I bought a pre construction townhouse for $239,000 a year and a half ago. I just noticed that the builder sold two townhomes exactly like mine for $219,000 - 229,000 a few months ago.
I went to the sales manager and told him that it was unfair that the builder is selling units exactly like mine for about $10,000 to $20,000 less and never informed me of the price reduction.
I didn’t close yet, but they have my cash deposit. I wrote a nice letter to the builder expressing my concerns that they are setting the tempo on the values of the homes in this new community and it unfair that they are doing this, I didn’t get a reply yet.
Is this an investment or to live in? If it was an investment, what were your thoughts on exit? Buy it for $239 hold it X years and sell it for $Y? Were you going to rent it in the mean time? How much are you expecting for rents?
By the way, that is why I don’t like condos. A major part of real estate (the way I do it) is control. If you buy a condo you don’t have any control. You can’t differentiate your property; you can’t control what the costs are going to be etc.
unfortunately, " fair" nothing to do with it. He is free to sell his product at whatever the market will pay.
I would ask for a price reduction and review the terms of your contract. You might be better off to walk away and lose your deposit (assuming you bought this as an “investment”)
This was my plan. I bought a year and half ago at preconstruction prices. I was planning on holding on to it for about two years and sell it. This is an investment property. Obviously, the market went south so that affected new home prices in this new community. My unit has went down as much as $15,000. So I’m awaiting from the builder if they are going to give me a price reduction. I didn’t close but they do have my $24,000. I really don’t want to walk away from that much money so I don’t know what I should do.
Also, my mortgage will be about $1500, the going market to rent my unit is $1400, so I’ll be about $100 out of pocket every month. But if real estate goes up about 3% to 5% every year, that $100 out of pocket won’t be that painful especially when I’ll write off the mortgage interest?
Shall I walk from my down payment or check out the waters out there?
<<Also, my mortgage will be about $1500, the going market to rent my unit is $1400, so I’ll be about $100 out of pocket every month. But if real estate goes up about 3% to 5% every year, that $100 out of pocket won’t be that painful especially when I’ll write off the mortgage interest?>>
You’re going to be upside-down for more than $100 a month. What about:
Taxes
Insurance
Vacanies
Maintenance
Management
Advertising
Evictions
Etc.
Etc.
You probably should re-look your math…
When you buy a property that you’re not going to occupy and it loses money every month, it’s referred to as an “alligator”. If you buy knowing that you’ll lose money every month but are betting on the appreciation, that’s not an “INVESTMENT”, it’s a “SPECULATION”! If you read about the investment environment for the next 2-to-7 years, apprecaiation might not be a good bet in many parts of the country…
This is Palm Beach County Florida, real estate news for this area looks very promising. That $1500 includes everything. I shouldn’t have to evict anybody if I screen them very well. If I walk now, I lose $24k, I don’t forsee the prices dropping anymore in this area. You are right, I’m a speculator and I’m learning from my mistakes but I want to make this as less painful as possible.
I really don’t know these preconstruction things. It really looks speculative to me. I don’t know of any builder that can’t get financing for his properties and sell them in a normal period of time. This looks like an attempt to pass the risk onto you. If the market turns against him you have already bought the condos. I would ask someone that does this type of thing and imitate them. Don’t reinvent the wheel.
If you want to be in the real estate business after this condo preconstruction scheme is not working anymore, I would develop a more robust business model. I would develop a plan that can be repeated over and over again. In order to do that you have to make the market. You should not be at the whim of fortunes (appreciation rates) For instance I buy my properties such that I can sell them in a month and make money. I set up my business so that I win in good times and bad. What I do is look for distress and relieve that distress. Distress causes a price discount. If I can relieve that distress cheaper than the discount, then I make money. An example is a property in disrepair because of one of the 3 Ds (Death, Disease, or Divorce). I can buy it repair the disrepair ($20k can basically gut and rebuild a house) and sell the house for a profit. Most of my houses have at least $20k discounted from the market rates. The house I am finishing up this week has a value of $150k. This value is based on what others just like it in the same subdivision have sold for. I bought it for $101k and it has taken $6k to fix up. I roughly have $110k in this house. This house has $40k equity. That equity is not based on market conditions, I controlled this equity. If the market turns against me and all house prices drop across the board by 10%. That means I have to sell my house for $135k. I have just taken the market out of my equation. If the market drops that 10% and I want to sell it fast, I can sell it for $125k and sell it in a day. That is not based on appreciation it is based on my activities. That is repeatable, that is a robust business model. I don’t know your area but there are people making money in real estate in your area. I would find them and do what they are doing. Don’t reinvent the wheel.
