Though a lot of would-be investors are scared off by it, investing in pre-construction property can be a very worthwhile move. It will enable you to start a healthy real estate investment at a tiny fraction of the cost of a completed property, and in a lot of areas, a piece of real estate will appreciate greatly before the project is actually completed. Furthermore, preconstruction real estate enables you to get a great deal on a property if you’re planning on living in it in the future. If you’re looking to reap the rewards of a preconstruction investment, there’s a right way and a wrong way to go about it. Here’s a guide to making your investment and avoiding the potential slip-ups along the way.

Laying the Groundwork

The first step in making a smart preconstruction investment is researching and comparing different kinds of properties. When investing in preconstruction real estate, you’ll have a range of options to choose from. Properties may be totally undeveloped, known as “raw” land, without any kind of planning or improvements done by the owner. Develop-owned properties, on the other hand, may be fully planned or zoned, with utilities and streets already installed. Further properties may already be slated for construction in these cases. Generally, the less developed the land is, the cheaper it will be, but cheaper lots can come with a range of complications. You’ll need to make sure that it’s all surveyed properly, work out local regulations, and look into any kind of crime that’s been reported in the area. The cost of property generally increases with each new phase of the development, so you’ll need to find a good balance between affordability and convenience.

It’s important to research and understand why developers are selling preconstruction real estate. If the profits are so much better after construction is completed, then why would they sell earlier? Preconstruction property isn’t exactly a frivolous purchase, so it’s important to find out why it’s being sold. Sometimes, construction firms need a quick injection of cash in order to complete a project on time, and selling preconstruction is an effective way of doing this. In other cases, they may need to have outside investors in order to get approved for a loan.

Having gathered this information, the next important step is looking into your competition. If you want to invest in a hot piece of property in an up-and-coming area, it may not be as affordable as you thought when you first considered going with the preconstruction route. Other investors and house “flippers” will have been monitoring the market for years, waiting for the most valuable preconstruction projects to come along. While this puts another obstacle in your way, competition from more seasoned property investors is usually a good sign that the project is worth a look. The amount of competition will depend largely on the size of a development, and the use it’s intended for. A single, residential lot is going to be significantly cheaper than developments for offices, apartment buildings and so on.

Finding a Property

Now that you’ve got a rough structure to your plans, it’s time to take some steps towards actually purchasing a property. First off, you need to find a local realtor. There are some agents who actually specialize in preconstruction property, who will be able to help you with going over house plans and organizing meetings with builders. If you’re already pretty savvy with navigating contracts and listings, you may be able to do a big part of this on your own. However, this is largely a cost-cutting step, that may or may not pay off in the long run.

Next up, you need to look for some phase 1 pricing. The less you pay for the preconstruction property, the greater your profit margin will be once the actual construction is finished. The first phase of selling is invariably the cheapest when it comes to preconstruction investment. However, it also carries a greater degree of risk. When these properties first hit the market, it’s much more difficult to accurately say whether the project will be completed on time, if at all!

Zoning restrictions are another important thing to look into when you’re pinning down the property you want to invest in. Before you sign any dotted lines, you need to ensure that it can be used for what you’re intending. Ask the agent about any relevant zoning restrictions, and land use laws tied to the property. They may not always fit in with your plans. If the agent seems unsure about any aspects of the zoning laws, get into contact with the local government and ask them directly. You’d be surprised at the amount of active real estate agents who aren’t up to scratch with these kinds of regulations. Even if a neighboring property has some ongoing construction on it, it doesn’t necessarily mean that the land you’ve got your eye on can be used for the same purpose. Make sure you’re always checking the relevant zoning laws before you go any further with the purchase.

While your estate agent will have done a lot of research into the area, and passed this knowledge onto you, it’s important to go over their head and do a little detective work of your own. On the surface, agents will be doing their best to find the right property for your needs. Having said that, they get paid on commission, whether they close a sale later in the day or a year later. Go out of your way to make sure they’re not sugar-coating any relevant details about the area. Look at some investor’s journals covering the area, or contact local businesses, asking if the area is still growing at a healthy rate.

During the property search, be sure to give yourself a lot of options. Any estate agent you’re in contact with will want to close the deal as soon as possible. You may only get a few days to come to a decision. Having said that, it’s important to make it clear to the agents that you want to have at least two preconstruction properties to choose from when it comes to decision day. This will give you a little more flexibility to weigh the up-front costs against the prospective long-term returns.

Making the Purchase

Next, we have the final stage of the process: actually making the purchase. Start by making your intentions known to the owners. The first few months of the pre-selling stage consists of a reservation stage. This is when you should sign up to the project you’ve decided on, and receive a contract from the property developer.

Next, take steps to identify the ideal end-user of the property you’ve settled on. As an investor, you’ll be purchasing the preconstruction property with the goal of reselling or renting the property to an end user. In order to make sure you get the best possible return on investment, you’ll need to identify the perfect end user, and then focus all your choices and selling efforts on that user. They may be vacation renters, permanent renters, homebuyers, or even other investors. Before you make that final decision, make sure that there’s a decent-sized local market of your ideal end user. Then, do some research on the availability of similar properties in the same area. If there are too few people in your ideal end user demographic, or too many similar properties, it can be very difficult to sell the property or find tenants later on.

Once you’ve established the suitability of your choice, the next thing to do is secure financing. The way you go about financing your investment property can vary a lot depending on the developer’s preferences and the unique attributes of the property itself. However, a typical deal will start with a down payment of 5 to 10 percent of the purchase. The entire balance, or at least a decent proportion of it, will then be due when construction is actually completed. There are some investors who will opt to flip the property before the total amount is actually due, betting on the fact that the value would have gone up significantly before this. Others will pay for the property and then hold it until a buyer can be found who will pay a good price. Whatever the case, you’ll need to source some capital for the down payment. This is typically paid for with the investor’s own money, as getting a loan for any property, let alone preconstruction property, can be extremely difficult. Raw land is typically more expensive. For this kind of investment, you’ll usually need to come up with about 25 percent as a down payment instead. Finding a creditor can be challenging, but mortgage brokers can help to pin down affordable land purchase loans.

If you’ve heard a lot of success stories surrounding preconstruction real estate, then I hope this post has helped you formulate a plan for moving forward. Preconstruction investing can be a lot to wrap your head around, but the rewards can be well worth it!