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Buying Off Floor Plans Often Means A Lower Price and More Choices

09-Oct-2017


Anne Machalinski, Mansion Global

In the new development world, some buyers prefer to get in early. They’ll sign a contract and put down a deposit up to three years before the building is set to be finished, and often before the developer even breaks ground.

Developers sell these early units off floor plans, using tools like built-out model residences to showcase the kitchen and bathrooms, photos of surrounding views to help people conceptualize what it will feel like to live on a certain floor, and 3-D renderings and plans to help potential buyers understand scale.

While an early purchase comes with some risks for the buyer, who might put down a sizable deposit, like trust that the building will be completed in the promised timeline and to a high quality, it also has benefits, including a lower sales price, the choice to purchase a preferred unit, and the option to customize the space. When a buyer invests early in the right property, these benefits can translate into a much higher resale price than other similarly sized units in the same building.

The developer, on the other hand, can use these presales to establish that the building is viable, and in some cases get a loan or financing based on early interest. They can also use a presale environment, when they’re selling off floor plans, to control the inventory they’re releasing and make regular price increases to ensure that they keep demand high and make a profit.

 

Location dictates how the presale process works

Developers in every market sell apartments in new buildings off floor plans. But how that process works, in terms of how much of a deposit they can take to how they can use that incoming cash, varies greatly by location, often because of local laws.

“This means that buying off floor plans consistently works in some markets and rarely works in others,” said Mike Leipart, a Los Angeles-based managing partner at The Agency.

In Southern California, where Mr. Leipart said presales are less common than in places like South Florida—in part because, until recently, tall apartment buildings were rare—the developer is never allowed to touch any deposit money. “You can pre-sell the whole building,” he said, “but it’s meaningless to the developer in terms of working capital to start building.”

That leaves little incentive for developers to sell early, especially in a hot market.

“If the market goes up between presales and building completion, you sold too cheap,” Mr. Leipart said. “And if the market turns in a bad way, it may look smart if you pre-sold units, but most people aren’t going to close and will instead walk away from their deposit.” In California, he said, the developer can only keep 3% of the deposit if this happens.

Even so, most developers must sell about 30% of a building’s units pre-construction to prove to a bank that the project is viable so that they can secure financing to start work.

On the other end of the spectrum, Florida allows developers to use any down payment over 10% to pay for construction costs. “The Florida market is different from everywhere else in the country,” said Miami-based developer Gil Dezer, the president of Dezer Development.

In his projects, which currently include the Porsche Design Tower and Residences by Armani/Casa, both in Sunny Isles Beach, Mr. Dezer said that he’ll take a deposit of up to 50% for new developments, but not in one shot. Buyers will pay the first 10% when they sign their contract, another 10% when construction starts, 10% to 20% when the construction reaches their unit’s floor and a final 10% when construction reaches the building’s top floor. “Investors get to pay these deposits over the course of a year or a year and a half, depending on when they buy,” he said.

While these deposits go to pay for early construction costs, lenders will only give a loan after 50% to 60% of the building is presold, which is why Mr. Dezer said most Miami developers incentivize buyers to get in early with lower pre-construction prices. “We work with an average price per square foot goal for the building,” he said, which might mean selling $1,000 per square foot units on the day sales launch, and $1,500 per square foot units two years later. “That means buyers who bought first can see an almost 50% gain on their purchase by the time the building is complete,” Mr. Dezer said.

This creates a secondary market in which early investors might sell their unit sometime during construction, and that new buyer might sell again before the building is complete. “There are definitely condo buildings in Miami where the guy that moves in might be the third owner, and every one of those sellers is making money,” Mr. Leipart said, noting that in California, this type of transfer isn’t allowed.

In terms of risk and reward, both are high, as the early investor can make some significant cash if they pick the right project, but also lose their entire deposit if the developer uses the money for construction, loses financing, and never finishes the project. “That’s happened before,” Mr. Dezer said.

 

New York state offer consumers some protection

Other cities often fall somewhere between these two poles. New York, where real estate developments are governed by the attorney general’s office, takes a strong consumer protection standpoint, said Anna Zarro, the senior vice president and director of residential sales and leasing at Extell Development. While most developers take a pre-construction deposit of 20% to 25%, they can’t touch that presale money, Ms. Zarro said. “Banks may want to see that there’s sales activity,” she said, “but as a developer, we’re not basing our construction process on the sales coming in.”

Instead, the sales office will launch with the attorney general-approved Schedule A pricing, which is typically the least expensive offering, and file amendments to increase prices after that, as the developer and sales team sees fit. “Historically, successful projects can have several pricing amendments,” Ms. Zarro said, noting that Extell’s One57 building filed enough amendments to get into the double digits.

What happens to a buyer’s deposit if they never move into their unit is also different in New York than it is in Los Angeles or Miami. “If someone chooses to walk away, they stand to lose the complete deposit,” said Melissa Ziweslin, the New York-based managing director or Corcoran Sunshine Marketing Group, who is currently selling the three Waterline Square buildings off-plan.

