Monday, June 28, 2010
A couple of weeks ago at the International Real Estate Investment Forum in Toronto an attendee put this question to me…
“Ronan, I’ve been offered a unit in Project X, Panama City (for obvious reasons I don’t want to publish the name of the project) for 32% less than the release price of two years ago. I’m tempted. Seems like a no-brainer. I’m told the building will be delivered next year. What do you think?”
Of course, it’s not my place to advise or suggest what any individual should do with their money. We’re grown-ups…we need to make our own decisions and take what comes, good or bad.
Having said that, when it comes to buying pre-construction, here’s what I look for:
-An appreciating market in the early to mid stages of growth
-A developer with a strong track record who is financially stable
-Supply constraints…a lack of developable land, for instance
-A liquid market with an abundant supply of end users who will pay the perceived “market price”
I asked the attendee to rate the project against each of these criteria.
Big discounts are tempting to all of us. We like to believe the best-case scenario. That’s why we need clear accept/reject rules such as those I use for pre-construction.
Panama City is an illiquid, oversupplied, stagnant market where prices are drifting down. There are developers and projects in trouble.
This project is a particular case where buying pre-construction should be avoided. The developer may not have the cash to finish the building. There’s a very real possibility the other buyers won’t be in a position to (or will simply decide not to) close. There is a real possibility the project will fail.
Pre-construction has been good to me. That’s not to say I’ve always gotten it right. I haven’t. If I’d asked myself these four questions before buying any property I wouldn’t have a few skeletons in my investment closet. But then…maybe I wouldn’t have learned.
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