$100,000 at Closing
PreConstruction
Investing:
The Way to Make BIG Money
in Real Estate
 |
What
Donald Trump Won't Teach You About by: Richard Odessey Don’t make the common mistake of being unprepared! |
You
have probably heard that preconstruction investing is
the way to make BIG money in real estate.
Well, it is true. It is such a lucrative market that it is garnering attention
across the country, from prime time television to the New York Times.
In fact, there are numerous stories in a recent New York Times
report. For instance, a preconstruction investing property Michelle and
I just secured earlier this year has appreciated almost $100,000 in just
six months, and a deal we are investing in on one of the projects is potentially
going to pave the way for a $250,000 profit.
So what is preconstruction investing?
Preconstruction
real estate investing is the art of buying properties at a very
early stage in the construction process. Developers are selling a future
property in-order to get money down on the project. Investors buy a plot
of land at market value, and the value goes up as soon as the land is
broken and developed.
Profit is made from then selling the property at a later time once the
property has appreciated from putting in roads and utilities, adding a
home or community amenities.
The benefits of preconstruction investing are becoming apparent to more
and more real estate investors. It’s the classic buy low/sell high
scenario. The problem is that many investors try to enter the
preconstruction investing niche without the education they need to make
money and avoid getting in over their head or getting scammed.
Don't Buy The Sizzle, Buy The Steak:
That’s good advice, but unfortunately most preconstruction investors
find themselves paying thousands of dollars to go on a “preconstruction
buying tour.” This is really market-speak for getting driven around
to various properties and hear sales pitches by various developers. Then
they’re encouraged to whip out their check books and reserve various
preconstruction properties for $1000’s before “they’re
all gone”.
On the surface, insider access to these kinds of deals can seem priceless
to a preconstruction investor. After all, these deals are hard to find
and it takes a lot of knowledge and research to know what markets are
growing and where the greatest profit potentials are.
The problem is that a lot of new preconstruction investors go into these
buying opportunities “cold”, and the only information they
have to base their buying decisions on is the sales pitch of the developer!
This practice is reckless at best and financially ruinous at worst.
New investors in these situations get caught up in the hype of the moment,
and quickly make some of the most common and detrimental mistakes
in the preconstruction investing niche, such as:
- Believing what you’re told by promoters
- Not doing your own investigation of values and costs
- Not knowing financing terms and costs
- Getting caught up in the buying excitement
- Paying simply for the privilege of buying a property
- Thinking that what you like is what a potential buyer likes
- Buying the sizzle not the steak
Like any other real
estate investment, there is a certain amount of knowledge and experience
required to succeed in pre-construction investing. If you want be able
to rake in these kinds of profits yourself, you need to learn the in’s
and out’s of preconstruction or predevelopment buying, financing
and marketing.
The best way to gain this knowledge is from an experienced, successful
preconstruction investor who knows the preconstruction niche
and is willing to mentor you as you navigate this new investing territory.
The Benefits of PreConstruction & PreDevelopment Buying
What some investors do, and what you can learn to do from an experienced investor or preconstruction investing coach to make big profits from preconstruction and predevelopment opportunities, is to take advantage of a situation where there is forced appreciation - the increase in value of a property by something the investor does that has predicable consequences.
As investors
we understand appreciation to mean the tendency of real estate to increase
in value over time even if no improvements or changes are made to the
asset. This type of appreciation is not linear nor is it predictable.
It may be fast, slow or even negative for a period time depending on the
economy, location and many other factors.
In preconstruction, however, there is a certain amount of definite appreciation
as properties are developed, buildings and homes are put up, community
amenities are added or a market becomes a popular destination for buyers.
Many of the hot preconstruction investing markets are in retirement and
vacation communities as the baby-boomers continue to look into retirement
and active living opportunities.
Is Preconstruction Investing Right for You?
So what kinds of investors should look into preconstruction investing?
- Investors who want highly leveraged, high cash returns,
- Investors who like managing a team that makes them money,
- Investors who would like to enjoy the perks of property ownership in luxury vacation communities (golfing, outdoor activities, spa, etc).
On the other hand, investors who do not want to take the time to get educated
and know the processes, common mistakes and things to look for should
definitely stay clear of this niche.
Pre-construction investors need to understand these factors
and be able to predict the likelihood of forced appreciation in order
to find the best deals. Once these deals are found, strategy becomes key.
Here are some key things investors in the preconstruction niche need to
know.
1. Know your buyers - Value is established by the price
someone who has the means to purchase your property is willing to pay
for it. Since you make your money when you sell, the smart investor will
understand what his/her target market is, what they like to buy, and how
much they’re willing to pay for it. And do not think: “If
you build it, they will come…” Rather “if you build
what they are looking for, they will come”.
