Pre Construction Real Estate InvestingPre construction real estate investing was a no-brainer for risk-takers and real estate speculators particularly in California and Arizona a couple of years ago. It made perfect sense and also made these people a lot of money in a short period of time. The basic idea behind pre construction real estate investing was to find an area where a new development of homes was going to be built. Home development projects occur in phases. Phase one is where the first twenty homes (made up number) would be built. Phase two is where the next twenty homes would be built. Phase three is the next set of homes, and so on. As a risk-taker or speculator you wanted to make sure that you were definitely buying a house in phase one and even better if you could be one of the first five people in that phase.
The point (and where the $$$ are) is in the market and the waiting period. First you had to be in the right market. Indicators of this market were when regular pre-built houses that were put up for sale on Monday would have 8 offers on them by Tuesday morning. That was what California looked like a few years ago. So, with this market, homes that were yet to be built were a hot commodity also. You purchase a phase one pre construction home, meaning that it hasn't even been built yet. Then you wait. It might take a year for it to be built. All this time, you haven't even paid one mortgage payment. You probably only brought in a $5,000 deposit. After waiting a year, the house is built. Some speculators did not move in. They continued the wait. They waited for phase two to be built. Some even waited for phase three to be built. If there were four phases, they may have waited until phase four pre construction homes were being sold. The gist of pre construction homes is this: With each new phase being built, the price of the homes goes up. A three bedroom, two bath home in phase one might have cost $300,000. That exact same model three bedroom two bath home in phase two might cost $315,000. The phase three home that looked exactly the same as the phase one and phase two, might be selling for $330,000. Finally, the phase four home might have a purchase price of $350,000. So, the person who bought the phase one house just has to wait until phase four starts selling. The phase one home has an instant appreciation of $50,000 because the market has been increasing and now the exact same home is selling for $50,000. (Please note that these are made up numbers for informational purposes only and that the real prices for these scenarios were much higher with phase four homes actually selling for $100,000 more than the phase one homes.) They have just made $50,000. Many of these speculators rented out these brand new homes for the duration of the waiting period. So, they had someone else paying their mortgage all that time. The profit of $50,000 was purely profit. (Oh yeah, you have to subtract the initial $5,000 deposit so that brings the profit to $45,000. That's not a bad investment, turning $5,000 into $45,000 in a few short years.) Pre Construction Real Estate Investing is viewed by some real estate investors as not true investing. You can make a philosophical argument as to whether they were just lucky risk takers or whether they were true investors. To me, I don't choose to delineate that fine of a line. I'm happy for the people who figured out the game, no matter what anyone wants to call them. Can we learn from them: Yes. Maybe we should wait for the next time the market indicates that this strategy might be a lucrative one!
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