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					Pre-Construction Financing Investment
By Price Morgan

Table of Contents

Introduction—Where to invest?...................................................................................... 2 What is pre-construction financing? .............................................................................. 4 What are the current market conditions? ..................................................................... 6 What are the stages of pre-construction financing investment? .............................. 7 The reservation period ................................................................................................. 7 Right of recission .......................................................................................................... 8 Hard contract................................................................................................................. 8 Construction .................................................................................................................. 9 Closing on the unit ....................................................................................................... 9 What happens if you change your mind? ................................................................... 11 How do you get started with this investment? .......................................................... 12 What does a typical transaction look like? ................................................................. 13 Conclusion........................................................................................................................ 15

Introduction—Where to invest? If you are considering investing in real estate, you are following the most reliable strategy in America for building wealth. And pre-construction financing is the safest and most reliable way to invest in real estate. It’s also a terrific way to own a wonderful condo on a beautiful beach. More millionaires have made their fortunes in real estate than in any other arena, including the stock market. Robert Kiyosaki, author of the wildly popular “Rich Dad, Poor Dad” series of books, seminars, and DVDs built the bulk of his wealth in real estate, as did Donald Trump. Real estate has also built real wealth for millions of middle-class Americans. These ordinary people don’t hold multi-billion dollar portfolios like Mr. Trump does, but you might be amazed at how many seemingly upper middle-class people hold multi-million dollar portfolios, built from real estate profits. Ordinary Americans have built substantial wealth by investing in real estate and you can, too. Why is real estate such an amazing tool for building wealth? Well, for one thing, the supply is finite—yet the supply of buyers increases each year. This drives up real estate prices. The stock market, on the other hand, derives its value from the performance of companies. New companies are being created every week. Most fail, some survive. Unless you have time to travel out to a company’s premises, interview their senior management, and get a feel for how they conduct their business, you could be buying into the next Enron or Worldcom.

Had you begun investing in 1989 in real estate, odds are you would have seen a nice, steady rise in the value of your portfolio every single year, since the median home price in America has gone up each year during that time. The same cannot be said about the stock market (remember the dot-com crash of 2000?) But the biggest way in which real estate generates amazing wealth is through the power of financial leverage. If you’ve got $10,000 to invest, you can buy $10,000 worth of stock. That means you control $10,000 worth of that stock. If the stock value increases by 10%, you make $1,000. All fine and well, but… When you invest in pre-construction financing, you can use that $10,000 to hold as much as $100,000 in real estate for 12 to 24 months, without any additional holding costs. If the property value increases by 10%, now you make $10,000. You have doubled your money. This is a much better scenario. Better yet, with pre-construction financing, you have the option to take a profit or keep a desirable condo for yourself. The choice is yours.

What is pre-construction financing?

If you’ve ever toured a brand-new condominium development on a sparkling, white-sand beach only to be told that they’re all sold, you’ve discovered too late that condos in gorgeous locations are a hot commodity. Everyone wants to have a condo in a destination resort location, so those condos sell quickly. But what if you could get in on the ground floor and invest in those condos before one single shovelful of ground is broken? And what if you were able to keep your options open…maybe have several different exit strategies? Better yet, what if you could make a significant profit? With pre-construction financing investment, you can do all those things. Your initial investment is minimal in terms of cash is minimal, and you have two different opportunities to cash out of the condo. Or, if you decide you want to retain the condo, you can keep it for your own use or rent it out and reap rental income. Pre-construction financing investment offers you multiple exit strategies and two separate opportunities to cash out of your investment, usually with a healthy profit. This lucrative investment vehicle was created by destination resort real estate developers in order to be able to show banks that they have a viable project for construction financing.

You could also think of pre-construction financing as a development process that is used to market destination resort real estate products, namely condos. Who invests in pre-construction financing? Everyone from the short-term investor who reserves a unit and flips his investment for a property 10 months later to the buy-and-hold investor who reserves a unit, signs a contract, then closes on the property and enjoys its use.

