Buying preconstruction, or off-plan, is where you buy into a development before it has been constructed. The only thing you have to trust in is a set of architectural plans. Frequently, developers will offer substantial discounts to buy preconstruction units. The best preconstruction projects will sell out before building actually starts. Often the best units go to insiders.
Why would a developer do this? Developers need investor funds to stay in business. That’s a strong incentive to create simple and profitable investor terms. Also, bank finance for construction costs will typically depend on a certain number of presales. The developer will want to hit that number as soon as possible. By shortening the length of the project, he can increase his return on investment (ROI). This timing issue creates a symbiotic relationship between developers and investors. The developer will also want to share some of the risk by selling preconstruction. He knows he is giving a good deal based on today’s prices but who knows what the market could be like when the units are delivered in two years time. If the developer has a good track record, banks practically compete with each other to lend him the money for a deal like this (under normal credit market circumstances). With presales in place, the bank’s risk is minimized. By simplifying the deal, the developer minimizes his administration costs while getting his construction funds at a competitive rate.