But if the developer abandons the project, she continued, it’s a different story, that varies by project, and depends on how the offering agreement is written.

In London, most developers take a 10% deposit, which is held in escrow and protected by an insurance cover that most of them take out, said Simon Barry, the head of new development at Harrods Estates. In the last 10 years, it’s become more common for developers to take larger deposits up to 30%, he said, which is usually paid in stages over 12 to 24 months. Some developers purchase additional insurance to cover these deposits, while others ask buyers to rely on their track record and credentials as a guarantee that they’ll finish the project. Most banks want to see 30% presold before they give a loan, Mr. Barry said.

“In London, the advantage of buying off plan has always been that in a rising market, you agree on a price that by the time the property is ready is looking competitive,” he said. “The main advantage for the buyer is always a financial one.”

Toronto is like South Florida, in that developers there often want to presell the entire building before they put a shovel in the ground, so that they can use that deposit money for construction, Ms. Zarro said.

While in Sydney, where off-plan sales are also common, early buyers can in some cases reap huge rewards, when the price of inventory goes up by 40% or more during the two-year construction process.

“The people who buy early tend to be knowledgeable about real estate and about how new development works,” said developer Bruce Eichner, the CEO and founder of the Continuum Company in New York. They understand, for instance, that in successful developments, like Mr. Eichner’s Madison Square Park Tower project, prices are likely to be raised at least five times, at 2% to 3% per increase. “They know that whoever buys on day one does better in terms of price than the people who buy at the end of year two,” he said.

In the Madison Square Park Tower building, that means that someone who paid $4.5 million for a 2-bedroom apartment when the sales office opened, would now have to pay $5.5 million for the same unit.

 

Getting in early means you get what you want

While many buyers are motivated to get in early to secure the best price, another benefit is having access to any unit you want that’s listed in this pre-construction environment, said Mr. Eichner.

Now that he’s 75% sold at Madison Square Park Tower, Mr. Eichner said there is only one duplex of eight left in the building, plus two studios, a non-view 3-bedroom and a high-floor 3-bedroom, plus the two penthouses, among a smattering of other units. Anyone who comes in now is left with what he’s got, he said.

On the West Coast, Mr. Leipart said this early choice of units is what drives most presales that he sees. “Even in a new building with 200 or 300 units,” he said, “there might be eight or 10 that are unique.”

In addition to getting that perfect apartment, with the stunning river or park view, depending on what the buyer desires, the choice of floor plan also drives early sales.

 

 

The option to customize

The final incentive to purchase early is some ability to customize the apartment.  Although in many cases, that ability is less significant than some buyers expect. “There are some people who think that by getting in early they can create their own space,” said Paul Finch, the sales and new development manager at Beauchamp Estates in London. “But generally, developers don’t like to do that.”

That’s because developers of big buildings are set up to build 200 of the same thing, not custom units, said Mr. Leipart. When buyers get in there and request significant changes to the layout of a unit or its finishes, a developer may agree to some of this to get the project sold, but he’s likely losing money by the fistful as he does it, Mr. Leipart added.

Most developers will offer specific design options that work within their budget—often a choice between a light package or a dark package in the kitchen and bathroom. In each of the three buildings at Waterline Square, there are two color choices, which impact the type and color of kitchen cabinetry, countertops and stone backsplashes, among other features. That means buyers can pick between six different looks total, “a beautiful amount of flexibility, and what feels like customization,” Ms. Ziweslin said.

Ms. Zarro said that all Extell projects—which include One Manhattan Square on the Lower East Side, 70 Charlton in Hudson Square, and The Kent and 1010 Park Avenue on the Upper East Side—offer two color palettes in each unit as part of their Extell Choice Program. Buyers like to have this option, Ms. Zarro said, which will eventually go away at some point as the units that aren’t sold are finished. And on resale, having units in a building with different color palettes means that the offerings won’t be so homogenous that they’re difficult to make appealing to the marketplace.

In London, Mr. Barry said that he sees less and less of this customization in luxury units. “As the market has become more sophisticated and developers have more often relied on a well-known interior designer to produce a look that buyers will pay extra for, there’s this sense that if they start fiddling around with the different components, they’ll destroy what they’re paying a premium for,” he said.

So, does buying early mean that on resale, the apartment will be more valuable? That’s hard to know, experts say.

If a buyer gets in early at a discount, and picks up a unit in an escalating market that is worth 20% to 50% more when the building is closing two year later, then the answer is obviously yes.

Likewise, getting in early to pick out a prime corner unit with the best views, or just a space in a highly-coveted building should also mean a better resale value down the road.

Customization is one of those things that there’s no good way to tell whether it increases resale price, experts say. If you’ve designed a home that has the exact floorplan and finishes that another buyer wants down the road, then the answer is yes. But there’s no way to predict that.

However, Ms. Ziweslin said, “the optics of giving buyers flexibility in a crowded marketplace is key.”


Mansion Global
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