The Daytona Beach area underwent major changes from 2005 - 2008. New luxury condominium buildings were sprouting out of the sand on beachside and the riverfront. These lavish condos are now available at preconstruction prices and significantly lower. We've experienced many short sales and REO's and it looks like we're nearing the end of these distressed sales. Its a great time to take advantage of this market and get in on the newest construction in Daytona.
This part of the Florida coast is still some of the best priced oceanfront property from Miami to Maine. As the price of oceanfront lots gets higher and higher, developers are waiting for the right time to start building again. Allow the expertise of Remax Signature. and NADINE CALDWELL assist in your next transaction. We take the time to constantly gather and analyze preconstruction opportunities so that you have all need to make an informed decision. We are not employed by any developers, so we can give you objective info.
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Frequently Asked Questions
What is Pre-Construction?
Pre-Construction is an opportunity to purchase a condominium that has not been built, but has been proposed.
How do you reserve a condominium?
A Pre-Construction condo can be reserved two ways. First a simple reservation agreement can be signed with a deposit required of usually 10% or it could be as low as $5,000 or $10,000.
Who holds the deposit monies?
An escrow agent of the developer. It can be a law firm, a title company, or a real estate agency.
Do I earn interest on my cash deposit?
Yes. The funds are invested in a low interest pass book account. Any interest paid on the account is applied to the purchase price. When the developer sells enough units, and is applying to go to hard contract for his construction loan, you will be asked to go to hard contract.
What is a hard contract?
A hard contract is the binding agreement that converts the reservation to a sale. When the contract is signed, generally you have 7 days to review the offering, and make your decision on proceeding with the purchase, or cancel.
(Note:) There will come a time, during the offering, that you will go directly to hard contract. This usually happens after some short time during the selling process.
Note: Some developers go immediately to hard contract. It depends on the developer.
When does the construction start?
Construction will commence once the developer has sold a number of units 80-90%, and will fund the construction loan.
Why does the construction lender require so many sales?
The loan to build a project is substantial. The construction lender usually requires binding contracts, with deposits, in order to fund the construction loan.
How much deposit money is required?
It depends on the developer and the construction lender. Usually it's 15 to 20% of the purchase price.
Do I have to put a cash deposit down, or can I use a letter of credit?
It depends on the developer. Usually a two year irrevocable letter of credit can be used to secure the deposit placed with the developers escrow agent, and with the approval of the construction lender.
What does the letter of credit cost?
All banks and lending institutions vary, however, 1 to 2% per year of the deposit amount is charged. Check with your local bank for rates.
What format of the letter of credit is used?
The developer usually provides the type of letter that needs to be used. This letter has been pre approved by the construction lender, and normally cannot be changed.
Can I lose my deposit?
The only way you will lose your deposit, whether it is a letter of credit or cash, is if the building is built according to the contract, and you fail to close when asked.
What happens if the building is not built, and it was no fault of the purchaser?
Your cash deposit will be refunded with interest. Your letter of credit will expire and it will not be called.
How long does it take to build a new condominium?
Generally it takes 1.5 to 2 years to complete, depending on weather and other factors.
What are the benefits of buying Pre-Construction?
You take advantage of being in on the "Ground Floor". As the condo is being built, it is hopefully appreciating over time. Remember that you purchased at the Pre-Construction price. If appreciation takes place, then at completion you unit is worth more than what you originally paid for it, thus a profit is created.
How much profit can be made at or near completion?
It depends on the general market conditions, interest rates, and competition. There is no guarantee of profit, however, a substantial gain can be realized. In the past few years, profits have run from 10,000 to as much as 200,000. We cannot guarantee how much is made, but based on past sales and history profits have been realized.
Note: Remember you have reserved a unit probably with a letter of credit, so any profit realized could be substantial. On the other side, if the unit is not sold before closing, you will be expected to close. At that time, at your option, you may then want to furnish the unit, put it on the rental program, and continue to have the unit marketed until sold.
Can I sell before closing?
Generally you can if the developer allows a new purchaser to take over your contract. The new purchaser must come under the same Pre-Construction purchase and escrow agreement as the first buyer.
What happens if I sell my unit prior to closing?
The developer will collect 15 to 20% cash or letter of credit, at that time, from the new buyer. The new buyer then steps into place to close. Your cash deposit will be returned with any interest paid on your account, or your letter of credit will be returned.
When do I receive my profit on the pre-sale?
When the new buyer goes to closing, your profit will be paid at that time.
Are there any risks in selling before closing?
The only risk is if the new buyer fails to close in such an event, the developer will keep the new buyers cash deposit or call the letter of credit. Any profit realized would be lost. The unit would then be back on the market for sale at the current selling price.
Note: It is unlikely but possible, that the new buyer will forfeit such a large deposit or letter of credit, especially when the hard contracts are in place.
Do I have to close on the unit if I have not sold it prior to closing?
Yes. If you do not sell your unit, you are expected to close, otherwise you will forfeit your cash deposit or your letter of credit will be called, and you could be sued to perform under the terms of the contract.
Are there other costs related to the sale?
Yes. You will be responsible for some closing expenses such as title insurance, funding of the association, insurance, reserves, etc. These charges will be outlined in a "Good Faith Estimate" provided by the selling agency, and in the developers offering statement.
Are there any other contingencies, such as financing?
No. This sale is treated like a cash sale. However you are welcome to obtain financing, and agree to pay the additional costs related thereto. I repeat, this sale is not subject to financing.
What about my Return on Investment?
Your Return On Investment (ROI) will vary according to your overall strategy and risk tolerance. There are various ways to manage your investment dollars. Our best advice is to consider an investment approach that is consistent with your current investment strategies and goals. This may look different for each individual
Buying is historically the best strategy. Yes, this sounds pretty basic but if you think about it, many people sit on the sidelines waiting while the market doesn't. If you hesitate, particularly in today’s market, then you might be giving up a portion of a future equity position. No one can time the market either. Successful real estate investors say you make your money on the purchase, not on the sell. If you continue to wait to purchase then when will you have something you can sell?
Many people get all caught up in the idea that they have to be the first to buy in a pre-construction property. These days that's easier said than done much of the time. If the market is moving and a buyer is waiting for the next offering then they might be missing out on appreciation had they purchased in another development. There are many excellent opportunities that may be purchased at Hard Contract or even via Assignment.
There is no answer better than another when it comes to exit strategies. Everyone has their own financial situation and goals. Some buy and sell frequently and utilize the 1031 exchange procedure. Others will hold then sell after a year to minimize capital gains expenses. Some will hold for a long time to see cashflow and build a residual revenue stream.
Short or Long term?
As with any real estate purchase there are short term and long term opportunities to sell a property and profit. To make the “right” decision you’ll have to answer your own questions about risk, cash-flow, capital gains and personal ease of mind.
Selling a property in the short term can provide a quick return but may be short sighted and you could miss out on further appreciation. You’ll then have to consider what to do with your returns ... invest it else where or let it sit in the bank. There are various tax implications as well with Capital Gains Tax and 1031 Exchange. You will want to consult a tax professional.
Holding a property for the long term can provide positive cash-flow and build equity in property which can become an annuity over time. When you hold your property long term then you understand the ups and downs of any investment and are prepared to ride any changes in the market. Historically an up and down market still maintains an upward path over the long term.
As with any investment you should consult the advice of a professional such as a Certified Financial Planner (CFP) and/or a Certified Public Accountant (CPA) to further understand the risk and tax implications of investing in real estate.
I hope this helps to explain Pre-Construction purchasing and how it works. Do not miss out on an opportunity that could provide a substantial profit. For further information or available projects and offerings contact me today!
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