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Buying pre-construction has its perks. You can be part of a unique and special project, like a brand new condo in Downtown Boston, or have first dibs on the penthouse in the latest hot high-rise. More practically speaking, you can also, in many cases, take advantage of some discounted early phase pricing (more on that below).
But how do you buy an apartment without touching, seeing, or walking through it? How will you know what the views from the 31st floor will really be like? How do you buy pre-construction smart? Here's some advice for you:
1. Let the offering plan guide you
For those who haven't read our most recent post about the 15 Most Crucial Questions for Brand New Condo Buyers, then you're missing out. We've basically covered everything and all that you need to know before you even start considering investing in a brand new development, including what is called the "Offering Master Plan".
Basically, the offering plan includes everything from the appliances that have been chosen to the opinion of a tax lawyer on what taxes will be after the city asseses the finished building. It will also have a "special risks" section, which will include things like whether or not the developer has the right to rent any unsold units. Take note though that the developer is only legally obligated to deliver what's in the offering plan, not what's in the rendering or the brochure.
2. Choose an experienced developer
Whether you've heard rave reviews from a friend or colleague about a certain development, doesn't mean that the developer has delivered the same quality throughout their projects. Take a look at the track record and the reputation of the developer in its totality. If the developer has a long list of satisfied customers, then chances are you will be another satisfied customer. If they had leaks or problems then maybe hold off until you can touch, feel, and see everything before you buy.
Googling around for any articles and discussion threads about the developer can help, and an experienced real estate attorney (one that was not recommended to you by your broker or the developer) should also have a bead on which developers to avoid.
Of course, we also suggest turning to us for advice: in particular, speak to us about the reputation of the developer, quality of past developments, re-sale history, success in those developments and quality of construction. We'll be more than happy to provide you with those details.
3. Make sure you secure Phase 1 pricing
Pre-construction apartments usually get sold in phases or waves of pricing, and if you buy in the first phase, you can save anywhere from 5 to 10 percent off the final listing price. Note, however, that most of the time, the choicest units are often saved for last, when prices are highest.
This is not to say however, that Phase 1 sales also only yield lower-than-market prices. In high-end developments and extremely in demand projects (like the upcoming Millennium Tower), developers are keen on current market conditions, so there's little elbow room for discount. What usually happens though is that there are flexible payment options such as lower down payments or deposits, and payment packages that are spread out and or "ballooned" until the development's delivery.
4. Inspect the quality of the materials
The materials will be listed and highlighted in the offering plan, but you should still ask extremely detailed questions about them.
Sometimes a thin sheet of oak will be used and covered with engineered floors meaning you really have engineered floors instead of the oak floors promised in the offering plan. Ask the developer specifically, for example, what percentage of oak is in the floor.
Developers are allowed to make so-called "normal construction variations" from the offering plan in everything from materials to ceiling height, and your attorney should find out what the construction industry standards for variations are and detail that in the contract.
Also try to negotiate the right to inspect the apartment, says Sonn. However, she says, sponsors don't like to allow this and it's easier to negotiate if you are buying a 'signature' apartment.
5. Have a list of questions to ask the developer
Get as much information as possible so you don't come have any surprises. Here are some questions to keep in mind:
- Will there be a commercial space on the ground floor? What are the developer's plans for that space? Will they bring in a supermarket (an obvious plus)? Or will it be an Olive Garden restaurant?
- What about the finishing touches? Will the developer put in the towel bars or medicine cabinets or will that be your responsibility?
- Where will the air conditioners or the heat ducts be put in? Will they be on top or on the bottom of the wall? How much noise will they make? Can you get a model number to read the reviews?
- The budget determines the common charges for the building, so is the developer painting a realistic picture of the budget? If the developer amends the budget by more than 25 percent, then you have the right to walk away.
- When can you put on a hard hat and go inside the construction site? Sometimes you're looking at a hole in the ground, so when is the earliest you can go up and imagine your future kitchen?
- When can you start to make changes? Can you turn that three-bedroom unit into a four-bedroom immediately or do you have to wait until all the units are sold?
- When will the amenities start? Will the building have a gym and will you have to pay extra for it? How long do you have to wait to use it? What about the garage? When will they hire a doorman?
Views are important in metropolitan cities, but if you're looking into a hole in the ground, you have no idea what the view will be. There's a well-known story in real estate circles about a buyer who decided against a pre-construction property after he and his broker sneaked into a nearby building to ascertain what the view would be like, so you can definitely make your own "creative" approach in estimating what your window will look out to, if the developer already hasn't given that information out on their master plan.
7. Be clear on what gives you the right to walk away
Always keep in mind that real estate is first of foremost a business. Naturally, and like any other business, proprietors would want to protect themselves first. That's why contracts are written with a lot of flexibility for the developer, not for the buyer.
A good lawyer will help you look for all the loopholes. For example, if a developer gives you a construction end date of August 1st, 2013 but doesn't deliver by January 1, 2014, then you should have the right to walk away.
8. It takes a long time to close on preconstruction, so keep in mind market-rate and interest-rate exposure
No crystal ball could have predicted the housing crash of 2008. Those who bought their apartment pre-construction in 2007 paid more regardless of any pre-construction savings. The market will ultimately adjust your final price. You should also keep in mind that your mortgage interest rate is from when you close, not when you go into contract.