers is emerging in baby boomers as the single most influential group affecting the future of the construction boom. They are bound to influence the real estate market both as the end-users or the investors. The end-users could be either a first or second home purchasers while the investors are trying to complement their retirement fund by purchasing and selling the pre-construction real estate or known as flipping.
No matter what category you belong to, just remember that even during the real estate boom a staggering 40% of preconstruction projects went bust and a number of investors lost their deposits. However the golden rule of thumbs that applied to the investors of the past still applies to today’s home buyers or investors. That golden rule of getting into pre-construction scheme still remains the same, which is nothing but a comprehensive Due Diligence Process. A good due diligence process will replace taking chances and entering the pre-construction market with a strategy to lessen the risk of any loss. That said, the question remains in how a typical pre-construction investor could conduct a due-diligence process to reduce the risk of the loss of his investment.
Historically a real estate investor either did not do any due diligence or joined a real estate group, such as a REIT, that afforded them a more professional approach to mitigating the risks in choosing a project. Working with an investment group has many other merits. Most developers tend to grant more favorable terms to a bulk buying group and the bargaining table is normally tilted more toward the investment groups than an individual buying a single unit. However in this re-emerging pre-constructions market there are not that many real estate investment groups as before and if found, they might be engaged in projects that are not a good fit for certain investors.
To fill this void for individual preconstruction purchasers we have compiled a list of the to-do items that based on our experience in both working with developers and preconstruction buyers are essential tools that will separate a seasoned pre-construction buyer from rest of the pack:
1) The Principals- The first step is to identify the main players in the project i.e.: a) Developer b) Architectural Firm c) Lending Institute d) Escrow Agent e) Marketing Group
2) Land Ownership– does the developer own the land outright or do they have the option to buy, red flag the projects that the developers don’t own the land.
3) Financial Overview- the following items are normally a tell, tell sign of what is in the future of the project:
a) How much equity does developer already have in the project
b) How much fund is dedicated to the future of the project
c) Has lending institution granted a loan commitment yet
d) What is the latest appraised value of the land
e) What terms are in place by the lender in order to secure a loan
Just remember the more skin the developer has in the project the more chance of success the project has.
4) History of the Past Projects– The list of developer’s attempted and completed projects is a good indication of their strength and discipline.
5) The specifics of the project– write down all details of the project like:
a) Price point
c) number of units
d) Targeted market
Are few of important points.
6) Location, Location, Location– this rule would never fail you. If the location does not match the targeted market no matter how beautiful of a project a failure is just around the corner. If the final price of each unit is too expensive for the location, for example, finding home buyers willing to pay that will prove difficult if not impossible. Some other factors that could also influence the location of a project are: demographics, other planned projects in the area, population expansion along with job increase
7) Zoning, Permits, and Environmental Issues– If the zoning is approved for the project and what is the status of permits or if the project is in violation of EPA
8) Development Overview– Developers usually compile a comprehensive overview of their project that is not offered to pre-construction buyers like you without asking. Ask for it!
9) Due Diligence Package- one of the first phases in starting a project includes feasibility studies and economic studies that are used as a guide for the developers as well as presenting them to the financial institutions to convince them of the viability of the project. Developers have these studies in their possession, Ask for it
10) The Cardinal Sin– do not go directly to the developer without a broker. Service of a real estate professional does not cost you, use it. Locate an agent that is experienced and specialized in the sale of pre-construction properties.
11) Final steps– study all the information that you have gathered to reach your own educated conclusion.
Excellence in service and loyalty to our partners with ethical guidelines will help the pre-construction real estate investors and developers alike. The good developers always appreciate the educated consumers. Whether you are buying your first home, a vacation home or trying to take advantage of preconstruction discount opportunities as real estate investment, please contact us. During the past market, we successfully fulfilled near $500,000 in pre-construction contracts and preserved the deposits of our buyers, how many other brokers could claim that?
If you are a developer with a solid project, use our experience and let us present your project to our partners and expedite the pre-sale of required units and construction loan process.