What is a pre-construction?
Updated March 10, 2022
A pre-construction sale is the purchase of real estate—most often a condo—before the project is completed. A major advantage to making such an investment is that early buyers can often purchase at a lower price than those who buy after the project is finished. This is because developers offer discounts in order to meet sales quotas set by their lenders, which may require a percentage of units to be sold before issuing a construction loan. Buyers of pre-construction will also face less competition with other investors, and therefore, in particularly desirable buildings, get in before things like bidding wars can happen.
However, there are also potential pitfalls, like delays in construction that mean buyers won’t be able to move into their homes on the timeline they had planned for.
Given the greater degree of uncertainty, there are special considerations for those buying pre-construction. Photo: Pixabay
How do you buy a new construction?
A pre-construction buyer and their attorney will review the developer’s offering plan, a lengthy document that includes floor plans, pricing, amenities and more (but all of which may be subject to change.) The buyer puts down a deposit, which is placed in an escrow account. The deposit may be structured as an initial 10% of the purchase price, with more payments as the development nears completion.
Buying early allows the purchaser more leeway to bargain on the size of the initial deposit, and they may choose to include clauses in their contract that allow them to back out of the deal and have their deposit refunded if there are issues like significant construction delays.
During the construction process, buyers have time to save for the remainder of their deposit. Financing a pre-construction purchase can be complex, as many lenders will not issue mortgages until the building meets specific requirements, like the number of units sold. To address this, developers often have a “preferred lender” that handles financing in advance of the building’s construction. This is a nonissue for all-cash buyers, who can make the required deposit and then wait for the project to be completed. Once that happens, they can close on the purchase quickly. Paying cash makes this a nonissue, too.
As construction nears completion, buyers may be able to view a model unit, as well as attend information sessions about closing on the deal and moving into the building.
Once construction is complete and the property move-in ready, buyers will go through a pre-closing inspection, at which point any last-minute concerns can be addressed. At closing, the loan is finalized and the buyer pays closing costs, which might include transfer taxes and sponsor attorney fees, both of which can be negotiated at the contract signing.
What should I consider when buying a pre-construction?
Given the greater degree of uncertainty, there are special considerations for those buying pre-construction. Buyers should always begin by looking into a developer’s history and reputation to ensure they’re investing in a reliable project. When they put down their deposit, they should also include an “outside date” in their contract—that is, a date by which they can back out of the deal if the development is not yet completed.
Buyers should also look closely at the offering plan for variances—that is, differences in aspects of the property between what is described in the plan and what results from construction. This can influence square footage, ceiling height and other key aspects of a home.
Some pre-construction buildings receive tax breaks. For instance, in New York City, many new condo developments benefit from tax abatements that lower monthly property taxes for a predetermined period of time, so buyers should inform themselves on whether this is a factor.
Other considerations include lifestyle factors like the building’s amenities and unit views, as well as whether it will share space with commercial tenants. For investors, it’s important to look into the prospects for renting out their units, or whether there are limitations on resales.