Flipping homes in pre-construction/construction stages?
Hi I am new to the forum, I was hoping someone could share their insights with me. I'm researching the strategy of flipping new homes in the preconstruction to construction stage. I've been looking at the Southern Florida market for these types of flips. Investors are putting downpayments on homes in new communities and then assign the contracts to an interested buyer 6-12 months later right before the homes are completed. I have been told investors are flipping these properties at a 20%+ profit margin as the house continues to appreciate from preconstruction to completion.
I wanted to see if anyone here does these kinds of flips and learn more about the pitfalls involved with this strategy.
So far I have identified high quality builders in Southern Florida who will allow me to assign contracts. Many won't let me do it but I have found a few so far the will, for a fee of course. I am working with a family member that lives in the area and she is assessing which developments in preplanning have the most potential to be "hot", especially to the new home buyer market in the 200-250k range.
I look forward to hearing others thoughts and comments on how I should proceed.
Thanks!
KK
Hi KK,
You might want to take a gander at Pres. Bush's new law on "flipping" or should I say "anti-flipping" before you proceed...it can be found here..
http://www.hud.gov/news/release.cfm?content=pr03-055.cfm
Hope this helps,
Clif
I am also interested in a response to this.
With the new regulation, would these types of transactions be prohibited???
I have also heard of this technique but have never tried it myself.
Has anyone ever done this, and will it be legal now with this new regulation???
Gary
ggaf18@aol.com
Quote:
On 2003-05-07 09:18, pbodys wrote:
Hi KK,
You might want to take a gander at Pres. Bush's new law on "flipping" or should I say "anti-flipping" before you proceed...it can be found here..
http://www.hud.gov/news/release.cfm?content=pr03-055.cfm
Hope this helps,
Clif <IMG SRC="images/forum/smilies/icon_cool.gif">
Thanks for the link. I'm not sure if this would fall into this category though. If things go as planned, I won't be getting a mortgage on any of the properties, they will be sold before closing.
Also, they would be priced at the going market price for the development. It's not uncommon for hot communities to go through 4-6 price increases set by the builder themselves before all the houses are built.
Dear flipper "to be" . In a hot market on new construction, the increase in value will come from the built in price increase the developer has already factored in to his project. The timing of which will be a direct result of how fast he is moving his inventory. If the area is "HOT" price increase will occur faster and will be larger in $ value. If the project tanks= no increase. All you have to offer by trying to flip new construction is a lock at a certain price point and a delivery date. The truth is unless some one needs to move there now and wants that area or development you could be at risk to lose your earnest money deposit and forced to close or walk away from your MOO-LA.
PS Do check out the anti- flipping page that was mentioned in another reply. But note that that only applies to FHA insured loans. Quick Turn Real
Easte Deals are alive and well.
Quote:
On 2003-05-07 11:22, stevelaz wrote:
Dear flipper "to be" . In a hot market on new construction, the increase in value will come from the built in price increase the developer has already factored in to his project. The timing of which will be a direct result of how fast he is moving his inventory. If the area is "HOT" price increase will occur faster and will be larger in $ value. If the project tanks= no increase. All you have to offer by trying to flip new construction is a lock at a certain price point and a delivery date. The truth is unless some one needs to move there now and wants that area or development you could be at risk to lose your earnest money deposit and forced to close or walk away from your MOO-LA.
PS Do check out the anti- flipping page that was mentioned in another reply. But note that that only applies to FHA insured loans. Quick Turn Real
Easte Deals are alive and well.
Thanks for the response. I agree that the pricing is going to be determined by the builders and the issue of inflated pricing won't really exist.
I'm not familiar with FHA loans but I'm assuming they are a vehicle for folks with lower income trying to purchase a home? I'm targeting folks who are buying homes in the 200-250, maybe even low 300 range.
Are you doing these types of flips? I would be interested in hearing more about the" ins and outs".
bump. I'm surprised this stragegy isn't more well known.
krispykreme,
Glad to meet you.
It is a well known method, I was doing this in the sixties, however the builders wised up to this. I just put about $500 down waited for the values to rise then sold my position.
Flipping has nothing to do with this as you are not taking title to the property, so before everyone goes crazy with this new flipping directive, use your heads. There are many loan programs that do not fall within the government guide lines.
To get back to this method of buying pre contruction, unless I miss my guess you now must qualify for the house before you can sign up to purchase the property. The builders are wise to this method and have put in stop gaps to prevent this from going on with their houses.
Nothing new under the Sun, if the lenders aren't wise to this in your area then this method works, but do a little homework before you figure that you have come across the method to end all methods.
Welcome on board this board, just another story in the long list of investing stories, unless you are actually going to buy the property then re-sell it hoping the value will rise enough for you to make a profit I would look for another way in this great industry.