What are the current market conditions? The market’s track record over the last two decades has been truly outstanding. Historically, destination resort real estate has appreciated at a rate of about 1015% in the last 20 years. Recent yearly appreciations have been even better— about 25-26% annually. The supply of beaches is limited, and so is beachfront property. Thus, according to the law of supply and demand, since supply is restricted, demand is high. Prices have been rising and will continue to rise as retiring baby boomers purchase second homes in beautiful destination resorts. As market values rise, so does the value of your condo. Typically, the time period from the reservation stage to Certificate of Occupancy (the point at which you could close on the condo and occupy it) is about 2.5 to 3 years. If the market appreciates at even the lower figure of 10% per year and you reserved a $500,000 condo, the market value of your investment might look like this: Initial value of condo After 1 year, at 10% appreciation After 2 years, at 10% appreciation After 3 years, at 10% appreciation $500,000 $550,000 $605,000 $665,000

Thus, your profit would be $165,000. Better yet, most pre-investment condos require a down payment of only 10%, with no payments until closing, so your Return on Investment (ROI) would be $165,000 on $50,000—or 330%.

What are the stages of pre-construction financing investment?

There are several stages of pre-construction financing investment, with opportunities at each stage. The first step is to reserve your condo with a low down payment. Later, you will receive a package of condo documents with a 15day right of recission. Next, you sign a hard contract. Finally, if you choose, you close on the property.

The reservation period Reservation periods typically last six months. During this stage you have the opportunity to reserve the type of condo you want based on square footage, floor plan and location within the building. The developer will show you a site plan and proposed floor plan and you can select the exact unit you want. At this time, you will down a deposit to reserve your unit. Deposits are typically 10% of the market value of the condo at the time of reservation. Thus, your deposit will range from $5,500 to $10,000 or $20,000. Most are around $10,000. Your money is held in an interest-bearing escrow account and you can get a refund in 2-3 should you decide this investment is not for you. This payment entitles you to first rights of refusal on the unit you have selected. That means that you will be offered the unit first, for the price you lock in minus your deposit. Be aware that unit prices, square footage and floor plans can change during, but this is rare. Your deposit is fully refundable during the reservation period. Should you decide you want your money back, you have the option to receive 100% of your money back at any time during the reservation period.

Right of recission The reservation period ends when the developer finalizes the details of the project and sends you your package of condo documents. You then have—by law—15 days to review these documents. This is where you will lock in purchase price, square footage and floor plan. If you are satisfied with the documents, you can sign them and begin the process of funding a hard contract on your unit.

Hard contract Once you decide to move ahead with the purchase of your condo, you will need to provide a down payment of 20%, but only half of that needs to be cash. If you like, you can provide a Letter of Credit (LOC) from a third-party letter— such as a bank—for half of the down payment. An LOC is basically a statement that you are good for the rest of the money. Most lending institutions will issue an LOC for a fee of around $500, assuming you have assets in your portfolio equal to twice the amount of the LOC or more and that you have good credit. There are no fees or payments to make, since the LOC is not a loan or note. It is merely the bank’s opinion that you are good for that amount of money. How does this work? Let’s say you reserve a condo with a purchase price of $500,000. Your deposit is $10,000, which goes towards your down payment. At the time you sign the contract, you will need to provide 20% of $500,000, which is $100,000. Since you’ve already paid $10,000 in the form of a deposit, you will need only $90,000.

This $90,000 can be in the form of $40,000 in cash and an LOC for $50,000. If you have assets in your portfolio valued at $100,000 or more, the bank will issue you an LOC for $50,000. So you pay $40,000 in cash—in addition to your $10,000 down payment—and provide an LOC for $50,000. You now control $500,000 worth of destination resort real estate with a cash outlay of only $50,000.

Construction There is nothing for you to do during this phase, which typically lasts 18 to 20 months. You make no payments, pay no takes, and have no ownership hassles. The unit is being built, and you can wait for completion, or sell your investment at a healthy profit—the choice is yours.

