Preconstruction Finance Risky But Offers Big Yield

202, 101Developers have clamped down on buyers flipping contracts before completion, because it creates the prospect of market instability. But, even at this later stage of this market, investments in the right units in the right properties in a prime location will always perform well.

Kevin Tomlinson, a broker with EWM Realtors in Miami Beach specializing in preconstruction investing.

The message blaring from a South Florida real estate ad packs a powerful punch: “Buy preconstruction and GET at least 80% return on initial investment.” A Miami agent was just as upbeat. “I’m here to help my clients make money through preconstructing investing.”

Thousands of people are socking away tens of thousands of dollars in South Florida condominium units before the buildings go up. Many are banking on a quick run-up in value, but the competition for a real estate buck has grown more heated in recent months with a rush of developments.

Several brokers and real-estate investors say they have made money by carefully selecting properties.

“I only buy waterfront, the largest unit on a high floor with the best views and a good floor plan,” said Gary Shacni of Miami Beach.

Preconstruction buyers have to put down a cash deposit of 10 to 20 percent when reserving a unit, add an installment at ground breaking six to 10 months later and close the sale with the balance when the building is completed up to two years afterwards.

Developers do offer incentives – like a 15 percent discount for early investors – when they are still seeking construction financing.

However, not every buyer has access to these discounts. Investors also have to be prepared to face such contingencies as construction delays or financial troubles on the part of the developer or contractor. There’s the ever-present risk of having to walk away from hefty deposits if they can’t or won’t pay the several hundred thousand dollars required to close. And buyers who want to “flip” their units – resell them before closing – are finding a less receptive market now.

Although property prices have continued to rise, some real estate experts perceive a radical change in the market over the past six months.

“Everyone thought the bubble would burst on spec buying and oversupply,” said Henry “Hank” Rodstein, president of Miami-based H.R. Mortgage & Realty. “Instead the bubble has burst on the developers who are seeing steel and concrete prices push construction costs up 15 to 30 percent.”

Rodstein said he thinks that as a result many projects on the drawing board will not happen.

“We are not building that much, that fast, as the number of people moving to the area continues to rise,” he said. “Investors have a tough call now because they have to buy at a higher basis due to increased construction costs. I’m much more nervous today with prices that were $250 to $350 a square foot three years ago hitting $400 to $600 a square foot.”

REAL ESTATE CONCERN

Even so, commodity increases will only push unit prices up about 10 percent, said Craig Studnicky, executive vice president of International Sales Group, which represents many major new condominium developments in Miami-Dade and Broward counties.

“I’m more concerned about the price of real estate outpacing household income,” he said. “That will make it harder for people to qualify for mortgages.”

The current conditions may separate the novices from the pros, said Michael Cannon, managing director of Integra Realty Resources.

REAP THE REWARDS

“We’re in a cycle where inexperienced investors and developers will get burned,” he said. “Speculators are going to have to retreat from the market.”

Yet some brokers say there still can be financial rewards.

Some speculative buyers have cashed in on a rising market by assigning their units to other investors or users (with or without the developer’s blessing). For example, a 22nd-floor unit in Murano on South Beach was first purchased from the developer in April 2002 for $1,241,000 and resold in January 2003 for $1,800,000. In April 2004, the completed unit went for $2,525,000.

Marco Galbiati, an Italian who lives in Venezuela and Miami Beach, has been actively investing in projects preconstruction. He became a broker in order to invest for his family and friends buying five or six units at a time.

“I like the power of leverage; that a deposit of 20 percent of my capital controls 100 percent of the product,” he said. “By buying at a discount and with great appreciation, it’s been possible to double my money in two years.”

His first venture was into M Resort and Residences in Sunny Isles Beach. “My incentive to buy into a condo hotel was the safety valve of a furnished unit that could be rented if I had to close.”

A LITTLE HELP

Since then he has helped friends take advantage of the strong euro to buy oceanfront properties that attract Europeans and Northerners and are easy to resell.

“Good condos sell out very fast in the early stages,” he said. “You need to know what a developer is doing, what’s his track record, and his price range.”

Galbiati is still upbeat on preconstruction investing.

“I think some areas have the risk of oversupply,” he said, “but, as an investor, you must be ready to ride a project all the way.”

Shacni saw real estate as a good alternative to stock market investing when he relocated to South Florida.

“I know the risk is limited if I move in,” he said. “Since I’ve lived here I’ve moved three times; and each time seen the property appreciate at least 35-50 percent.”

Kevin Tomlinson, a broker with EWM Realtors in Miami Beach specializing in preconstruction sales, said that the process works well if buyers know what to expect.

RIDING THE STORM

“The first year may be a little unnerving until inventory gets absorbed,” he said. “And at closing, you may find the investors who need to sell their units undercutting the market. But if you bought the highest apartment in the best line you can afford, you can wait out the storm and come out ahead.”

And, in case of a storm, “most seasoned investors have an exit scenario: “Who do I ultimately sell to?” Studnicky said. “The smartest with the most money close on a unit and hold for a year after completion.”

Points to consider before investing in a project, preconstruction (This assumes you are prepared to tie up your deposit money for up to two years until a project is complete.):

* The location. What does it have going for it?

* Is it a big, popular building with hundreds of units that may create competition when you want to sell? Or is it a smaller, boutique building with fewer potential resales?

* Who is the developer? Is he known for quality? What is his track record? Will he build it, finish it and deliver it on time?

* Who is the contractor? What is his reputation?

* Who is the architect? Is he known for designing good layouts?

Check the floor plans, layout and views for yourself.

* Read the fine print. Developers have different stipulations.

* Will you be allowed to assign your unit at any time? Will you have to wait for 95 percent of the building to be sold before selling? Or will you have to close on the unit?

* How large a deposit will you be required to put down?

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The Bath Club: 112 Tower Residences start at $1.7 million. It’s due to be completed in the beginning of 2005.

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GROUNDBREAKING: Construction machinery digs up earth at Canyon Ranch Living, located at 6801 Collins Ave. Preconstruction investment, while risky, promises big returns.

Photos Courtesy of Kevin Tomlinson

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