nvesting in Preconstruction Homes

Since it’s so easy these days for home buyers to get a mortgage, more and more people choose to purchase a home as soon as it is economically feasible for them to do so. This trend has created a strong demand for new housing, in particular for new homes. Americans, prefer new homes because of their modern design, low maintenance, higher energy efficiency, and fewer problems caused by weather and insects. In addition, most states require builders to warranty their work so home buyers feel more safe buying a new home rather than an old one.

Developers seek to meet this demand for new housing by building new homes as fast as they can. Since banks need extra assurance before they finance construction projects, they require builders to pre sell homes in the pre-construction phase in order for them to lend. In other words, the developer needs to pre-sell some units as proof to the lender that the development they are planning will be profitable.

This creates an opportunity for real estate investors to invest in pre-construction homes. Developer will sell pre-construction homes to real estate investors at a reduced price, usually around 10 percent under market price. In return, the developer benefits by getting the project funded by the bank. That’s a win-win situation for everyone.

Because it may take 6 months to a year to complete the construction of the new home, the value of the preconstruction home may appreciate during this time. This appreciation means an even higher return for pre-construction investors because they not only get equity by buying below market value but also build equity by riding the appreciation during the construction phase.