Closing on the unit After construction has been completed, the developer will get a Certificate of Occupancy. At that time, you will be offered the opportunity to do a walkthrough of the condo, complete with punch list, just like you would with any other property you have built. The price you pay was locked in when you signed the hard contract, along with any homeowner’s association dues. Even if the beachfront has become a very popular area and prices have risen 30-40%, you still pay the locked-in price. It is not uncommon for an investor to sign a hard contract for a $500,000 condo, only to watch it become a $700,000 condo by the time closing time rolls around.

Note, too, the tremendous leverage you enjoy: the $500,000 condo is controlled with a 10% cash down payment of $50,000. If the market value is $700,000 at closing, that’s a profit of $200,000 on a $50,000 investment—which is 400%. If the property meets with your approval, you can arrange financing for the 80% of the purchase price that is due and close on the property. You may then begin enjoying the property yourself, or have it furnished and start receiving rental income.

What happens if you change your mind?

If for any reason you decide that pre-construction financing investment and the opportunity to own a destination resort condo is not for you, you can receive a 100% refund of your deposit at any time during the reservation period. The refund process typically takes 2-3 days. When the condo documents arrive, you have the right of recission for 15 days. This means that you can review the documents and if you do not wish to sign a hard contract, you can receive a full refund of your deposit. After you have signed a hard contract and paid a 20% down payment—either with all cash or with half cash and an LOC—you can flip the property by selling it to another investor for a nice profit. Once you close on the property, you own it, so if you change your mind you can either sell it for a profit or rent it out and receive income.

How do you get started with this investment? Pre-construction financing investment is a very hot segment of the real estate market and condos in destination resort areas are going fast. To have the best chance to reserve the unit of your choice, call the industry specialists at Price Morgan today at 1-888-251-0850 or email them at info@pricemorgan.com to reserve your unit now.

What does a typical transaction look like? Mark Pierce sees an attractive brochure for Vue Crescente in Biloxi Mississippi, located in the back Biloxi Bay area. This project is part of the historic rebuilding of the Gulf Coast, and it will set the standard for luxury condos in the area with a statuesque 30-story building with abundant amenities. After reviewing floor plans, Mark selects unit 10G, which features a 1,400 square foot 2-bedroom, 2-bath floor plan that faces the bayfront. Mark puts down a $10,000 deposit. Four months later, Mark’s condo documents arrive. He already has an offer from a fellow investor to purchase the rights to the condo for $12,000, but Mark decides to hold. After reviewing the documents, he signs a hard contract to purchase the unit for $500,000. Mark puts down $40,000 in cash and gets an LOC for $50,000. Adding in his $10,000 deposit, he’s now put down $100,000 on a $500,000 condo…at today’s market values. Fast-forward to two years later. The condo is now worth $700,000. Two other investors have made offers to Mark—one for $700,000 and one for $720,000. But Mark’s wife has fallen in love with the condo and wants to use it as a vacation spot. The Certificate of Occupancy is issued. Mark arranges for $400,000 in financing and closes on buying the condo.

A year later, Mark receives an offer of $800,000 for the condo he paid $500,000 for and he sells for a 60% profit. He takes his $300,000 profits and puts deposits down on 10 new pre-construction condo units and pockets the rest. Mark is sold on the value of pre-construction financing.

Conclusion Pre-construction financing investment is the darling of real estate investors worldwide because it offers high financial leverage, zero holding costs, and the opportunity to get in on the ground floor of some of the world’s most beautiful vacation properties. Unlike most property ownership strategies, you pay no debt service, no taxes, and no insurance for 18 to 20 months while your unit is constructed. You have multiple exit strategies and as far as profits are concerned, time is your friend. For a low deposit of $10,000 and a down payment of 10% cash, you could reap rich rewards or own your very own piece of paradise. Make the smart choice and call Price Morgan today at 1-888-251-0850 to purchase a piece of paradise.


				
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