Notes From the Trenches on Pre-Construction

Sunday, April 20, 2008

A while back, I wrote about some things I’ve come to look for—and to look out for—in pre-construction real estate deals.

We started getting e-mails almost immediately on the topic, and I want to share one of them with you.

Alex from Houston wrote in with some great additional observations on pre-construction that he’s learned from his own experience. He brought up some excellent points, especially for those who want to take as much risk out of the proposition as possible.

I’ll let Alex say it in his own words, but I want you to pay special attention to numbers 6 and 7 below.

The recommendations you made about buying pre-construction are all very good. Here are some additional things I look at before pulling the trigger:

1. Buy in an emerging, hot real estate market.

2. Look to see who else is building in the area. If you see big names like Four Seasons, Ritz, St. Regis, then you probably have a hot market.

3. Look for no capital gains and no (or low) real estate taxes. This gives you low carrying costs once you close.

4. Buy beachfront resorts. There is only so much beachfront property to go around.

5. Look at the financials of the developer. I often get a local attorney to look into this for me if I’m not familiar with the developer.

6. Buy in big-name, mega resorts. I don’t think Ritz Carlton, Weston, Four Seasons, etc. are going out of business soon.

7. Buy Phase 1 pre-construction, but wait until the end of Phase 1 so you can see that the developer has the sales in place to move forward with the project. The downside is that all the less expensive units might be gone; however, you are still getting ground-floor pricing on what’s left.

I found those last two suggestions especially interesting.

Remember that when you buy pre-construction, you’re buying exactly what’s on the ground when you close the deal…nothing more, except for the developer’s promise. In number 6 above, you at least have the promise of a heavy-hitter with a proven track record. And in number 7, you’re making sure that, even though there’s nothing built yet, there are enough sales in place that the chances of something eventually being built are much higher.

Alex goes on to say that this simple business model has worked like a charm for him, particularly in the Caribbean, where he’s been concentrating his efforts. But, he adds:

I really enjoy reading International Living , and am always looking forward to receiving the Postcards to see what other emerging markets I may not know about.

Thanks for the kudos, Alex...and thanks for your excellent advice, as well. Keep reading, and we’ll do our best to keep you on top of the emerging markets on our radar screen.

Dan Prescher
Publisher, International Living

P.S. Many areas of Panama are great examples of the kind of maturing pre-construction markets Alex mentions above. Panama has a number of attractive late first-phase developments where spec and sold units and/or anchor facilities have already been built. The upcoming International Living event in Panama is a great place to find out more about them...and about the many other lifestyle and financial advantages of living and investing in Panama.