There seems to be a lot of
confusion out there about how time can be used to your
advantage in a preconstruction purchase. For those of
you that have listened to our mini course 2 video, you
know that when preconstruction purchases first started,
they began as a way for developers to get their projects
financed.
To recap, typically a lender for
the developer will force them to presell 50-65% of a
project before they will provide the first nickel of
financing. In the “old” days, this meant the developer
had to hire a marketing firm that could entice people to
buy units off nothing more than an artist rendition.
Before this concept really caught on, this was like
selling ice to Eskimos because people could not touch
and feel the project
To motivate people to purchase, the
developer would discount the sale of maybe the first 5%
of the units to a level where they were quite
attractive. Astute investors and vacation home
purchasers would come in and purchase those units in the
very first phase: PHASE I. These people would also
start telling their friends and the developer would do a
press release about how rapidly they have already sold X
units; that would start getting some more buyers but
they would be offered a different, PHASE II price; the
people who had already secured their purchase in Phase I
would now already have equity (at least on paper).
Once the Phase II people were in
place, more advertising would be done about the success
of the project and that due to demand, the prices were
going up yet again to Phase III pricing. Now the Phase
I people have just received an additional bump in
equity. This process continues until the developer
sells their 50-65% presales at which point they can go
back to the bank and get started on the project.
How would you like to be the person
in Phase 1? Yes, you and everybody else in the world
would as well. As this process started becoming better
known in some areas, then the exact same things played
out but maybe on a faster time scale. For example, I am
aware of 1 project where the developer opened up on day
1 with a single FAX machine (on purpose). The first 30
people got Phase I pricing……. Do you think there was a
little inside knowledge required to get in on the first
30? After about an HOUR, the next 30 were offered Phase
II pricing. The process was repeated until the building
sold out in 1 day. That was a very nice day for some
people.
We have had a similar experience in
our MasterMind Group which is all of one week old at the
time of this article. Because we had a little advance
notice, the members of our group purchased where offered
a price that was actually available to the public but
not much noise was being made. The announcement was
then made a couple of days later to the public but the
price bumped up about $10,000 for a 2bdrm unit. Today,
within 1 week, that price has bumped again to where they
have about $50,000 in equity on that unit (on paper).
Lots of things still have to happen to turn that into
real equity, or real cash depending on your use of the
property, but it is a very nice start.
In many locales these days, this
concept has become so popular that when a developer
“accidentally” mentions an upcoming project in a pre-release, they
are likely to have 1,000 people signed up for 200
units. To make it “fair”, they will hold a lottery to
select who gets a unit. Now the whole need for Phased
pricing, or even reasonable pricing is a little
different at this stage. If a developer has this much
demand for their product, there is really little need to
offer incentives to purchase but rather see how much
they can make.
While so far, most of these lottery projects have worked
for the purchasers, there will come a time when the
market is overdone….. At least for me, I am going to
feel much more comfortable knowing that I am in at a
price MUCH lower than other people rather than just
selected in a lottery. Of course, to do this, it means
you have to go out and find projects and locales where
the “old fashioned” approach is still being used.
Chris Anderson, PhD
chris@GetPreconstructionProfits.com
GetPreconstructionProfit.com
