by Tim Shepard

Created on: June 14, 2010

Following the crash of the equity indexes in 2000, money started flowing into real estate across the country. Investors were just fed up with "paper" gains on intangible assets. The thinking was, and I heard it repeated over and over "At least with real estate, I own something..it can never go to zero". So there it started, gradually at first, but the interest soon started to grow exponentially.

At the same time, mortgage rates on 30 year mortgages were trending downward to historic lows. With investors eager to invest in real estate and "cheap" money available, the game was on. The obvious choice for most was to buy a second home or investment property in a nice resort area, maybe even a place they had vacationed at in the past. Many flocked to Florida, California, Las Vegas, and Arizona. Even if their investments did not earn a return, it surely wouldn't lose any money and they would still have something that they could use.

That's how it started, in the beginning, these buyers came down, found a property that they liked, and bought it. The supply of homes and condos in resort markets started to slowly disappear. The available inventory was quite high but prices did start to appreciate...4%-8% per year. As the market prices increased, developers started to see an opportunity to build new homes and condos.

The developers needed large sums of money in order to get their projects off the ground. Typically, the banks would require the developers to "pre-sell" a certain percentage of the units in a complex before they would close on the construction loan with the developer. The challenge for the developers was to convince weary buyers to make a commitment on a project that was yet to be built. Remember, these buyers wanted something tangible, and looking at a set of drawings and blue prints and listening to a slick presentation was a tough sell. To overcome this, developers marked their units at prices that were typically 10%-15% below the current market price. This did the trick and many buyers made the commitment.

The funny thing is that the buyers weren't committing much money in the first place. All they had to do was complete a reservation. Typically, $5,000 to $10,000 was enough to hold a place in line for a $500,000 condominium. The reservation was non-binding and the buyer could cancel at any time. Once the developer was ready to start construction, the buyers needed to come up with a total of 10% cash and obtain an irrevocable letter of credit for 10% from

• 1
• 2
• Next Page >>