Presale

Definition

A presale refers to the sale of proposed properties, such as condominiums or homes, before the construction process has begun. This strategy allows developers to gauge market interest, secure financing, generate capital, and assess project feasibility well in advance.

Common Goals of Presales:

Financing: Secure construction loans.
Market Demand: Test the market and mitigate risk.
Revenue Generation: Generate capital to assist with construction costs.

Examples

Condominium Units: A developer presold 40% of condominium units at a $5,000 discount per unit before construction began. The strong presale numbers enabled the developer to secure favorable construction loans.
Residential Housing: A real estate development firm marketed a new suburban housing project as a presale. Early buyers were offered discounts and locked in current market prices in anticipation of potential value increases upon project completion.

Frequently Asked Questions

What are the benefits of a presale for buyers?

Buyers often benefit from presales through:

Discounted Prices: Lower purchase prices compared to post-completion market rates.
Potential Appreciation: Value increases as the project nears completion.
Customization: Early buyers might have the opportunity to choose finishes or layouts.

What are the risks associated with presales?

Potential risks include:

Delays: Construction delays can extend the waiting period for property delivery.
Market Fluctuations: Changes in market conditions might affect property values negatively or positively.
Project Cancellations: In rare cases, development projects might get canceled, causing buyers to seek refunds.

How does presale help developers secure financing?

Successful presales can demonstrate to lenders that there is sufficient demand for the development, which can make it easier to secure favorable terms for construction loans.

Are presale contracts legally binding?

Yes, presale contracts are legally binding agreements. They typically require a deposit, which could be forfeited if the buyer backs out.

Condominium: A type of real estate divided into several units that are each separately owned, surrounded by common areas jointly owned.
Construction Loan: A short-term loan aimed specifically at financing the construction of a real estate project.
Market Demand: The total amount of a particular good or service that people are willing and able to purchase at a given price.
Discount: A reduction applied to the regular selling price of a property, often used as an incentive in presales.

Online Resources

References

Lawrence, Simon. Real Estate Investing 101. New York: Wiley, 2019.
Johnson, Mary. The Development Marketing Playbook. San Francisco: Harper, 2018.

Suggested Books for Further Studies

Principles of Real Estate Practice by Stephen Mettling and David Cusic
- Comprehensive guide to the principles of real estate, including presale strategies.
Real Estate Development by Mike E. Miles, Laurence M. Netherton, and Adrienne Schmitz
- In-depth exploration of real estate development processes and financial considerations.
The Real Estate Wholesaling Bible by Than Merrill
- Offers techniques on how to successfully invest in and sell real estate, including presale methods.

Real Estate Basics: Presale Fundamentals Quiz

### What is a presale in real estate terms? - [x] Selling properties that are yet to be constructed. - [ ] Selling properties immediately after construction is completed. - [ ] Selling properties in the resale market. - [ ] Auctioning non-performing properties. > **Explanation:** A presale involves selling real estate properties that are yet to be constructed, enabling developers to secure financing and gauge market interest. ### What benefit does a developer generally seek from presales? - [x] Financing for construction. - [ ] Immediate profit from sales. - [ ] Reducing property taxes. - [ ] Acquiring more land. > **Explanation:** Through presales, developers aim to secure construction loans by demonstrating demand, which helps in advancing the construction process. ### Which of the following is a risk associated with presales? - [ ] Immediate property handover. - [ ] Discounted property prices. - [x] Potential project delays. - [ ] Customization of property features. > **Explanation:** One significant risk associated with presales is the potential for construction or project delays, extending the wait time for property delivery. ### Why might buyers be attracted to presales? - [x] Potentially lower purchase prices. - [ ] The opportunity to live in the property immediately. - [ ] Avoiding market fluctuations. - [ ] No need for legal contracts. > **Explanation:** Buyers are often attracted to presales because they may secure the property at a lower price than the market rate upon completion. ### Are presale contracts legally binding? - [x] Yes, they are legally binding. - [ ] No, they are not legally binding. - [ ] Only with a witness. - [ ] Only with court approval. > **Explanation:** Presale contracts are legally binding agreements that usually involve a deposit and terms agreed upon by both buyer and developer. ### How does presale help in understanding market demand? - [ ] By completing the construction quickly. - [ ] By selling properties in bulk. - [x] By indicating how many buyers are willing to purchase before construction. - [ ] By setting a future selling price. > **Explanation:** Presales help developers understand market demand based on how many potential buyers are willing to commit before construction begins. ### Which of the following is a common feature offered to buyers in presales? - [ ] Guaranteed rental income. - [x] Customization options. - [ ] Immediate possession. - [ ] Lifetime warranty. > **Explanation:** Developers sometimes offer early buyers the opportunity to choose certain finishes and layouts as a feature in presales. ### Why might a presale offer a property at a discounted rate? - [ ] To meet legal requirements. - [ ] For tax reductions. - [x] To attract early buyers and secure project financing. - [ ] To quickly liquidate unsold inventory. > **Explanation:** Offering discounts in a presale can attract early buyers, helping the developer secure financing and validate market demand for the project. ### What could happen if a real estate development project is canceled? - [x] Buyers may need to seek refunds. - [ ] Buyers immediately receive the property deeds. - [ ] Prices of the units decrease significantly. - [ ] The developer starts a new project right away. > **Explanation:** In cases of project cancellation, buyers often need to seek refunds for their presale deposits and any payments made. ### Can a developer modify the design after presales? - [ ] No, it's fixed once presales begin. - [x] Yes, but it must be within specific contractual allowances. - [ ] Only with buyer approval. - [ ] Only after construction starts. > **Explanation:** While design can sometimes be modified, it has to comply with terms and conditions specified in the presale agreements and may require buyer notification.