Buying condos in the pre-construction stage has been a profitable strategy for many investors over the past decade. The buyer provides the up-front money and commitment to later purchase and close on the completed unit from the developer before the building is visible. This advance commitment enables the developer to secure construction financing and proceed with the project. In exchange, the developer typically offers the unit at a discount from what it would be sold at when fully completed. Investors who then sell their units near or at completion of the project may realize this gain plus any additional market price appreciation.

However, the pre-construction process can be complicated, so it pays to know exactly what you are buying and what commitments you are making. What follows is a basic glossary of terms you should know, sequenced in a rough timeline covering the condo construction and sale process. For a fuller treatment of this subject and observations on the local market and its practices, please call or e-mail me!

RESERVATION AGREEMENT

The developer provides preliminary site plans, floor plans, a description of planned amenities, and initial price offerings. The prospective buyer reviews this information, selects a unit or units as desired, and reserves it by filling out the Reservation Agreement and placing a deposit (usually between $5,000 and $25,000) with the developer's escrow agent. Once received and approved by the developer, the unit is now under contract for this buyer.

The Reservation Agreement is a non-binding agreement. The buyer can at any time and for any reason rescind the Reservation Agreement and receive a full refund of deposit money along with any applicable interest. By the same token, the developer is not obligated to build the property at all orto sell the unit(s) reserved at the price indicated in the Reservation Agreement. That commitment is only made at the hard contract stage (see below).

CONDOMINIUM DOCUMENTS

These documents (commonly referred to as "condo docs"), required by Florida law, include the project name and address, descriptions of the property and the units offered, and a wealth of information about the building itself as well as the homeowners association rules and proposed management fees. Be sure to review these carefully, as once you enter into a hard contract to purchase, you are agreeing with all items in them. Under Florida law, buyers have 15 days after signing a hard contract and receiving the condo docs to review the documents and change their mind regarding the purchase (known as the "Right of Recission").

HARD CONTRACT (SALES CONTRACT)

This shows that the buyer and seller are in agreement on the entire project and that the buyer will purchase the agreed upon unit. The buyer deposits additional funds to bring the total deposit to 20% of the purchase price (sometimes half of this can take the form of a bank letter of credit). In contrast to the Reservation Agreement, the Hard Contract is an enforceable contract (subject to the Right of Recission described above). If the buyer cannot complete (close) the purchase or get someone else to take their place (assignment) with the developer's consent, they can lose their deposit. Importantly, however, the buyer is not responsible for financing any of the developer's building costs until closing on the property: the buyer's funds are held in escrow and no additional funds, whether by cash or mortgage, need be supplied until closing unless stipulated in the Sales Contract.

CONSTRUCTION

Before accepting Reservation Agreements, the developer typically establishes a lending relationship to finance the project. Commitment of construction financing is based on a minimum number of units under Sales Contract with 20% deposits to escrow. When that minimum is met, construction loan funds become available and ground breaking is scheduled. Construction time can vary greatly from project to project but is usually 18-24 months from Hard Contract. The condo docs give the specific time frame for an individual project.

PRE-CLOSING OPTIONS AND REQUIREMENTS

Once a Hard Contract has been entered into, the buyer may have several options and requirements. Once is whether to sell their interest before completion of the project. This is commonly accomplished through an Assignment of Contract. In this type of transaction, the new buyer (the assignee) assumes all the contractual rights and obligations of the original buyer (the assignor). Assignments of Contract are nearly alway subject to the approval of the developer. Many developers do not permit assignments at all, in which case the new buyer and the original buyer would execute a Simultaneous Closing wherein the first buyer would take possession of the property and the new buyer would immediately thereafter purchase it at a previously established price. Arrangements for these types of transactions can be tricky, so you are well advised to seek the advice of an experienced Realtor® and, if there are any legal questions, a qualified real estate attorney.

Another potential requirement, which would be spelled out in the Sales Contract, could be for the buyer to show evidence of a mortgage loan commitment (if the property is being financed) well in advance of the actual closing. Check your contract and condo docs to be sure.

CLOSING

Once a Certificate of Occupancy (known as a "C.O.") is provided to the buyer, the deed and title can be prepared and the closing can be completed. The buyer (and/or his/her representative - though a substitute is not recommended) should complete a walk-through inspection of the unit and develop a "punch list" of last-minute corrective items. When the developer has completed these items, or if the buyer waives their completion or accepts that they will be done post-closing, the closing can be held.

"ORAL REPRESENTATION CANNOT BE RELIED UPON AS CORRECTLY STATING REPRESENTATIONS OF THE DEVELOPER. FOR CORRECT REPRESENTATIONS, REFER TO THE BROCHURE AND DOCUMENTS REQUIRED BY SECTION 718.503 FLORIDA STATUTES, TO BE FURNISHED BY THE DEVELOPER TO THE BUYER."