Buying pre construction is the "ART" of purchasing property prior to its completion. You are basically buying a unit based from a floor plan, artist renderings, and or building model. In my eyes pre-construction is one of the greatest ways to buy property in New York. Many New Yorkers purchase these types of properties, live in them for a few years and start the process all over again while seeing great appreciation on their property. I personally know of a family who moves every 2 to 3 years and lives off of the profit that they make on every transaction. Granted they purchased 3 units at a time, but my point is that this can be very profitable.
Buying pre construction can be tricky, so I highly recommend that you find a knowledgeable agent to guide you through your purchase. Not to mention it does not cost you anything as a buyer, the agent's commission are paid for by the developer. So why not get free service and free advice. A popular misconceptions is that a purchaser will get a better deal at a development if he or she purchases without a broker, since the developers don't have to pay a broker's commission. This is truly a FALSE statement. Having a great broker right next to you is like having Einstein giving you all the answers to a physics test. These brokers know how to talk the talk, and walk the walk. They know what layouts are great, and they know how to spot a good deal in the building. Also, a knowledgeable agent will be able to guide you to great projects and steer you clear from the ones that you should avoid. Last but not least a great broker would know which developments are willing to taking offers , paying closing costs, or even giving away free storage units. Remember not all projects are created equal. Believe me the last thing the sales people want to tell you is that they are willing to discount their unit. Remember have the right broker next to you.
Thousands of NY real estate investors have made money in purchasing pre construction, why cant you? The answer is you can, but you better make the right choices. I can't stress enough, to have the right people on your side. The people who I am referring to, is you real estate agent, your mortgage broker or banker, and last but not least your real estate attorney. If you connect a line to each one it forms a triangle. And guess who should be in the middle of that triangle? That's right, it's you. This triangle of power is designed to make your transaction a smooth one. Granted it would be great if all three knew each other but that rarely happens. Basically find the ones that are great at what they do and are great communicators. When all of the people involved communicate well and are good at what they do, the transaction should be smooth.
Here are the basic keys to making money in pre construction:
1. Learn The Language: Every developer and marketing team speak the language of price per square foot ($ per sq ft). It is very important for you to know this concept. Knowing this concept will allow you to gauge the value of the unit. For example: You are looking at a unit priced at $1,000,000. The size of the unit is 1000sq ft. $1,000,000/1000sq ft= $1000 per sq ft. Now a days it is very typical for a new development to start at above the $1000 per sq ft mark. Sometimes 1200 to 1500. I have even seen some as high as 5000 per sq ft. If you are a first time investor I would suggest starting off small.
2. Know Your Objective: In essence everybody who purchases real property is an investor, and as an investor you should be able to figure out what you are going to do with your property before you buy it. Generally there are 3 basic options to choose. You can live in it, sell it, or rent it out after closing. If you are going to sell the property you purchase, you have to be aware of the general direction of the market. This will greatly affect the amount of profit potential you could see. If you choose to rent out your unit, definitely do the research and check the surrounding areas for the current rental market conditions. This way you could determine what your unit should rent out for and this way you could also determine how much money you would like to put down. Most developments are now requiring a minimum of 10% down. But generally with only 10% down that will not put you in a position where you would be getting positive rental income. If you are looking to get positive rental income I would suggest putting at least 20% down.
3. Pick The Right Project/Development To Purchase: Remember not all projects are created equal. Now a days' everybody is a developer. There are so many projects to choose from. Pick a project from a developer with a good track record. I am not here to promote one developer over another but developers like Related and Extell put out some great projects. Remember, New Yorkers like to purchase properties with substance behind them. Certain developers and architects give these projects its flair, pizzazz, or wow factor. Those developments tend to sell and appreciate better than others.
4. Choose The Right Unit: Now what I am going to tell you is very subjective. Some brokers out there may agree to disagree with me, so to each their own. In my opinion, purchase the best unit you can afford. If you could afford a great one bedroom, with a great view, with a great layout, with great space and on a high floor vs. an o.k. 2 bedroom on a low floor with not much of a view and a bit of a quirky layout, I would say get the one bedroom. Spend your money wisely. In my opinion the more "wow factor" the unit has, the better it will sell in the future. Some agents believe to get the best priced sq ft in the building, but that may limit your options to an odd layout on a low floor with questionable views. The best priced per sq ft unit is not always the best purchase. Also you should know the demand. Is there is a greater demand for the family style units like the 2 bedrooms and 3's in the Upper West Side? Are the Studios really selling like hot cakes in the Lower East Side? How are the 1 bedroom sales and rentals in Chelsea? Knowing these answers will definitely help you make your decision. Over all I see a bigger emphasis on the purchases of 2 bedrooms and up. I think the market has shifted towards the larger units and full service concierge style buildings with every amenity under the sun, like sun decks, swimming pools, indoor volleyball and basketball, Fresh Direct deliveries, screening rooms, indoor simulated golf...... You get the picture!
