Have you ever looked into purchasing a pre-sale condo? If not, they can be a good way to get into the housing market without needing a massive down payment.
When purchasing a pre-sale condo, you’re buying the unit directly from the developer before it’s actually finished and livable. Sometimes, the building’s construction hasn’t even started yet!
By purchasing one of these condos, you’re making a legal contract with the developer in relation to your specific unit: They’ll offer the unit to you for a (relatively) small deposit that counts towards your down payment, and in exchange you’ll purchase the unit once it’s finished.
Typically, pre-sales are listed at a specific price per unit, and will be sold in phases that increase in price towards the completion of the development and construction.
Because developers need to sell these units to finance the development as a whole, they’re forced to offer them at somewhat of a discount to get a better chance at achieving their initial sales quotas for financing.
Lately, certain developments have been using a different approach to their pre-sale model, and it could cause a huge change in the way people shop for pre-sales if it becomes widely adopted.
So how does this new strategy work?
Basically, it implements Competitive Game Theory and information asymmetry to optimize sale prices based on demand.
Here’s how it works, and what makes it different from the traditional pre-sale model:
The developer uses a price range per unit rather than a fixed price list, for example, instead of saying “Unit 405 is $450,000”, they will say “Two bedroom units from $430,000 to $490,000”.
To create urgency and a sense of buyer competition, showings are privately booked and only available 1-on-1. Additionally, to ensure that each buyer is at least somewhat attached to the units they’ve picked, buyers may only show interest in up to 5 units.
Now the developer can count exactly how many people are interested in each unit, and they can offload the lowest-demand ones first at non-discounted prices. But how can they sell units with low demand for a higher price?
Buyers will pay a price on the higher end of the range because they do not know how much (or little) demand there is for ‘their’ unit, and because they had to be selective about which units to put their name down for, they’ve grown attached and fear missing out.
Since the developer keeps appointments 1-on-1, the buyers never truly know how many people they’re actually competing with for their chosen unit, so they are very likely to pay a bit of a higher price to ‘secure’ their top choice.
During this initial round of sales, the developer will also lock in their construction contracts and prices. They can do this before getting full financing because of the proven demand. By not having to sell at a discount, and sometimes even selling units above market price, the developer can retain many more of their units while qualifying for financing.
Since their construction costs are locked in, the developer knows exactly how much the development will cost before having sold any units. With this information, the developer can now charge buyers a ‘perfect’ amount for each unit without worrying about inflation, guaranteeing their profit for each unit sold at this stage while offloading units with low demand.
After selling the units with the lowest demand, the developer can wait and continue to build interest in their more desirable units.
Once they need more funding, or the development is closer to completion, the developer can start selling their units with higher demand. If there is enough interest at the higher end, the developer can spark a bidding war for their more desirable units, potentially receiving offers above the high end of the range. This could mean up to $50,000+ extra per unit in pure profit!
You can think of this pricing method like a game of Blackjack. The developer in this scenario is the dealer, and the buyers are the players. However, the players cannot see which cards have been drawn, and the dealer can see everyone’s cards as well as the next 10 coming up from the deck. The dealer can also decide whether each buyer hits or not!
Basically, the players come to the table, put down their chips, and really really hope that the dealer is nice to them.
If you would like to learn more about Game Theory, check out Parametric Pro's post about it here.