$99 Down Preconstruction Condos!

By Chris Anderson, PhD

Ok, now close your eyes and imagine the late night infomercial proclaiming this!   It would come complete with pictures of yachts, tropical beaches, and Rolex watches of course.   In addition, there would be no less than 13 video testimonials about how "you too can be rich if you just follow this simple program!"

Obviously I was being flippant in order to introduce a very common question that we constantly hear regarding preconstruction real estate:   How much money is required to get involved in preconstruction investing?   The simple answer is it depends!   Since that answer would result in a very short article and some disappointed readers, let me clarify this a bit.   Actually, the answer is that it is typically between $99 and $250,000 and it all depends on how the deal is structured. Let's dig a little deeper into this.

To understand the preconstruction process, we need to understand the money trail.   Preconstruction opportunities typically exist because the developer needs to obtain financing for their new development project.   Frequently, a financier for the developer will agree to finance their project if the developer can demonstrate true demand for the project.   How do they do that? By the developer pre-selling somewhere between 30-60% of the project, the financier is comfortable with this project since they will be able to have their risk covered through the pre-selling.

Typically the financier wants to see REAL money put into this deal by the presell purchasers.   This is important because it lets you know that somehow, someway, at some point in time, the developer is going to need to get real money (or line of credit) from you to satisfy their financier.

Because each financier/developer has different needs and circumstances, the exact requirements for amount due at reservation (if there is a reservation period) and the amount due at hard contract will vary greatly.   For example, let's consider condo projects.   As a rule of thumb, typically 10% down is required and then another 10% letter of credit is also required.   But I have seen this drop to as low as $2,500 required at hard contract for a large townhouse project and as little as $1,000 for a single family home project.   In other words, it is all over the map.

If you are low on cash and/or want to get in on the cheap, then the obvious course of action is to find all the $2,500 and $1,000 projects that you can.   But wait! Before you make that your sole purpose in life, there is a little more that you need to consider.

In my opinion, people focus on the wrong thing when mainly considering how much up-front money is required.   I will make a statement that is considered blasphemy in many real estate circles.   Ready?    "INVESTORS SHOULD PLAN TO CLOSE ON THEIR PRECONSTRUCTION PURCHASES even if they fully intend to flip before closing."   Bottom line is that this is just simple risk control.

If you subscribe to that philosophy, now how much is required for this investment?   That will depend largely on your ability to obtain investor financing.   One of the 19 critical steps that I suggest in my home study course is to meet with a mortgage broker to determine exactly where you stand in your ability to obtain a loan to close the project.

Suppose you find out that it is pretty easy for you to get an investor loan with 10% down and your project only requires 10% down at hard contract.   If you PLAN to close, then you will need the 10% plus about another 4% for closing costs.   Then you will also need some cash reserves as you attempt to either resell or rent the property.   All things considered, you will probably need 15-17% of the project available in cash.   So even if the deal only requires $1,000 down payment, you may find yourself needing between 15-17% in reserve.

I know….I can hear you thinking "but the title of this article is $99 Down Preconstruction Condos!"    So how does that match what I said above? The answer is quite simple.   You call up your buddy who has plenty of money and take them out to a nice $99 dinner.   You then tell them that you have learned a ton about preconstruction and you have found a great deal for them but you don't have the money.   Would they be interested in partnering?

Chris Anderson is a leading authority on preconstruction real estate investing. Get his 4 day e-mail course and a 33 minute video free today! Visit http://www.GetPreconstructionDeals.com.

In addition, Dr. Anderson is the on-line training coordinator at the Van Tharp Institute, a group dedicated to providing world class training for investors and traders.