If you’ve been searching for a condo a while, you’ve probably come across listings of places that are still under construction. Maybe you can see developer’s plans, or you can visit a model at the developer’s office, or you can walk around the construction site. But the place you’re buying is not yet built and you cannot see the actual unit that would be your new home.
Is this something you want to risk as a first-time buyer? What are the plusses and minuses of buying pre-construction? Here are some things to think about:
Minus: Timeline. If you’re looking to buy for the first time, you’re probably planning on buying soon-ish. If the building’s not yet built, or is only halfway there, you’re looking at a timeline of months or even years – so you have to plan far in advance.
Plus: Everything’s New. If you’ve always dreamed of having brand-new carpeting, gleaming appliances, spotless fixtures and knowing that you’re the first to use them – this is your dream come true.
Minus: Potential Delays. Even if a developer tells you a building will be ready in eight months, if something goes wrong, for example a permit application gets denied, the weather’s so bad that no construction can be done for a few weeks – anything – then the project will be delayed. Which means that you can’t have a hard deadline for when you move.
Plus: Customization. Often, if you buy early enough in the process, you’ll have some say in what type of layout you’ll get, what kind of counters and appliances will be installed in your unit and other easily adjusted aspects of the construction. This can be quite satisfying, and something you won’t get if you buy an already-built unit.
Minus: Possible Shoddy Construction. This is the darker side of everything being new. With a brand-new building, everything might look great on the first day, but if the foundation is flawed, or the parking lot develops potholes after one winter, or the front steps crumble before your eyes – well, you’re the one that has to deal with the consequences. (Usually in the form of your association suing the developer.) In other words, the developer makes money up front – and some shady developers may take advantage of that.
Minus: More Complex Buying Process. When buying a not-yet-completed condo, there’s a lot more that can go wrong, several steps in payment and a lot more trust required. Which, in practical terms, means there’s a lot more paperwork, so that all contingencies and maneuvers are drawn up and accounted for – which means that you’ll want your lawyer and real estate broker to both be experts in this type of transaction.
Plus: You May Get a Deal. Especially if you buy before the building has even broken ground, you can often get into a neighborhood for far cheaper than you would otherwise. This is in part because you’re buying into the gleam in a contractor’s eye, rather than an actual physical building – and in part because a contractor usually needs to have sold a certain number of units before obtaining financing to begin construction.
Minus: Your Money Is Tied Up. While you won’t necessarily be paying anything monthly until the unit is ready (though you may still have a monthly fee, check your contract), you’ll at the very least need to put down a reservation fee, and more likely the full down payment … all for something you’ve not yet used. If you’re comfortable with that, fine – if not, you’ve been warned!
Plus: Your Unit’s Value May Appreciate Quickly. If you reserve an un-built three-bedroom for, say $200,000, you just sit and wait at first. But, by the time the unit is actually ready a year and a half later, it will likely be worth quite a bit more, since it’s now reality. In other words, while you’re locked into paying $200,000, the market value for the place may be quite a bit higher – which can be a very nice investment with a quick return.
Minus: More Difficult Mortgage Process. Getting a mortgage for a building that doesn’t yet exist is more difficult. It’s certainly do-able, but you’ll need to clear a few more hurdles and may have slightly fewer options than you would otherwise.
Minus: Association Dues Could Vary from Estimate. The association dues quoted when you buy are just an estimate, often based on the average dues in the neighborhood. But remember that the association doesn’t yet exist, either. Once it does, it will have no reserves – in other words, it’s not uncommon for the association dues to jump significantly not long after everyone moves in.
Minus: You Need Others to Buy In. If you’re committed to an un-built building, but no one else is, several things may happen: the project gets delayed, or you move into a building that’s half-empty, or the other units are sold to investors who then rent out most of the building and you’re stuck in what’s functionally a rental unit.
In the end, buying into a new development can turn into a fabulous deal, but caution is warranted. Anything that involves speculation, the possibility of sky-high profits, pre-paying and elaborate sales routines will attract its fair share of unsavory characters.
So, if you do decide to go pre-construction (or mid-construction), find a lawyer and broker who know what they’re doing, verify everything the developer tells you and proceed carefully. If you do that, you’ll be ready to enjoy your new, well-constructed home that you got at a good price.