Pre-construction condos are units
that have been proposed by a
developer, but have not yet been built. When you purchase a
pre-construction unit, you are putting money down before construction
begins.
Buying a pre-construction condominium
can be a great
opportunity, but you should proceed with caution. Because you are
buying into something that does not yet exist, there is greater
potential for unforeseen problems and setbacks before you move into
your home. By understanding the risks and planning carefully, you can
avoid complications and come out a winner.
Advantages
The
main advantage to buying into a condominium development before
construction starts is that you often get a lower price than if you buy
when construction is complete. The reason for this is that developers
typically need pre-construction sales of 50 percent to 90 percent of
the units in a development before they can borrow funds to begin
construction.
Pre-construction condos can also get
you in on the
ground floor of an investment that will appreciate. The market value of
pre-construction units generally increases during the one to three
years it takes to build a development, so your unit may be worth more
than you've paid for it before you set foot in the place. In addition,
you can often choose from a variety of finishes and flooring options,
allowing you to customize your home.
How the process works
There
are several steps to buying a pre-construction condo. They can vary
from developer to developer, but the basic components are:
1. Reservation agreement
You
give a deposit (usually between $5,000 and $10,000) to reserve the unit
and set the price (although the builder can reserve the right to change
the price in the contract). The deposit is held in escrow and you can
cancel the agreement at any time with a full refund.
2. Condominium documents
When
a development is approved for construction, the developer submits
condominium documents (including budgets, association rules, unit
descriptions, materials and other important information) for approval
by the state. Once the documents are approved, they are sent to you for
review. Read them carefully to make sure that you will be comfortable
living by the association rules.
3. Right of rescission
In
some states, once you receive the condominium documents, you may have a
specified period (e.g. 15 days) to decide whether you would like to
proceed into a binding contract. If you don't want to proceed, you can
exercise your right of rescission and withdraw with a full refund.
Consult your lawyer to find out if the right of rescission applies to
you.
4. Hard contract
If
you don't withdraw, you'll provide the balance of the required down
payment, usually 15 to 20 percent of the purchase price, and sign a
binding contract agreeing to purchase the condominium. You generally
have seven days after that to cancel. This is your last chance to walk
away with no penalty.
5. Closing
When
construction is nearly finished, the developer will obtain a
Certificate of Occupancy on your behalf. A closing date is set when you
will hand over the balance of the purchase price and sign the final
documents. If all goes according to plan, your closing will coincide
with your move-in date and you will be ready to enjoy your new home.
What are you
waiting for?
