Pros/Cons of Pre-Sale Condo deals
Involved In Real Estate · Oakland, CA · Member since 2008 · 141 posts · 25 votes
I'm considering placing a reservation for a pre-construction condo in Bellevue, Washington. I'm familiar with the process of analyzing multi-family investments (& own quite a few), but would appreciate some thoughts on the pros/cons of this newer opportunity.
Have you ever bought a condo?
Independent of that answer, have you ever bought any property off-plan (where all you get to see is a brochure or maybe a mock up).
There are many issues. Some are specific to condos. Some are specific to buying off-plan. Some are a combination. Some are just related to the fact that you are not sure what the future will bring in your own life and this is normally a multiple month or multi-year commitment.
I have purchased condos off-plan multiple time in different cities in different countries.
My first question would be what is the market likely to be in the future where the unit is being built? How can you really be sure?
Then there are the issues related to what your situation might look like in the future. I have gone through a divorce during the build period and there was no sign of a divorce when the process started. I have seen builders come in a year late. I have seen 9/11 happen so a developer dumps a project and by the time it was finished (new owner) the market was completely different even though the units were walking distance to the world largest financial centre.
Oh, I have made a ton of money on off-plan deals. Not every one but many. The leverage can be great even before you have to consider getting a loan. You can also end up buying a place at a price that is higher the market value when the unit is ready. I have not done that so far but I know people who have been wiped out by the same.
A reservation on a single condo in Bellevue will not be something that needs to be analyzed like a multi-family property. Unless you are buying a number of them there is little overlap.
Note that if the project has a lot of investors buying the financing could be a problem when it comes time to complete. The project normally needs something like 70% owner occupied owners for conventional lenders to be happy offering financing on a unit in the project. You also can not own more than about 10% of the project without running into similar problems.
I have visited Bellevue a few times over the years but it was some time ago. What is the local economy like right now and what will it be like when the property comes online? Are there many other projects in the pipeline? Miami is having issues with condos partially because of the FL market but even more because there were too many projects started around the same time. The lead times are long compared to SFR. More like commercial buildings so projects sometimes hit the market when demand is not there.
Dear REI,
Thank you for your reply. Sorry about posting in 2 forums. I'm new to this website & posted before discovering the more appropriate forum on pre-con.
To respond to some of your questions:
• The market in Bellevue is very, very strong. Projected population growth huge. Microsoft & Boing are hiring. I'll certainly gather more hard data & economic forecasts before proceeding. Meeting with my R.E. agent tomorrow, armed with many questions.
• I'd only be buying one unit at this time.
• So far as I know, there's only one other project in pipeline now (although a big one--455 condos compared to 239 for the one I'm interested in), and it's target demographic is very, very different.
• Occupancy scheduled for 2010
Any more thoughts? Can you tell me more about this issue of leverage before even getting a loan? How do the economics of this kind of purchase usually work (i.e. some money down to reserve, then what)?
One issue I have noted is POOR budgeting/reserve studies. Once the building is occupied, the maintenance fees get bumped hundreds of dollars per month for "unexpected" operating costs. You really need to critically analyze the numbers, but the fact is you have zero control. Should be filed under the heading "speculation".
Leverage:
You are being asked for a deposit. You are not expected to fund the full cost of construction or to get a loan. It would be impossible to get a loan on a condo project at this stage as you do not have title to the property (it does not exist as it is only air now).
So, small deposit that is a reservation fee to hold a unit at a fixed price. If the property was to go up or down in value then you are getting the effect of leverage on your investment. Similar to options and legally much closer to an option.
Note BeachBum's post. In OR all new projects starting around 2000 had to have sinking funds for all expected costs (roof, etc). This means that when you buy in the HOA charges are more or less on target with the long term running costs. No sales can happen with tiny HOA charges which later jump when maintenance start to happen. Check the WA laws. If the project does not have a sinking fund when it comes on line expect special assessments later and problems when you go to resell.
Conclusion: I can talk for quite a while on off-plan pros and cons. How much you want to cover in a public thread is up to you. Some questions might only come up later so get in touch when that happens.