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 to $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 for his construction loan, you will be asked to go to a 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 direct to hard contract. This usually happens after a 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 is required?
It depends on the developer and the construction lender. Usually it is 15 to 20 percent 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 to 2 percent 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 you 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.

What does "need not be built" mean?
This means that the developer is allowed to pre-sell the condominium which has not been constructed. It also means that it may not be built if all permits and approvals are not met. In any event the consumer is protected by the Alabama condominium law.

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 your unit is worth more that 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 $50,000. 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 in a 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 percent cash or letter of credit, at that time, from the 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 put 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 you cash deposit or your letter of credit will be called. 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 contingencies, such as financing?
No. This sale is treated like a cash sale. However you are welcomed to obtain financing and agree to pay the additional costs related thereto. I repeat, this sale is not subject to financing.

I hope this helps to explain pre-construction and how it works. Do not miss out on an opportunity that could provide a substantial profit. For further information please call Pete Vakakes at 1-888-840-5864 or locally at 251-948-8008.

Thanks for your time!

Sincerely,

Pete Vakakes Assoc/AL/Broker ABR, GRI
Designated Florida Broker