2. Know your strategy - Once you’ve understood
your market and found a community meeting their criteria, what should
your strategy be? That is, how are you going to force appreciation? Every
strategy carries some risk. Preconstruction investors need to have the
knowledge and ability to create strategies that will force their property’s
appreciation, make it attractive to their buyers, and thereby make their
deal extremely profitable.
3. Finance your Preconstruction/Predevelopment Project
- Virtually all preconstruction and predevelopment acquisitions require
money. So financing is an issue every investor has to address. Remember
there will be carrying costs on the loan until you sell the property.
There are a lot of choices, and the best one will depend on how long you
wish to hold the property, and what you predict the appreciation will
be.
***Personally,
buying and holding land is not a preconstruction investment strategy that
Michelle or I would recommend. The risks and costs are significant and
the return is unpredictable. What Michelle and I prefer to do, and recommend
is to buy and build a new home or condo. There are several benefits to
this strategy. There are also financing benefits to building a home on
a preconstruction or predevelopment lot. Namely, that the loan is frequently
based on the appraised value of the property after the home is built.
4. Manage the Construction - Time is money, and contractors
have to be managed. This means having a tight construction contract with
materials and timelines specified in detail and the consequences of non-performance
spelled out explicitly. The investor should also expect to make site visits
on a regular basis and be in communication with the contractor on a weekly
basis at least.
And once
you’ve decided on your plans, don’t change them. Change orders
are very expensive in both cost and time. It’s important to do all
the research and due diligence on materials, prices, and features before
the contract is signed.
5. Sell Your Property –Getting to the closing table
– that’s the great reward. But first, you have to sell the
property. If you’ve chosen the right development and a good homesite,
used smart marketing strategies, and priced it right that shouldn’t
be too hard!
Although this process may sound logical and intuitive, there are a lot
of factors that investors need to control. Uneducated investors, while
understanding the profit potential, don’t understand the numerous
variables that can make or break their deal.
This is why education is so important for investors looking
to enter any new market or the preconstruction investing niche. Having
a mentor to guide you through your first few deals can help you manage
the pressure and cut through the hype to the true profit potential and
possible issues associated with each and every deal.
Here is a list of common warning signs to watch for:
- Promoters that simply want you to pay to hear a property sales pitch
- Being pressured to buy without adequate due diligence on your part
- The promise of making a quick buck
- Developers that don’t have a convincing track record for marketing and selling the type of development they are promoting
- Developers who are using the buyer’s money to fund the development
- Not having solid comps to determine whether the property values for this type of development are continuing to rise
- Not knowing where to get the money to finance the acquisition construction and carrying costs until you sell
What preconstruction investors need
To summarize, new investors looking to enter the preconstruction investing niche need to have the following in order to be successful, and not loose their shirts by getting lost in the hype or the pressure to get properties “before they are all gone”:
- Education – learn from experienced investors who know all the in’s and out’s
- Market Research Strategies – information on the demographics and desires of prospective buyers
- Understanding of the Industry – knowledge of contracts, contingencies and negotiations
- Financing - understand how to create favorable financing options
- Process Knowledge - do the necessary due diligence so that you control the deal from start to finish
- Contact Network – create a team of professional advisors for financing, valuation, construction and marketing
- Protection - knowing warning signs and quick exit strategies
Here’s what we recommend
Like
every other aspect of real estate investing, education pays for itself
many times over.
Finding an experienced preconstruction investing mentor or reputable coaching
program is the best way to find success in a dynamic, fast-paced investing
niche like preconstruction investing. Mentoring programs can teach new
investors the ropes, while helping them avoid the pitfalls that inexperienced
investors often aren’t looking for.
What if you already knew the demographics of your target buyers, knew
what they were looking for, were able to find the communities that had
the features you required, were familiar with construction financing and
planning and knew how to get the property sold.
Then, I can tell you, it’s very likely you could be making a $100,000
plus profit on every preconstrution deal. That’s what I call making
your money when you buy.
Best of Success,
Richard Odessey
P.S. Are You Interested in PreConstruction Investing?
Since
we don’t know anyone who is offering this, Michelle and I are considering
putting together a course on PreConstruction Investing.
We’d like to know how many of our investors are interested. To let
us know, please click the link below and fill out the form. We will put
you on a special mailing list to give first crack at our PreConstruction
Investing Training at a “PreDevelopment” price.
Also, as a thank you for helping us gauge interest, we will send you a
free copy of my PreConstruction White Paper, which expands
the information in this article, and gives some more detail about what
investors need to know when entering the preconstruction investing market.
Go Ahead - do it now, because we will only be selecting a limited number
of investors for this opportunity.
