Understanding Preconstruction Trends ~ By Chris Anderson, Ph.D.

January 1, 2006

Everybody's Rich!!!!!!!!!!!   Or at least it would appear that way if you follow all the preconstruction projects that are on the internet.  These days, the list of amenities of many projects reads like a 5 star hotel and the price point keeps going up.  From these observations, you would have to conclude that everybody out there is rich and can afford just about anything their heart desires.  Clearly developers would not build things that people were not going to buy----- right?

But on the sales front, what some preconstruction projects are finding is that there just are not as many buyers for the super luxurious condo/townhome/home as everybody projected.  In some areas, we are seeing the speed of sales slow down, even in the preconstruction phase.  Is this the dreaded double BB (Bubble Bursting) or is something else going on?

After traveling to many projects and spending hours on the phone with developers and brokers from many areas, let me give you a little different perspective.  First, let's address why most of the development projects are very upscale and expensive.  Fundamentally, the reason is that quality, developable land is in reasonably short supply.  This is true in many regions but especially in Florida, Las Vegas, waterfront, and to some degree mountain property.

As an example, consider beachfront in Florida.  In most cases, developable tracts of land are becoming somewhat rare because 1) they already have structures or 2) much of the remaining land has a ridiculous price tag if it is for sale at all.  If you are a developer and want to build a highly profitable project, and your land is very expensive, then you have 2 options.  You can increase the number of units per acre (density) or you can increase the price per unit (or both).  Frequently, in premium properties, the developers have to do both to make the "numbers work".  Hence, the developers will frequently be building higher end units that are condos with the maximum density allowed by local zoning.

Does this mean that there is really a demand for those units when built?  Not really.  Previously, you could offer these units preconstruction and sell them in hours so the sky was the limit.  After selling tons of these units, then is there really demand for more?  As an investor, is there really enough demand to further drive prices?  A very good question with many people arguing both sides.  As an investor, you have to decide what you believe.  Just remember that just because the developer produces it, and just because the broker promotes it as preconstruction, does not mean that there is truly a market for the product.

So what does this mean to the preconstruction investor?  In my mind, it means business as usual.  WHAT????   This should be your first reaction to this statement but it is true.  For myself and other investors, we are investing exactly as we always have.. By looking for situations where we believe there is substantial future demand for what we are buying.  We are constantly looking for opportunities where we believe a real estate product is offered into a strong market with limited supply. 

As an example, this Sunday we offered a project to the Mastermind Group that was some mountain property that we believe is very competitively priced; to boot, the developer offered our group some very nice incentives.  What we believe is that in this price point, and with these incentives, then there is strong demand now and in the future.  If this was super high end property priced at $350,000 per lot, then we would have felt very differently since we see a lot of this market getting saturated.  Are we right?  Only time will tell that answer.

At this point, I probably look at more preconstruction offerings in a month than most investors look at in several years. Just a few suggestions when you look at your next potential project: Determine if the project is unique .  Think about who will ultimately want to own your property if you buy it and why they would buy from you as compared to similar projects down the street or even in a completely different locale.  (hint:  there are very few unique properties being constructed) Determine Who Is Buying While You're Buying:   Is it a bunch of crazed investors like us or people who want to own.  If the markets get tight, everybody buying along side you is your potential competitor.  This is partly why I am not fond of all investor projects. Examine Your Exit:   Getting into an investment is easy.. Getting out can be a bit trickier.  If you can control how you will exit and when, then you have much better odds.  As an example, the Mastermind Group project mentioned above has a wide time window to exit thus they may choose to sell in a few months or in a couple of years and it does not dramatically impact them.  Contrast that to a large condo project where maybe 200 people are closing in the same month and had no opportunity to sell before hand.  So as you look at your next investment opportunity, hopefully this article will shed some light on why the trend in preconstruction is towards very expensive property and how you can adjust your thought process accordingly. 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.