Flipping Pre-Construction

The Benefits and Drawbacks

In many hot real estate markets, a whole new breed of housing has arisen: pre-construction homes. Development companies buy land, put together various floor-plans, erect a sample suite and sell, sell, sell. If you live in a market that has pre-sale apartments, condos or homes for sale, flipping pre-construction or post-construction may be a viable and profitable opportunity.

The magic of this type of sale for the development companies is they get financing from the future buyers, sell the suites at projected market value and then use economies of scale to finish each suite. From a buyer’s perspective, if the buy is good and the market goes up, selling a pre-sale can provide a nice yield above and beyond the purchase price.

Here are the benefits and drawbacks to purchasing a pre-sale for resale:

Benefits
-typically can get away with not putting much money down
-don’t have to make monthly payments until project completion
-can buy direct from development company
-usually pre-sales have well thought-out floor plans
-stylish finishings put together by interior designers
-don’t have to paint, get appliances, or the like
-move-in and everything is brand new
-in a good market and good area, pre-sales can increase in value from the time of initial purchase to move-in

Drawbacks
-projects usually have a 2-year wait period from purchase to move-in
-not really buying a place, only buying the right to buy the place as mortgage officially sets in upon completion
-until occupied, a pre-sale is not subject to the same potential tax benefits of a regular flip
-cookie-cutter style –ie, everyone has similar color-schemes, sinks, floors, etc...
-depending on real estate market, pre-sale assignments can be over-priced, thus, if you try to sell before your move-in date, the buyer is stuck with paying your deposit plus any adjustments in market value
-if the market turns bad, pre-sales can run the risk of decreasing in value

If you’re looking to enter the flipping market with a pre-sale, educate yourself and decide whether the purchase is flip-worthy and provides the desired profit margin.

NOTE: some projects have restrictions on assignments, thus, read the fine print carefully.