Pre-Construction: Frequently Asked Questions
WHAT IS PRE-CONSTRUCTION?
Pre-construction is an opportunity to purchase a condominium that has been proposed, but not yet built.
HOW DO YOU RESERVE A CONDOMINIUM?
A pre-construction condo can be reserved with a reservation agreement and a deposit.
WHO HOLDS THE DEPOSIT MONIES?
An escrow agent of the developer holds these funds. It can be a law firm, a title company, or a real estate agency.
DO I EARN INTEREST ON MY CASH DEPOSIT?
Usually. The funds are invested in a low interest account. Any interest paid to the account is applied to the purchase price.
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 15 days to review the offer, and make your decision to proceed with the purchase, or cancel.
WHEN DOES THE CONSTRUCTION START?
Construction will commence once the developer has sold a number of units (usually 80-90%) and the construction loan is funded.
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 construction.
HOW MUCH DEPOSIT MONEY IS REQUIRED?
It depends on the developer and the construction lender. Usually it is 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 and the construction lender. Usually a two-year irrevocable letter of credit can be used to secure the deposit placed with the developer’s escrow agent.
WHAT DOES THE LETTER OF CREDIT COST?
All banks and lending institutions vary. However, 1% to 2% per year of the deposit amount is customarily 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 as agreed.
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 issued. In any event the consumer is protected by 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 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 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 $100,000. We cannot guarantee your profits. Remember you have reserved a unit probably with a letter of credit, so any profit realized could be substantial. On the other hand, 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 that you, as the first buyer, were under.
WHAT HAPPENS IF I SELL MY UNIT PRIOR TO CLOSING?
Usually, the developer will collect 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 may or may not be returned with any interest earned on your account, or your letter of credit may or may not be returned.
WHEN DO I RECEIVE MY PROFIT ON THE PRE-SALE?
Your profit will be paid when the new buyer goes to closing.
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 buyer’s 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 would 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 developer’s 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.
