anybody got experiance w/ preconstruction investing and/or flipping new construction?
There is a subdivision in my town in (SC) that is almost done. There are only 3 lots left and I was looking at building a home for my family in that subdivision. 1 builder, semi-custom homes…I’m a mortgage broker and I know a guy who lives there. I looked up his house and had it comped out by an appraiser friend, and he said that it will likely appraise at 300+./- 10k. I was talking w/ the builder and I could build the same house plan w/ “middle of the road” upgrades/specs for around $220k-$240k depending if I wanted brick face, deck etc…
I realized that’s about a 50k spread. Why couldnt I just build the home for say 240k and then sell it for the new appraised value or close to it and make an easy 40-50k? I could do a heloc after closing using the appraised value to make the payments while the property is being marketed…so I’m not out any money!
I guess it’s just market driven demand driving the price up for the neighborhood…now that, I’ve started looking around, I’m starting to notice there are several areas in the county that I could do this in…
A lot of people are getting hosed on preconstruction these days in a falling market (falling in most places). You better know your market well before you attempt this, you might be at the point when its time to sell and have no equity whatsoever.
A lot of people are getting hosed on preconstruction these days in a falling market (falling in most places).
Rich is right. I have several clients that invest in pre-construction opportunities. A few have lost on their speculation gamble as property prices are starting to level out.
Others are still doing well. As with any thing it is based on location. Some markets (even in the same State) are up and coming, where others have reached their potential.
good points. it all depends on the market. In my city, we’ve not seen the dramatic increases that alot of areas have. I’m in central SC and it’s been real steady, whereas the coastal regions have peaked out and seen some decline. Worst case, I could stip the equity, and then do biweekly payments to reduce principal quicker using the equity and then since I’m not really coming out of pocket on my own account, take the money I’m normally accustomed to paying for a house payment and do a principal reduction each month and have the house f/c in under 5 years. Wow!
If your doing a CTP loan, be prepared to make payments. I am yet to see a builder get the home completed before the interest reserve is runs out, so when its time for you to pay, its big payments over $1400 a month many times, especially with preconstruction interest rates around 9+% since its generally prime +1 or 2 depending on bank your using.
If its a spec home, where you put a downpayment down like $5K max and they build, then do the loan when its completed, it is not bad. Your taking a risk of your 5K, but if market sours, you can walk away with only a 5K loss. This way you know what you have before you close.
Also keep in mind, it generally cost $100-$125 per sq ft to build in most cities for basdic homes, add $25 sq ft for customer work on avg. Buiilders are not really giving you a discount I have found out, they can’t since they have to contract out so many workers for a time frame, the cost can become higher.
It can be cheaper to goto a local guy and get him to build, since he is not pulling anyone really. Find someone that goes from start to finsh, that has his plumber, A/C guy, electrical man, etc. I been looking in my area, and have come across one person willing to build for $90 sq ft, but working on getting him to $70 a sq ft and giving him 35% the profits when the home sells.
Remember this one thing about pre-construction: the builders have deeper pockets.
It’s a gamble. Builders will do whatever they have to do to unload inventory. There are 2 major developments in my area where a lot of rookie speculators are totally screwed. Bought “brand new, never lived in, can’t sell cuz the builder undercut them” homes. I know of one development where HALF the homes are either in a short sale or asking ridiculously low rents just to try and stop the bleeding!!!
BEWARE of pre-construction. Builders will hose you if you give them the nozzle!
Always buy for cash flow. Be smart about this. There’s no such thing as get rich quick. If you’re going to live in the home it’s one thing…but trying to flip a pre-construction home in a declining market is pretty crazy.
again I guess it depends on location and builder. If I get into a multi phaze subdivision that’s almost done, I can deduce what the market value for a particular floor plan is at that time and then I can obviously know what the price to build that home is in that sub. at the time. If there is a spread large enough, then it doenst matter if I could sell the home for that amount, it only matters if it will appraise for my projected amount. Here is what you have to remember…A home may appraiser for 250k, but you may only be able to sell it for 230k. Market value appraisals are not hard and fast…one guy may get 250k value and the next appraiser may get 240k value and the 3rd appraiser may get 259k value…AND a lender may be willing to take all 3 appraisals as long as the grid adjustments are w/ in fannie guidelines and the comps are similar. The important thing is lendable equity. If I can get the value in the appraisal, then I can borrower that amount. I can control the full amount of equity regardless of what I could sell the home for. Now the rest of the story and success depends on what I do w/ the equity (cash) when I get my hands on it and at what price (rate) I’m having to pay to get the equity.
In my market supply and demand are still in balance and the builders are not even thinking about slowing down…Avg. appreciation is still single digit and typical marketing times for median home values are still under 6 months for homes < 10years old. I feel pretty comfortable trying it w/ 1 home and screw it, I can always move in it, if need be…
PLEASE Keep in mind I am new here. When you say a house is $100-$125 a square foot does that include the land? And are there builders out there that will negotiate the price per square foot with you? I stay in a Alaska and the price per square foot here is roughly about $160- $170 a square foot and that include the land but nothing is custom built about my house.
NO the price does not include land. land values is what really dictated the value of a home in many ways. Also I have no clue about Alaska, since most of your state is very secluded from other cities with access.
Prices of land is what determines the value of properties in the new construction areas. Look at Cape Coral, Fl, was a hot city from 2002-late 2005. Prices for a 1/4acre lot went from in 2002 to 11K to over $115K in Dec 2005. Then in Jan 2006 prices started to dip. By summer 2006, you could grab a lot for 60K and now you can pick them up in the 45-55K range. beacause those lots dropped in prices, buyers lot money since new buyers are paying less for land. The house cost the same no matter what.
Buillding construction is always based on sq footage as this determines how much building material will be needed.
Now will a buiilder come down on price. Not a major builder. A local independent guy will as he is not building homes all day long and selling them to end users or investors. Plus these guys want to make money also, so getting them to lower the cost to build to a closer figure of true build cost and enough to cover his expenses and then cutting him in on the profits can become attractive to a contractor. And then it can lead to mroe homes and eventually his own large company with you as the partner with the money. How do you think all the big guys became big. NO ONE just goes out and builds 50 homes in 1 spot or a mall…