Pre-construction – Risks & Rewards

Given the limited resale inventory levels Cabo is experiencing and the boom in construction, buyers are starting to strongly consider pre-construction as an option when looking for their perfect Cabo home. Pre-construction can be anything from a condo building that’s a dirt pile now to an upscale luxury home on a custom homesite. The basics for buying pre-construction are the same.

How a pre-construction purchase works

The purchasing process for entering into a pre-construction real estate agreement is a little different than purchasing a property outright and involves the following stages:

Initial deposit – An initial deposit, typically about USD 10,000, is deposited by the buyer in an Escrow account or put on account with a credit card once the sale price has been agreed to. The deposit allows the buyer to enter a due diligence period. During any time during the due diligence period, if you want to cancel the transaction, the initial deposit is returned to you. Monies lost will be the fee you had paid to establish an escrow account, usually about 700 USD. Some developers may not use an escrow account. However, all developers who market on our MLS system must use escrow accounts.

Due Diligence – Two weeks typically is given to review items related to the sale of the condo/home (conditions), such as HOA rules & regulations, design selections, payment terms, financing terms (if offered), and other relevant items. Once all conditions are met and the due diligence period has expired, you will be required to make a second deposit into an escrow account. After the removal of conditions and the expiration of the due diligence period, the initial deposit is no longer refundable.

Second Deposit – Often, around 30% of the total purchase price (less your Initial Deposit of USD 10,000) is deposited into escrow or directly to the developer’s account. If funds are deposited into an escrow account, the buyer will be required to release the funds to the developer. The developer uses these funds along with the initial deposit to pay sales commissions and fund the construction of your property.

Payment Terms & Subsequent Deposits – Each developer will negotiate payment terms for the remaining 70%, ranging from equal monthly installments, milestone installments, and/or a final payment upon completion. It is important to note that the developer uses all payments made throughout the agreement term to compete for the construction of your property.

Pre-construction in Los Cabos

When Americans and Canadians consider buying pre-construction, they have a general sense from “back home” as to how they will be delivered. Without asking many questions, buyers could be surprised about how their new house or condo is delivered.

Mexican Box – Sometimes developers will deliver your condo or house as a box. It will have no appliances, no kitchen, no closets, and no ACs. It will come with doors, flooring, walls, toilets, showers, and bathroom sinks. It won’t even come with glass around the shower. All the rest of this is yours to decide. It’s a very typical way of delivery in Mexico as Mexican buyers usually have friends or relatives who they will hire to install kitchen cabinetry, closets, ACs, appliances, and whatever else you need to complete the condo. Not necessarily the way ex-pat buyers would like it. It is out there – watch out for it.

More complete but not quite – Some developers will deliver a complete home with ACs, a full kitchen, closets, and cabinetry, but there will rarely be appliances included. My husband and I bought a pre-construction house, and the price included a gas stove but not a hood fan and no other appliances. If the developer provides an appliance package, it will always be priced separately and not part of the purchase price. The same goes for furniture if a furniture package is offered.

Turn-key – Some developers may offer a turn-key condo with appliances and furniture. This is a great option but relies on you to like their choices, and fingers crossed, you get what you saw in the photos or something close. Turn-key in pre-construction rarely means you walk in, and there are glasses, dishware, pots and pans, and the usual appointments found in a fully furnished resale condo or house.  

Rewards for the pre-construction buyer

Better Price – The single most significant advantage is the opportunity to buy into the development at a lower price than what you would be paying if the development was complete. It is a win-win. The developer gives you a better price, and you provide them with the needed cash flow to complete the project. This can result in big savings at the end of the day.

Brand New – The opportunity to have a brand new house or condo is appealing to so many. No wear and tear and no thinking about what you would have to change to make it your own.

Design Input – In some cases, you can also have input into the design and finishes in the home, making it even more your own.

Other advantages include the ability to plan around and take advantage of changing exchange rates in making payments and having an estimated delivery date that you can plan around.

Risks for the pre-construction buyer

Purchasing pre-construction poses some significant risks and is not for the weak of heart. Many things can go wrong that are simply out of your control and will affect the delivery of your property.

Delays – Delays are common, and they do happen. In Cabo, a hurricane can shut a building site down fast. And keep it shut for some time. Most developers have clauses in their contracts allowing for weather-related delays. More recently, COVID pushed completion on many developments. We have a pre-construction client who cannot close on their property because the developer has been unable to complete the legal paperwork to establish the Condominium Regime. This legal structure must be in place for property titles to be issued.  

Failure to complete – This can happen for many reasons. The developer running out of money is one. It happens. More than you think. And it’s a risk. The construction site stops if the developer runs out of money to build. It does not start again until there is an influx of cash. Your money: deposits, and any payments you made, were used, and there is no money to return to you. Failures to complete can happen because of poor planning, weak unit sales, someone taking the money and running, or a key player passing away. We’ve seen all these situations firsthand.

Substandard work – Buying right from plans and artists’ renderings can leave you expecting one thing but getting another. The result may be truly substandard or just not what you thought. Either way, you are left with some debate on resolving the issues with the developer. One example of substandard work is plumbing and P traps. P traps are supposed to be under sinks to maintain water levels in the drain to prevent sewer gases from coming back into your house. They are left out of condos and homes more often than you can imagine.

Slow punch list resolution – Developers can and often take a long time clearing your punch list. It is frustrating and you need to have some strength of character to work through it.   Be prepared to hear mañana over and over and don’t give up.  

Broken promises – Every developer usually has big plans and wants to offer a lot to buyers. That clubhouse they promised or the tennis court may be a casualty in the quest to put up another condo building.  Sometimes it is just talked about and never happens at all. See below about Puerta Cabos Village.

Living in a construction zone – Developments of some scale will have multiple homes or condo buildings. Buyer early in pre-construction and taking possession in the first condo building or house means you get to listen to all the rest being built. The noise, dust, traffic, cement trucks, etc., will seem endless for the remaining construction in the complex to be finished. Over five years, my husband and I listened to 14 homes being constructed in our development. In our case, this happened because the developer, who built the occasional spec house, would wait until they had a buyer under contract before breaking ground on another one. Copala is an excellent example of this where the owners of the unit in the first building completed listened to six more buildings and upwards of 100 houses being constructed before life became peaceful. Depending on your tolerances, you may be better off waiting until the development is completed.

Failure examples

Examples of developments that experienced failures of the variety noted above are as follows: