Preconstruction sales are real estate purchase transactions which commence prior to construction of the new project’s (typically condominiums) completion. Preconstruction prices are usually lower than those of existing or “already built” properties. (Recently, a Florida beachfront condominium unit was offered for $190,000 during the Reservation Agreement Phase and was worth $270,000 when the unit was completed.)Developers discount the prices of these units to create incentive for purchasers to buy a property “they can’t see, feel or touch.” Developers sell preconstruction properties in order to secure their construction loans on the project.Lenders may require that 50% to 80% of a project be pre-sold in order to approve the construction loan and subsequently the beginning of the construction process.
The purchasers perform a walk-through inspection of the property and attend the closing where funds are disbursed and settlement is completed.
Be sure to inform the seller (developer) of the intent to perform an exchange and that the contract will need to be assignable to a “Qualified Intermediary.” Although closing dates for preconstruction properties typically are not specified in advance, it is critical that an investor desiring to perform an exchange meet the following time requirements:
(a) after the sale of the relinquished (sale) property, the Exchanger must identify the replacement (purchase) property (ies) within 45 days of this closing;
(b) the purchase of the replacement property must be completed within 180 calendar days from the closing on the relinquished property.
Clearly indicate in the preconstruction purchase contract the purchaser’s intent to perform a tax deferred exchange. One suggestion to help alleviate time pressures for closing on the replacement (preconstruction) property is extending the closing date on the relinquished property once it is under contract.
The 45/180 time requirements begin after closing on the relinquished property, so postponing this closing gives an investor a higher probability that the replacement property will be completed within the exchange period.