Buying Pre-construction Property And Then Selling At Closing?
I'm not sure if this is the right forum to post this topic or question but do anyone have any experience with buying Pre-construction properties then selling then at delivery?
jm
Assuming I'm completely clear on your question...It sounds logical. I could see the angle. The only thing is you would have to offer something more than the builder is offering, ie, upgrades, financing, etc. Remember, the builder will be your immediate competition. What do you think? :-D
I figure if you purchase property during first phase with minimal upgrades, just something basic but nice. By the time delivery comes around hopefully the appreciation value have gone up 20 or 30 thousand. Maybe even more depends on the are and then you can turnaround and sell it for a little below market value or below builders value for that specific model w/upgrades. I see the concern you have but I figure if you can sell just a little below builder price but at a good profit margin, this may be a good investment method.
Do you have any experience with this type of investing?
I haven't done it myself, but know several in my area who have made this their entire investment business. Of course, the appreciation here (during the times they were doing pre-construction buying) was 30%+ per year (insane!); the market's going to be slowing down a bit now with rising interest rates, so I might be a bit more cautious in my forecasts.
Best of luck!
Thanks mandiland for your responds.
I've got a deal I'm sorta doing this way. I'm buying an industrial building which I am going to chop up into condos (smaller units sell for more per foot in this market) I'm looking to pre-sell two of the units at a substantial discount to retail in order to fund the deal. I'm even willing to contract to buy them back in a year for substantial profit. The front-end deals are even no-money-down (though there is recourse debt).
It makes a lot of sense to me as developer to do the deal this way since then I don't have to take in a partner and give him half the deal.
Commercialking,
Since you is a developer what's you take on the idea of purchasing a pre-construction SF or townhome and selling it at delivery time or within one year presuming it appreciation dramatically by the last phase?
If this is a good idea, do you know what are the pitfalls to watch out for?
Well its all about risk. The reason the developer is willing to sell you this unit at a discount to retail is that by doing so he reduces his risk. Since developers tend to be risk takers they are usually making this move because their bank required it. The bank is rightly nervous that there will not be a market for the units when they are done and that, as a result, the bank won't get paid. So the bank requires the developer to presell a certain number of units to establlish a market.
Now the total amount of risk in a deal is pretty constant so by means of this mechanism the bank cannot make there be less risk. They can only transfer the risk to someone else-- in this case, YOU.
So your post asks, "Will this work, presuming it appreciation dramatically by the last phase?" If you make this assumption then it will work just fine. But that assumption is precisely the risk the bank is attempting to avoid. The risk you are taking is the risk that the project won't work in some way. For example that it will turn into a dog and never sell any units beyond the presales.
The bank is willling to let you have the upside in the event that the project is a big hit in exchange for taking the risk that the project will be a dog. They do this because (unlike developers) they are risk-adverse. The only thing the bank is going to make is their interest rate. If the value of the units tripples they still only get their 8% or whatever. So banks are much more worried about risks than either the developer or the investor.
In other words: if you can stand the heat you can stay in the kitchen. But don't be shocked if all that dreamed for appreciation fails to appear.
Commercialking,
Thanks for the insight I really appreciate it. I guess I have to really research how the area have appreciated over time. So, it looks like the only risk I have is that the area doesn't appreciate like I assume. But if it does appreciate like I assume then I'm cooking in the kitchen. You know if it doesn't appreciate like I would want I could live there for a year or two, then rent it out for a year for some cash flow and then hopefully in three or four years it goes up in value then I can sell it or even try to do a lease option to tenant.
I have another question from a develpor standpoint. Do builders allow for contracts to be assigned?
sure, the builder doesn't care. As long as sombody closes.
Commericalking,
So from our conversation it looks like the only risk I'm taking is the appreciation value not going up. Is this what you is saying?
If I understand correctly what you guys are talking about, it's completely different here in Vegas, the market is so crazy here! We went to one of these lottery thing for first phase homes, they were auctioning off only 40 homes and there were 1250 people there, for 40 homes! They also said if you were lucky enough to secure a home you could not sell earlier than one year, and you had to sign a contract in which if you did sell before one year, they had the right to buy it back for the same price you bought it for. How bad does that suck? You can't even get a first phase home let alone first phase preconstructed property here.
shaunsinger,
That's quiet interesting. I don't know if that how it works. I have to look more into it.
Quote:
On 2004-04-30 08:23, jmart2221 wrote:
I have another question from a develpor standpoint. Do builders allow for contracts to be assigned?
I am looking into the same investment you are talking about. Putting a deposit on a lot, upgrade the essentials, then ideally sell at closing for a price below what the builder is offering brand new. I have done a cash flow analysis and if the "assumptions" hold true it's still very profitable even if I hold it for 6 months.
I asked the same question to one of the local builders with regard to the assignment of contracts. They do not permit it. Whoever signed the contract to begin construction must close on the home. Otherwise it would be deemed a new sale and the price of the home would adjust to the new market price. Basically the extact opposite of what I'm trying to achieve. That is unless you have the last lot in the development and someone is desperate to get in and will pay you for your slot. Check with each developer, don't assume.
domino00,
Whats going on? Thanks for the respond. I have do some more research and see how developers do things. I see that you is from Jacksonville, Fl. I'm here in Chicago but was born and raised in J-ville. What part of town you reside?
Here are a couple of things to consider when buying preconstruction. As mentioned in an earlier reply, most builders won't allow you to assign the contract...you must close on the house. In addition, in S. Florida, many builders are putting clauses in their contract during preconstruction that you must live/own the house for XXX amount of time before selling...they are being undersold by their own residents. Finally, you must realize that you will probably need to put 10% of the purchase price down to go to contract. The question is...do you have that kind of money and do you want to tie up that money for 6-12 months.
We bought preconstruction for our primary residence...bought off the plans for $325K in June of 2002, moved in Aug. 2003. Had appraisal last week to open Home Eq. LOC...appraised at $470K. :-D :-D :-D :-D
Sometimes it works!!! Good Luck!
EPINVESTOR,
Thank you for the tips. This information is very useful. I definitely don't have 10% to put down on a preconstruction property. I just was pondering with the idea. And wanted to get some thoughts on it. I'm going to stick with my focus on rehabs. Again thanks!
jm
i have a realtive whom assinged a condo , but before it was clsoing time it was assinged 3 different time 3 different buyers, so I guess it depends on the state law or developer, I am talking second hand here.
good luck
jmart, I live in the Southside (Intracoastal West area).
Just be sure to do your homework with each builder. Every builder is different. Some of the builders I have spoken with even posed flipping as an option if I wasn't planning on occupying it. Can't get more investor friendly then that.
Well, no appreciation is not the only risk here. There is also the risk that the builder/developer will fail to put together the following stages of the deal. A great deal of the price in most such transactions is the "ammenities" (pool, park, etc.) which don't get built in phase one because in phase one the builder is attempting to pay off the bank.
Shawnsinger, your situation is a little different. The developer is holding the lottery as a marketing tool. He gets 1250 people there to look at his models, see the complex. A few of those people (40) get to buy real bargains. The rest are prospective buyers who he will follow up on later and attempt to get to buy full price. Yes, many of them will turn out not to be qualified but if he sells another couple of hundred units via this mechanism he did good. All those rules about not being able to transfer title are about convincing people that the auction is a huge bargain, thus increasing the buzz around the project.