Preconstruction In 2006: What's Working & What Has Changed ~ By Chris Anderson, Ph.D.

March 9, 2006

As we approach the dreaded April 15 tax day, my friend "William" has a problem.  You see, William has recently sold a condo for $1,300,000 that he bought in preconstruction.  So what is the problem?  He bought it for $300,000 3 years ago so is going to have to pay tax on about $1,000,000 in capital gains!

Everybody in unison say:   POOR WILLIAM since I am sure you are feeling sorry for him!  If you come to the Gulf coast or visit other areas where preconstruction has been common, you would find story after story of people like William who have made millions of dollars in the preconstruction "Gold Rush".

But like many booms of the past, the preconstruction boom will also have a limited time where huge profits are made.  Looking at William's condo, the value went up 400% in 3 years!!!  It is pretty clear to everyone in our area that there is no way we can sustain that growth rate and in fact, prices may even drop for some of the high end properties.

For preconstruction investors, much of the excitement in this industry began in the 2002 time frame so we are entering year 4 of this boom market.  To give us a little historical perspective on this boom, let's hit some of the highlights:

• Many hot preconstruction markets have doubled or more in value;

• The largest amounts of money was made in high end properties like beach condos;

• 2004 and 2005 were the real banner years with largest number of units sold preconstruction;

• Units pre-sold in 2004 and 2005 are now nearing completion in 2006 thus there is many more high end condos available for rent and for sale;

• In 2006, pre-sales of high end condos have slowed appreciably;

• In 2006, only small price reductions have been seen in some areas but this may change as more units are completed and the owners are forced to close.

• Presales of lower end townhomes, single family homes, and "affordable" condos is still going strong in many areas.

Given that we are in year 4 of this boom market, then it is appropriate to ask what we do and don't like in the way of preconstruction investments for 2006.

Preconstruction That We Like In 2006

Affordable, affordable, affordable, affordable, affordable, affordable, affordable.   In many areas of the country, first time home buyers are literally getting priced out of the market.  In effect, this is creating two separate markets within a geographic area.

To illustrate this point, consider the plot below showing the number of homes for sale in different price bracket for Niceville, Florida.  Like many Florida communities, Niceville has experienced tremendous growth which, in turn, has created a serious lack of affordable housing.  This is about to get further complicated because it has been recently announced that another 12,000 families are coming into the area via the Air Force. 

In Niceville, "affordable" housing is really defined as properties that are less than $275,000.  Looking at the histogram of homes for sale, we see that below $275,000, very few properties are for sale.   In contrast, if we look above $275,000, we find that a large number of homes are for sale in that range.

In fact, homes below $275,000 are APPRECIATING at about a 12%/Yr rate currently while homes above this mark are DEPRECIATING       at about -2%/Yr currently; i.e., there is two very distinct markets in the exact same geographic location.

While I used Niceville as an example, you could tell this same story over and over again in many communities.  If you look at those communities expected to receive additional population growth over the next several years, then purchasing properties targeted at this market segment is about as no brainer as it gets.

With the above discussion, then we are very big fans of any preconstruction projects that service the "affordable" housing side.  While each area has its own definition of "affordable", you can rest assured that quality preconstruction projects purchased towards the lower end will likely serve you well going into the future.

Preconstruction That We Are Cautious Of In 2006

In 2006, we are very cautious when deciding to invest in projects that are on the high end of the price spectrum.  As mentioned already, many preconstruction projects of the past have been for very high end properties such as condo's on the beach.  Because it has been extremely lucrative for developers, many of these projects have been sold to investors but at some point you have to ask if the market is saturated.

For example, there is a location on the Gulf coast where there is approximately 19,000 units scheduled to be completed in the 2006, 2007 time frame.  This will represent over a 100% increase in condo units into the area.  Unfortunately, when you look at the real increase of tourists coming that will use the condos, you only see about a 12% increase over the last couple of years.  I don't know about you, but that sounds like a bit of a mismatch to me.

In 2006, we encourage you to be very cautious of high end preconstruction investments in areas that have already exploded in price.  At the very minimum, you should find out how many similar units are being constructed in the area before you decide to invest.  In Summary The outlook for preconstruction investing is very bright in some areas in 2006, especially when it involves affordable housing plays.  Sophisticated investors that I know are still very bullish on the market. On the other hand, some of the high end products that have made investors millions of dollars in the past are probably getting saturated in many areas.  Many of the same investors that made millions are now staying out of these markets.  For example, our William discussed above is now avoiding most high end investments.  In our opinion, preconstruction investing is here to stay for the foreseeable future but we will have to adapt with the times to always select the most timely investments. About The Author Dr. Chris Anderson is the founder of one of the largest preconstruction groups on the internet today and is referenced in many venues including the New York Times and USA Today. Get access to wholesale property investments today. Note:  This article may be copied for use on other websites under the following conditions: It is not altered in any way. The about the author is included The http://www.GetPreConstructionDeals.com hyperlink remains intact.