Buying in bulk is a strategy many shoppers use to save money. That same strategy can also help real estate investors expand their profits.
Real estate developers typically have to pre-sell a certain percentage of condo or home developments to get a construction loan from banks. In addition to allowing for bank financing, getting the first few units sold tends to help start sales momentum and helps the developers get started on the project more quickly. As a result, developers are often willing to offer huge discounts in order to move large blocks of units. Most investors, though, will likely find it difficult to come up with the funds necessary to purchase a block of condos.
Investors interested in this type of investment should be glad to know that there are now several institutions that work to bring together investors to buy these bulk offerings. These institutions get deep discounts from the developers and pass them along to buyers, who can then buy individual properties at prices much lower than what they could have bought them for if they had purchased directly though the developer.
Most investors, after buying a property as part of a bulk rate discount preconstruction offering, sell it after construction is completed at retail price, often making thousands in profit. This investment strategy is called wholesale preconstruction, bulk preconstruction or preconstruction syndication.
Developers must pre-sell a certain percentage of units Preconstruction syndicates
A wholesale preconstruction sale typically involves three players: the developer, the business offering the bulk deal and the investor.
In order to get a construction loan to get a project off the ground, developers must pre-sell a certain percentage of units to a number of different individuals, rather than a corporation or other singular entity. Some developers do this on their own, but it can take three to six months or even longer, according to Eric Jafari, CEO of Bridgepoint Ventures, a preconstruction syndication company.
Marketing condos for pre-selling can be difficult for a developer, who must pay the fees for marketing, sales centers and other expenses out of pocket until approved for a loan. Into this void step bulk preconstruction businesses, which can offer a solution to a developer facing six months of out of pocket expenses.
“We tell the developers that we’ll purchase whatever amount of inventory is needed for them to unlock financing, and we’ll have the entire transaction consummated within 30 to 60 days,” Jafari said. “They can immediately access their construction loan for building the project, and now instead of paying out of pocket...they can use the construction loan to fund those initiatives. It significantly mitigates their risk.”
Benefits
Investors looking to get into wholesale preconstruction usually get into it because of the leverage and the rate of return the strategy offers.
“I heard that a lot of money could be made wit...
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