Chicago Real Estate Investors

When developers plan projects they must overcome many roadblocks in their way. One of the biggest may be a financial one.  No matter who the developer is, the financial backers want to see the interest in the project and in many cases require the developer to have reservations on a certain amount of units before the project is given the go ahead with sufficient funding in place. This develops into a savings for the real estate investor. The developer needs pre-sales to prove his project and get the financing so incentives will be given to early buyers.

Reservation Phase.

To obtain the necessary financing, a developer must prove that there is a demand for the proposed project. They will create architectural renderings which may look like sand tables with the layout of the project in mind and floor plans or drawings , and will begin to pre-sell units at a greatly reduced pricing. Buyers hold a "reservation" on a particular unit with a small down payment, anywhere from $1000 to $10,000, which is placed in an escrow account. The "Reservation Agreement" can be canceled at any time for any reason, and upon written notice , the investor receives a full refund.

Contract Phase.

After the developer has the required number of presale agreements,  "hard Contracts" which require a down payment (usually 10-20% of the sale price), which can be a letter of credit issued by your lender. If you are trying to make a quick profit, you must make sure that the contract that you sign is "assignable". In other words that you have the right to assign or sell your right (at a Profit) before you go to closing.

Construction Phase.

Construction can take a while anywhere from 6 months to 2 years. The contract should have an expiration date, which lets you get a refund of any money you have deposited if the developer has not completed construction. After the "hard contract" is signed , no additional money is required, until completion of your unit. While you are waiting you will likely see several sales price increases as the units near completion. At this point is where you make your profit by assigning the contract before actually owning the unit. Say you got in early and reserved the unit at $299,000 pre-construction. 3 months after construction begins the goes up to $339,000. 6 months later the price goes up to $359,000. If you have done your homework and read the contract you could now sell your rights to the unit upon closing making the same amount that the developer is.

Closing Phase.

If construction completes and if the contract has not been assigned, you will be expected to go to closing. If you cannot go to closing then you forfeit your down payment. It is advised that you locate a lender and get pre-qualified prior to completion of your unit. The closing will go just like any other real estate purchase. At the closing depending on whether you have assigned the contract or not you could actually leave the table owning a condo with a lot of equity and money in your pocket.

There are Risks-

As with any investment, risks do exist with pre construction purchases. The biggest one being that the developer is unable to complete the project and goes bankrupt. Do your homework research the background and completed projects of the developer. The second risk is that real estate values may not increase as rapidly as they have in the past.   The key point to remember here is if you intend to sell or re-assign your contract before construction is complete, make sure not to  enter into this type investment unless you CAN afford to close.

Your Return On Investment (ROI) will vary according to your overall strategy and risk tolerance.