Party time is back again… condominium pre-sales are back in fashion with residential buyers. Nothing seems more fortunate for developers than being able to sign sales contracts and take deposits for units in a building that doesn’t yet exist.
Wise developers know that no opportunity comes without risk, though. Let’s take a look at pre-sales — the good and the potentially bad/ugly of selling the dream.
First off, what is a pre-sale?
A pre-sale is when a condominium unit is legally offered for sale on a pre-construction/early stage of construction, price-discounted basis solely off of mouth-watering photo-real renderings, a building scale model, a construction webcam, subject-to-change unit interior finishes specs and floor plans, and a sales center (ideally with a vantage point on the site…sometimes initially a trailer near or on the site).
What opportunities are provided by pre-selling?
Proof of market demand
Initial marketing and sales momentum
Sources of funds for development from non-refundable sales deposits (thus equity player diminished cash investment requirement).
The latter is not available in all jurisdictions or in all cases, but it’s a sweet bonus if it is. Our condominium development modeling templates (Pro version | Standard version | comparison) allow for up to 100% of pre-sales deposits to be purposed towards development.
What risks does pre-selling introduce?
- Selling at too low of a price if market pricing continues to rise
- Making representations to pre-sales buyers that you end up breaking, such as changes in unit layouts and in the interior unit finishes schedule
- Cannibalization of your regular sales by pre-sales buyers who flip their never-occupied units upon construction completion (this opens up the can of worms of which units you should pre-sell).
I’m sure I’ve missed some important ones. Please add more in the comments below!
If you depend on pre-sales for funding and absorption is not what you expect you end up delaying the Project. Must have a second option for financing in case pre-sales are not what you expect.
Hi Miguel, thank you for the insightful addition! Yes, Plan B needs to be formed and ready to deploy.