If You Buy It, They Will Build It
Profits in Preconstruction Investing

By Jordan Taylor

Preconstruction investing is exactly what the name implies: investing in a property before the construction begins. Preconstruction investors buy tomorrow's properties at today's prices.

Perhaps the most well-known preconstruction investing strategy is in the condominium market. This is because condo developers typically need to sell a substantial portion (often 50 percent or more) of a project's units to qualify for a construction loan. But due to overbuilding, the condo market is at best flat in many areas. That's why many preconstruction investors are looking at the opportunities in single family homes.

“Preconstruction investing in single family homes is not as common as it is in condos,” says Brian Haag , managing member of Gulfstream Development Group, LLC, in Cape Coral, Florida. Even so, he adds, “There are a few innovative developers across the country that are doing very well for themselves and their investors with preconstruction programs.”

Here's how single family preconstruction investing typically works:
The developer chooses an area or project with potential for appreciation and quietly acquires a large number of lots while land prices are still relatively low. Next, the developer puts together a package for prospective investors describing the project, the demographics, and the growth potential of the area. An interested investor must qualify for and obtain a construction loan; when that loan is closed, building begins. When the house is complete, the investor can sell the property or obtain traditional financing and hold the property as a rental. In most cases, the market value of the completed house will be significantly higher than the cost of the land and building.

“A number of factors contribute to the investor's profit,” Haag says. “First, our investors make money on the increase in land values. When we come in and start buying up lots, we spark interest in the area and that drives the land prices up. We create momentum in the market. Second, as a developer and builder, we enjoy some economies of scale and cost savings that we are able to pass along to our investors in the form of lower prices. Third, many people are willing to pay a premium to have a brand new home that they can buy and move into immediately without going through the construction process—they want instant gratification, and that translates to profits for the investor when the property is sold.”

Developers selling to end users must invest substantial amounts of money in marketing as well as the costs of building and maintaining model and spec homes. Developers that work with preconstruction investors do not have those costs.

“We certainly don't turn away an end user who comes to us to have a home built, but our focus is on preconstruction investors,” says Haag. “We have a turnkey program that takes our investors through the entire process with very little effort and cash invested on their part.”

Begin at the end
As with any real estate venture, know your exit strategy before you make your preconstruction investment. Many condo preconstruction investors routinely flip their units at some point during the building process, although not all condo developers allow this. With single family preconstruction, your two primary strategies are to sell the house as soon as it's complete or rent it out for a few years to gain cash flow and appreciation. Occasionally, a preconstruction investor will even move into the property. If you're planning to sell, you can usually put the house on the market before it's finished and often have a buyer lined up ready to close as soon as the certificate of occupancy is issued. Of course, before you plan on doing this, be sure you are aware of any possible restrictions a developer may have on this type of activity.

“We study the market, analyze the trends, and put together forecasts that guide our investors in developing an exit strategy that will work for the property and for the individual investor's circumstances,” says Haag. “We have a real estate sales division and a property management division, so we can provide assistance with whatever strategy—sell or keep-and-rent—our investors choose.”

The key to successful single family preconstruction investing is synergy, says Haag. “The way to make money is to get in the middle of something that's much larger than you can do by yourself. Partner with developers and builders who know how to get in quietly and build momentum. Put yourself in the path of growth, make money, and then do it over and over again.”