John $Cash$ Locke
JohnLocke, thanks for the response. I'm looking into a commercial line of credit right now. The broker thinks I have a decent chance of getting it. I will need it for any houses I purchase where I can't assign the loan before closing - to avoid the mortgage process. I'm going to double check on the lender issue, you bring up a good concern to look into.
KK,
I am in W. Palm Beach and had the same idea as you. I am a bit further off in pursuing it since I am going in other directions right now, but am interested in learning general points on the topic. I know of several communities just starting in Palm Beach county. Some are in the clearing stages and others have yet to get going. One is ironically a subcommunity in my own community. I know at least one that will not allow assignment of contract, the others I am checking into.
If you are interested in trading info local to PBI then drop me a line.
Best of Luck
Dave
**Please See My Profile**
Its a gamble and I think sometimes you'll get lucky and some times you will have to close and hold the property
As a real estate agent in S. Fl I have shown many investor properties that have been on the market for weeks and by the time yoiu pay to market and sell and closing fees its not that great of a deal for the investor esp if he has several
I would say if you got in by the very first phase of development , you could make a little money
Quote:
On 2003-06-01 20:01, LynLinz wrote:
Its a gamble and I think sometimes you'll get lucky and some times you will have to close and hold the property
As a real estate agent in S. Fl I have shown many investor properties that have been on the market for weeks and by the time yoiu pay to market and sell and closing fees its not that great of a deal for the investor esp if he has several
I would say if you got in by the very first phase of development , you could make a little money
How long does it usually take to sell one of these if you do it "for sale by owner" with an MLS listing? I was told investors list them at least 3 months before they're ready.
I'm definitely concerned about being forced to close. I can see how double closing costs could quickly eliminate profits.
Great posts everyone,
I too am focused on other methods, but this has struck me as a good way to make a profit. My brother bought a house in Northen suburbs of Chicago and his house isn't going to be ready until November. Its already gone up 25K in 6 months. He bought it for 330K.
How do you go about asking the builders if they to allow assigment? Just call and ask?
[addsig]
Quote:
On 2003-06-02 13:19, Tanner wrote:
Great posts everyone,
I too am focused on other methods, but this has struck me as a good way to make a profit. My brother bought a house in Northen suburbs of Chicago and his house isn't going to be ready until November. Its already gone up 25K in 6 months. He bought it for 330K.
How do you go about asking the builders if they to allow assigment? Just call and ask?
Yes, you need to ask them if they allow assignments or not in their contracts. You want to get them down to the lowest deposit on the house as possible, some of them expect 20% down. I won't put down more than 10%. You should also figure out all your closing costs if worst case scenerio you need to close.
I am actually in the process of doing this, I'm guessing it's the same thing anyway. My son is a building contractor, I am buying the lot, and taking out the construction loan. I'm not sure what it's all called but he sets modular stick builts.
The house's built in the factory and then shipped in pieces. He is selling the house to me for his cost plus labor. We are going to sell the house and split the profit. We are not over inflating the price, we are selling it for market value. We should both profit around $12,000.00 each. We are advertising during construction, so at best, we might sell it before it's even finished. I'm borrowing enough money to pay for the lot and the cost of the house and labor. The lot is in a nice subdivision with a lot of construction going on. Business is booming here so we plan to do it again if this works.
Wanted to add one more thing, if this works as we plan and I really can't see it not happening, new homes sales are out of this world, I will let you know, if you're not lucky enough to have a son who is a builder, you might find a new builder, who is really wanting to get his name out there. The builder may interested in a 50/50 profit share. especially if he doesn't have the money to do it himself, and you do!
Quote:
On 2003-06-03 19:09, msnbobby wrote:
Wanted to add one more thing, if this works as we plan and I really can't see it not happening, new homes sales are out of this world, I will let you know, if you're not lucky enough to have a son who is a builder, you might find a new builder, who is really wanting to get his name out there. The builder may interested in a 50/50 profit share. especially if he doesn't have the money to do it himself, and you do! <IMG SRC="images/forum/smilies/icon_smile.gif">
Are you in Florida? Someone actually suggested I look into doing this when I was visiting West Palm a few weeks ago. What's the cost of this type of house and what's your net % profit margin? I need to find a builder to help me out.
I have a friend who just puts up a guarantee from his bank. He puts no $ out of pocket. He gets in the deals before the hole is dug. He's got a prime condo which in 1 1/2 yrs has apprec $600K & he expects more !! He is an insider as he gets called on deals before they are open to the public. We should all be so fortunate
Tom B.
