Southwest Florida Real Estate Investment Analysis 

 Preconstruction Purchasing

Buying a new home in a new community is a very attractive idea. New is often better, and fewer repair expenses would be expected as well. Making your own design choices to reflect your own tastes up front is usually better than buying and existing home and remodeling. Because of the tremendous influx of buyers, builders were stretched to catch up with demand until 2005. Market appreciation rates reflected this imbalance and offered great opportunities for the careful buyer until last year. In 2006-2007, the market changed.  Though it has changed, there are still  many builders utilizing preconstruction purchases for financing their projects.  Your deposits enable them to obtain construction financing.

Exercising extreme caution is critical for today's buyers.  Seek expert guidance and read the contracts thoroughly.  The contracts are written by and for the builders, often including many escape clauses on timing and quality, while not allowing buyers many alternatives.  The financial strength of the builder is extremely important.  If they go bankrupt, for instance, your deposit could be lost.

Not only could you lose your deposit, but the value of the homes may decline if the builder abandons the amenities or doesn't build them at all. Expenses for the amenities are left to the remaining homes in the development and can be substantial.

There are many formats used by developers, but a typical scenario would involve a down payment of 5%, 10% or 20% depending on the price, time until occupancy and other factors. There could be a further down payment at later stages of development, but the total is usually 20% or less.

EXAMPLES

Let's run an example of how this actually works in theory. If you put down 20% on a home of $300,000, that is a deposit of $60,000. If this home is ready in a year, and appreciation is 10% of $300,000, your appreciation is $30,000 before closing or ever taking possession.  If there is no appreciation, you have no paper gain.  If prices go down, you are in the red before you even close. Some builders have a price guarantee insuring you would be getting the lower price if it declines before purchase.

Under the scenario where there is appreciation in the property, and if you have a buyer for this property at the time of close, a simultaneous close may be a possibility. Depending on the title and mortgage company practices, a single financing may be required instead of two financings, simplifying the transfer and saving costs.  This will have tax implications you should discuss with your tax specialist as it could be taxed as regular income.

If you finance yourself and take possession, holding this property for over one year after, it may be eligible for capital gains treatment. Appreciation rates are not predictable, and can change rapidly, as we saw in 2005-2008.

HOW TO FIND PRECONSTRUCTION DEALS

In constructing "planned communities", their usual method is to buy a large piece of land and plan to develop and release property in stages. This process can take five to ten years. The earliest stages generally are lower in price because fewer amenities may be built and more risk (or vision) is required for buyers. Each section released is generally higher price and pricing within a "release" changes with time also. For this reason, it is important to have experts keep watch for good properties coming to market well in advance. Contacting Chris Quackenbush at 239-823-2980 is your first step to finding great deals in Southwest Florida.