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Pros and cons exist at the beginning, middle and end of every project’s sales cycle
BY ANNE MACHALINSKI, MANSION GLOBAL
Every new development, regardless of the market, has a strategy for how to launch its sales and release inventory, the details of which are dictated by who’s developing the project, where it’s located, how big it is, the price of units, the target market, and other factors.
For instance, the sales team for a 500-plus unit development in downtown Miami might open a multi-million-dollar off-site sales office, featuring a completed model unit, months before construction even begins. The strategy might be to launch by offering 15% of the building’s inventory off-plan and to increase pricing in each subsequent release until it’s completed and all the units are sold in two to three years.
On the other hand, the sales team for a boutique luxury project on Manhattan’s Upper East Side might hold off on launching sales until the building is finished so that potential buyers can get into the kitchens and bathrooms, see the amenity spaces and experience the views. They might choose to release a few units at a time, in three to five stages, to keep up consumer interest.
Regardless of these differences, developers and brokers always release a new building’s inventory in stages—each including some choice units—for the same reason: “Any time you have a lot of something, it’s hard to create urgency,” said Mike Leipart, a Los Angeles-based managing partner at The Agency. “Each phase should have something to drive traffic, and be a small representation of the building itself.”
Even though there are in-demand units released at every stage in the sales cycle, there are some universal pros and cons that buyers should be aware of, depending on if they purchase at the beginning, middle or end of this process.
Buying early means more choice and lower prices, but less security
Many real estate experts, like Peggy Fucci, the CEO of South Florida-based brokerage OneWorld Properties, think the best option for buyers in new developments is to get in first.
“If someone is interested in buying new, and knows where they want to buy and what they’re looking for, it’s best to get in first and have the pick of the litter,” she said.
Andrew Barrocas, the CEO and founder of Brooklyn-based real estate brokerage MNS, agreed. “If you get in first you can choose the unit you want, on the floor you want, with the view you want,” he said. “That’s very important when you’re deciding where you want to live.”
While units are often released in small batches, Mr. Leipart noted that people who get in during the pre-launch friends-and-family phase often can pick any unit they like and aren’t constrained by what the developer or broker decides to list, which is a huge advantage.
The second biggest perk of getting in early is securing the best price, experts say.
“Early buyers and investors are often looking for some capital appreciation,” said David Galman, the sales director for Galliard Homes, a London-based private developer.
“If you get in early, specifically when the market is rising,” he continued, “it’s likely that you’ll have some nice built-in equity when the building is complete.”
Buyers can also get the best deals when they buy early because in some cases—especially when pricing unique units, like duplexes and penthouses—that product hasn’t been tested by the market, so developers don’t fully know what they’re worth, Mr. Galman said.
Although specialty units might not be listed with the initial batch of inventory for exactly this reason, Anna Zarro, the senior vice president and director of residential sales and leasing with New York-based Extell Development Co., said that it’s still advantageous for interested buyers to start this conversation early.
“If they’re a real buyer prospect,” she said, “they may be able to convince the sponsor to sell that unit.”
Other pros of buying early include the ability to secure concessions, such as free storage or a parking space; to achieve more flexibility on the deposit schedule; and to negotiate for some customization in the kitchen or bathrooms.
There are some cons to purchasing early, too, experts say, all related to risk.
The first risk has to do with construction, and whether the development will go up as scheduled.
Mr. Leipart said that to mitigate this risk, early buyers should follow a developer they trust, with a track record of getting similar projects done.
Ms. Fucci agreed, but added that in today’s market, in which it’s difficult to get financing, most developers either have deep pockets that can support the start of construction, or enough clout that they know a bank will back them. “As a developer today, if you’re willing to start the sales process, you’re ready to start building,” she said.
The other risk is that the building won’t turn out to be what the buyer expects, in terms of who else lives there and what the lifestyle in the building is like.
“If I’m buying into a luxury condo building, I don’t want to hear from the start that 30 units are going to be renters,” Mr. Leipart said. “That’s why from the health standpoint of a sales process, early investors can have a detrimental effect.”
Finally, if a buyer will end up needing financing, they won’t know what a mortgage will look like in two years if they purchase early, Ms. Zarro said. They also may be concerned about tying up their funds for two to three years during construction, when they can’t predict what will happen in the world.
Therefore, buying early requires comfort with the developer, and what Ms. Zarro called, an “educated decision about a calculated risk.”
Buying toward the middle means “hedging your bets”
If buying early is about taking a calculated risk in return for more choice and lower prices, buying about a year into the sales process means minimizing some of those risks in exchange for less of both.
“Some people prefer to take a more conservative approach and want to hedge their bets,” Ms. Zarro said. “They’re not comfortable being the first in.”
About a year into the sales process, she continued, buyers have an indication of popular inventory. They can see where there’s been the strongest market demand, which can guide them to select a unit that may also appreciate more quickly than others. At this point, it’s also likely that there’s a good amount of inventory left, which still gives buyers some choice over floor, views and other similar features.
They can also get a better sense of who is buying into the project, whether it’s staying on its construction schedule, and how it’s generally shaping up.
Prices are likely higher than they were at in the beginning of the sales process. But how much higher—whether that’s 5% or 10%—depends on whether someone buys at phase four out of 10, or phase seven, Mr. Leipart said, noting that, “you pay a premium for taking some risk off the table.”
These buyers also might have a better sense of their personal finances, now that they’re within 12 months or so of the building’s completion, rather than three years out, Mr. Galman said.
Buying late means convenience and certainty, but higher prices… unless they’re not
The biggest pro for buyers at the end of a sales cycle—defined as a few months out from completion, to anytime after units have closed—is the ability to see the unit they’ll purchase in person and make sure they are happy with the finishes, the layout, the views, and other features in the building, such as the amenities, the level of service, and the building’s personality.
“At the end, there’s nothing left to chance,” Mr. Leipart said, “and you can move right in.”
It’s for this reason that Mr. Galman said, “if there’s an opportunity as a purchaser to wait until the very end, then I’d recommend that they wait.”
Financially, this late buyer will almost certainly pay more than someone who got in at the friends-and-family rate or in the first sales cycle, Ms. Zarro said, but if they need financing or are relying on the sales from their current home for a deposit on their next, buying late is a huge benefit.
“They can put their 20% down, finance the rest, close on their home and move right in,” she said. “That immediate gratification is attractive.”
The biggest negative is in unit choice and the ability to customize, both of which are obsolete at the end of a sales cycle. However, most developers do hold onto some choice units until the end, as well as penthouse units, because they know this is a time where they can make a profit.
Which leads us to a major misconception that many buyers who come in toward the end of a sales cycle have, Mr. Barrocas said: that the developer will be flexible on price, because they want to get rid of those last units.
While this does occasionally happen, many developers choose to hold firm on price at the end, especially in a hot building or market, Mr. Barrocas said, so that they can maximize profits. He said that he’s working on a high-end project now where the developer decided to hold onto those final units and rent them out for a few years and sell them later, when he believes the profit margin will be even higher.
Other experts said that while buyers shouldn’t expect price cuts at the end, they should always ask for them, as they might get a deal from a developer who wants to move on.
“If the developer is sitting on the final six units that he can’t sell,” Mr. Galman said, “a buyer is in a great position to come in and buy at a discount.”
In that case, both parties win.