5.Purchase At The Right Time: Generally when a project initially goes on sale, the lowest price one could purchase a unit is called the offering price. Sometimes this price level is reserved for friends and family of the developer / sponsor. This is the time period that you should try to purchase a unit in that development. Sometimes you may need the inside connection to get this done, it is hard, but it does happen. Certain agents and brokers in Manhattan have very close relationships with the developers, sponsors, and marketing team and sometimes they have the ability to get their clients in at these reserved prices. They usually do not advertise this, so make sure you have the broker with the inside scoop. The sponsor does not sell all of the units in the building all at once. They release blocks of units in the building one at a time. Usually, as the blocks get sold they increase the price according to the demand of the project. If the demand is great, you can surely expect the next pricing increase to be pretty big as well. And vice versa, if the demand is not "hot", you could probably expect the prices to stay level or even dip a bit. It is not uncommon to see a project with over 20 pricing increases.
6. I Love It, I Want It, Lets Buy It: OK now your talking!!! How do I actually take a unit off of the market? The first thing the sales people are going to ask you for is yours and your lawyers information and sometimes a check for the offering plan ranging from 75 to 200 dollars. Not all developments charge for the offering plan and some of them are actually refundable if you choose not go ahead with the purchase. Now for the nitty gritty.. the offering plan is basically a giant book with all of the legal details of the development. Your attorney's job is to review the offering plan with you and explain to you the good, the bad, and the ugly. If you choose to move forward with your purchase, your attorney is going to ask you to sign the contract and return it to the developers with your 10% deposit. Once the sponsor takes receipt of your contract and deposit, it is now official, you are a proud owner of nothing tangible...
7. Now What?: OK... so you have purchased your piece of the big apple and your closing is scheduled to happen in about a year. What do you do? The answer is simple. Sit back, wait for the development to finish it's construction, relax and enjoy the appreciation on your property. Most developers are pretty good about letting you in the construction site to see the progress of your unit. Just remember it is a construction site and they will make you sign a waver and wear a construction hat for insurance and safety purposes.
8. Your Closing Is Coming Up, Time To Get Ready. At least a month before you close, you should be preparing with your broker, lawyer, and mortgage person for the closing date. But even before you close you and your broker should be preparing you for your walk through. This is a chance for you to walk through the unit and find all the imperfections that need to be addressed like a scratched floor, broken dishwasher, or a missing light bulb etc. Since you are buying a new construction property, the unit comes with a warranty against manufacturer and construction defects for a limited period of time. As you find the defects in your unit, these defects are to be noted on a document called a punch list. All the items on the punch list should be fixed prior to your closing date. You could also request a final walk through to see if all the items on the list have been resolved. As for your mortgage broker, he will have to send an appraiser prior to closing. And your attorney will have a lot of paperwork ahead of him.
Closings are really never a fun process, but a well planned closing is a breeze. Although it is not really required for your mortgage person or real estate broker to be there, a caring mortgage person and real estate broker will be there to hold your hand through the process till the bitter end. I personally have been to every closing because I care and I want to make sure the customer walks away from the transaction with a positive experience.
A short list of the:
Pros
-No board approval needed
-You are the first to live in a brand new unit
-You are purchasing hopefully below market value and you do not need to make a single mortgage payment till your closing date, and with some developments that could be 2 years of appreciation.
-Most new developments come with a 421 tax abatement. (Why pay full taxes if you don't have too)
-Typically a very safe investment, since sale of the development is closely watched by the attorney general. Every pricing change needs approval before it can actually take place.
-Most new developments have great amenities
-Typically low common charges
Cons
-Don't count on the construction finishing on the time. In my experience, I rarely see a development finish when they say it will be completed by.
-Although rare, I have seen a few projects that never were completed due to poor sales. If the sales are poor, the project may never take place. In this case the people who purchased units, received there money back.
-You purchase based off of a floor plan. It may be hard to visualize the unit without actually being in it.
-In some developments the abatement is delayed in taking effect. In that case you end up paying full taxes till the abatement kicks in.
-Sometimes when you move in the amenities are not yet finished.
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