Buy Early in New Developments for the Best Pricing and Concessions
A summer real estate slowdown is hitting markets across the U.S., amid concerns over interest rate hikes and inflation. According to Fed Chair Jerome Powell, activity has “weakened,” and the National Association of Realtors found that in June, contract signings had dropped 20% year over year.
Despite the decline in demand, median home prices remain high—up by 31% in June year over year and by 16.6% in July, Realtor.com found, which experts attribute to sellers being slow to adjust their pricing to the new normal.
For buyers seeking out deals and greater negotiability, there’s one sector of the housing market where they may find better opportunities: new developments.
“The slowdown is affecting all the different property types,” said Susan Abrams, a broker with Coldwell Banker Warburg in New York. “It’s a good time to be a buyer of new development, because you can make a better deal than you [could] six months to a year ago.”
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A benefit of investing in a development still under construction is that developers are incentivized to sell a certain percentage of units quickly in order to meet their loan obligations. Those who buy early may get better pricing or concessions, but there are also risks involved, like unanticipated delays in the property being completed.
So what is the ideal timing to invest in a development still under construction?
“The very best time is going to be right at the release, which is typically when you get the best pricing. Developers want to attract people right out of the gate, and then over time they’ll increase their prices,” said Melissa Camp, an agent with Sotheby’s International Realty in Seattle.
However, she cautioned, this kind of investment is not for the faint of heart, and buyers must have an exit strategy in place should things go south.
“You have to make sure you do your research and are buying from a developer you can trust,” Ms. Camp said.
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Advantages of Buying in a New Development Now
Despite some cooling demand, luxury buyers in New York shouldn’t expect to land substantial discounts. Though contract signings for new developments were down 13% year over year in the second quarter of 2022, prices didn’t follow suit.
That doesn’t mean negotiating is off the table, though, particularly in under-construction developments just opening to buyers.
“Developers like to keep the asking price as high as they can, and negotiate on a lot of the extras instead,” Ms. Abrams said. “They might agree to pay transfer taxes, give away free storage and pick up a lot of the closing costs. It adds up quickly.”
In Seattle, cooling demand has led to a decline in median home prices, down by 11% since May. The region’s usual summer slowdown is being compounded by economic factors, like rising interest rates.
Still, Seattle is seeing population growth, gaining just over 20,000 new residents from April 2021 to April 2022, which bodes well for demand to bounce back in the fall.
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New development in Seattle could be an especially smart buy right now for investors who aren’t in a rush to move.
“It’s a great investment if you put down a deposit early and can get equity before you even close on a home,” Ms. Camp said. “A baby boomer downsizer is a good buyer profile for pre-construction. You know where you’re going to go in a couple years, and have time to make that transition.”
The real estate market in South Florida, meanwhile, is still booming, with prices in Miami up by 37.3% year over year in the second quarter, according to the Knight Frank Prime Global Cities Index.
The advantage of purchasing in a new development in such a fast-paced market filled with bidding wars comes not from price cuts but from having more time to think through the investment.
“One of the main advantages of buying a pre-construction condominium is the flexibility it offers buyers,” said Edgardo Defortuna, president and CEO of Fortune International Group in Miami. “With the state of the current market and soaring demand, existing homes are being sold often within a day or two of hitting the market. Considering purchasing a new construction condo offers buyers ample time to decide if that property offers everything they want, from the finishes to the amenities.”
Strategies for Timing Your Investment
It’s never “too early” to invest in a pre-construction new development, real estate experts say, because the opening of a project tends to be the best time in terms of pricing.
“The best time to find deals is frequently pre-sales launch, when developers want to secure a buyer base before formally going to market,” said Ryan Shear, marketing director of New York and Miami-based development firm PMG. “You may also be able to find value on particular unit lines that haven’t sold as well as others but still suit your needs.”
Buying in a new development may offer especially good value depending on the market. In Miami-Dade County, where prices continue to rise and sellers—particularly of move-in ready homes—have the upper hand, pre-construction could offer good opportunities.
“There is an incredibly limited inventory of move-in ready, new condominium residences and a continued demand from buyers, so sellers of those properties are able to ask for premium pricing,” Mr. Defortuna said. “Buying a pre-construction unit locks you in at a certain price point, and the price per square foot is only going to continue to rise.”
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The flip side of finding that better value, though, is that buyers in new developments face a higher degree of uncertainty.
“The advantage of buying early is better pricing, and if the development is successful, often the developer will file amendments with the attorney general and increase prices on the next units,” Ms. Abrams said. “But you’re buying something you haven’t seen, and really relying on the development offering plan and floor plan, and what it promises to deliver.”
Relying on offering plans and buying sight unseen requires waiting quite a while until a new property is move-in ready, and this comes with risks—but there are ways to mitigate these risks.
Buyers should research the developer’s track record, for instance, and include clauses in their contracts that provide them with an out, should major issues—like major delays, construction defects, or end results that don’t deliver on the offering plan—arise.
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And drops in asking price, while tempting, could be a red flag, Mr. Shear said, as it might indicate the developer has run into trouble with lenders.
“Look at the history of the developer’s projects, and whether there have been complaints or litigation,” Ms. Abrams said. “There are always protections you can include in your contract, like the right to inspect the new unit, and the right to cancel and get a refund if the developer doesn’t deliver within a certain amount of time.”
Buyers should also anticipate the possibility for delays on delivery due to pandemic-induced supply chain issues, which have been plaguing the construction industry. Lengthier waits before move-in may mean they should consider the possibility that their own priorities will change in the meantime.
“If the delivery of the development is two to three years out, you need to have an exit strategy. What if something changes in your life? Can you lease out or resell immediately?” Ms. Camp said. “Make sure you have backup plans.”
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