Yes I would put them on the market approx 3 mos before finish
Also, even thought hese homes have reached another phase annd the price is going up doesn't exactly mean that you will have a sale right away
Most people looking in new home develpments are looking for new and if the builder is still building they will likely choose to design or add their own colors , pick lot, etc so you will be competing with new home sales until they sell out or move on. Now if its for your own residence and you want to resell I would say add something really unique like crown molding , granite instead of corian , get a better view of a lot etc. but then the price goes up and not so much profit but you have had some enjoyment out of it and it may sell quicker because of the upgrades even though the subdivision is not completed
I have also recently invested in a pre-construction condo and could use some advice. I am curious to know how much will I get taxed on the profit. Am I able to collect the new buyers deposit?
Thanks,
Alex
Alex,You will be taxed at the time of close with your buyer. It will be at short term capital gains. [ Edited by MichaelChandler on Date 04/23/2004 ]
This is a very risky part of REI, because it is really speculating. You are risking all of your earnest money if you cannot sell it before closing and you walk away. That will also likely burn the bridge with the builder.
The other option is to close and take the chance of paying your mortgage until it is rented or sold. That could be ugly.
If you are in a hot area, it can be a mild risk, but it is still a risk.
I plan to buy a couple houses pre-construction this year, but I will look at selling on a CFD (per Mr Locke) if I do not flip it before closing. That way, no rental mgmt, I get a small monthly CF, and an extra 5-6% after 2 years when the buyer refi's. The buyer gets the mortgage deduction, the pride of ownership, and into a new neighborhood they really want but couldn't qualify for.
My 2 cents
Peter
This is a very risky part of REI, because it is really speculating. You are risking all of your earnest money if you cannot sell it before closing and you walk away. That will also likely burn the bridge with the builder.
The other option is to close and take the chance of paying your mortgage until it is rented or sold. That could be ugly.
If you are in a hot area, it can be a mild risk, but it is still a risk.
I plan to buy a couple houses pre-construction this year, but I will look at selling on a CFD (per Mr Locke) if I do not flip it before closing. That way, no rental mgmt, I get a small monthly CF, and an extra 5-6% after 2 years when the buyer refi's. The buyer gets the mortgage deduction, the pride of ownership, and into a new neighborhood they really want but couldn't qualify for.
My 2 cents
Peter
All said and done, I would follow JohnLocke's Advice for there are simpler and quicker ways to make a return on your investment than have to put a down payment, wait a few months and then assign / sell your position. If you feel you have the time to do this - well and good and GOOD LUCk but for some of us, there are simpler ways to make bigger returns. Good luck anyway
Allow me a word here from the developers point of view to explain how/why this works.
Developers, as a rule, do not work with their own money. So if i am building a project I have to convince a bank that the units can be sold. Usually the bank would like to see something like either a 10 to 20% presale or enough pre-sales for the projected profit to cover the cost of the land (after the cost of construction, of course).
So the developer is willing to sell some units at a "discount" so to speak on what he thinks he's going to actually sell the units for. These loss leaders make it possible for him to convince the banks that there is a market for the units and that, in turn makes it possible for him to do the deal.
So, the earlier you sign on the more likely you are to make money here because the more discount the developer is willing to take.
I happen to be doing a deal like this right now. I'm doing a condo conversion on an industrial building in Chicago. I believe I have one unit sold to an existing tenant. If I could sell a second unit, even at a substantial discount to the market, I would have enough cash to acquire the property with no money down and no loan. Therefore I'm willing to sell this second unit at a 30% discount to the market, and even to sign a guarantee to buy it back in a year for market price because the sale of these two units makes it possible for me to sell the other 5 units at a substantial profit.
I hope that added some insight as to how/why/when to buy into such a transaction. Make sure your EM is held in escrow and that there are provisions to get it back if the project falls apart and never gets off the drawing board.
Quote:
On 2004-04-23 01:35, MichaelChandler wrote:
Alex,You will be taxed at the time of close with your buyer. It will be at short term capital gains.
<font size=-1>[ Edited by MichaelChandler on Date 04/23/2004 ]</font>
Mike - I guess it's only short term cap gains as long as the holding period is below 12 months, correct ?
I TO HAVE HEARD AND SAW FIRST HAND HOW PEOPLE ARE FLIPPING HOUSES IN SOUTH FLORIDA, IM CURRENTLY A BUILDER IN NY
IN ORDER TO FLIP A HOUSE OR CONDO IN S FL YOU NEED TO GET IN BEFORE THEY BUILD AND IT SHOULD BE A GREAT LOCATION LIKE WATERFRONT OR WATERVIEW NEAR MIZNER PARK ETC ANYTIME THERE IS A LARGE DEVELOPMENT BEING BUILT IN STAGES YOU NEED TO BE IN ON THE FIRST DEVELOPMENT FIRST STAGE THAT IS BECAUSE 99.9% BY THE TIME TE LAST STAGE IS COMPLETED THERE IS ALWAYS A INCREASE IN PRICE