First, you need to read your contract very carefully and look for any point to drive the negotiations with the builder. At this point, you ahev very little leverage as he will get your $24k plus even if he has to sell for $205k he still make his money.
As for the rental, but rather blunt, you are obviously a newbie at the landlord game. I can easily see you incur several thousand dollars a year in cost even if things reasonably well. In the meantime your house is getting worn down by renters; they are very hard on property. Don’t fool youself into think you probably screen people to avoid this. I’ve seen people driving expensive auto and fancy cloths and live like pigs.
Furthermore, even if you are right that the market is at the bottom (which I don’t think so), the market does not just turnaround and march back up.
How about this scenario:
assume $5k/yr in cash into the property (some of the experienced LL will say this is LOW)
assume market is flat for 2 yrs and then increases at 4% thereafter.
if you sell after 7yrs (assuming 5% realtors commission), you will have lost $10k. :o IMHO, you have a greater than 50% chance that this scenario is too optimistic and losses will bigger. Also, if you reduce the holding times, the losses are >$10k.
I appreciate your advise, but this is a one time investment shot that my wife and I took on buying this preconstruction home in South Florida, I’m not in it to make it a career. I had some cash sitting in my savings so I decided to use this cash to make a little money–more like in two or three years down the road if this property gains some equity, which I think it will.
In brand new communities, its the builder that sets the tempo as far as what are these houses worth. So my house will be worth what the last unit sold for, which they are still building and not finished.
For example, I bought my house that I’m living in at preconstruction at $163k, the last unit sold for $191k. That was May of 01, now my house is worth $380k.
So I’m hoping once the builders goes away, all units are sold, and HOA takes over, its going gain equity, maybe not like 10%, but 3% to 5% a year.
So, I’ll take the hit being in the red once I rent it and sell it in 3years.
As the other experienced landlords told you - NO you do not have a good plan. You are probably going to lose money on this deal, even if you hold it quite a while. Keith gave you a breakdown of some of the expenses that you will incur. Throughout the United States, operating expenses run 45% to 50% of gross rents. The vast majority of new investors don’t know this and this is largely the reason that the vast majority of newbies fail in a short period of time. From a historical standpoint, we are not even close to the bottom. The bottom should not occur until 2008 and then it normally takes 8 to 10 years for inflation adjusted prices to reach their previous highs. Translated, that means that you’ll have to hold this property until 2016 to break even on the price. During that entire time, you will be losing about $800 per month. You won’t realize this in the beginning, but it will happen.
You are in a bad spot. Preconstruction is risky and is speculation. The builder is dropping his price because sales have stagnated and he needs the money.
I’m 17 years old and will be graduated from college in 2011, when I graduate from college are you saying that it will be tough for me to find good properties, at a good price until 2018? Or what? Please explain.
No, I’m not saying that at all. What I am saying is that buying pre-construction is very risky. In a rapidly appreciating market, you can make a lot of money with pre-construction. In a declining market, you can lose a lot of money.
It is always safer to make your money when you buy - in other words BUY AT A BIG DISCOUNT.
look for a loophole in the contract. don’t walk away from $24K but find something that lets you out of the contract so you don’t have to close and they give you your deposit back.
As a lender, we use a 25% of projected gross rents as a vacancy rate when we underwrite a loan to figure out the costs. As others have noted this may be low.
But before you make a decision, you need to do some research. Who will you rent to? Is it in an area that is over built? Are the rents projected to go up in your area. Im not saying you will be making a bad investment, but I would rather lose $3000 per year than $24,000 tomorrow. You have 8 years to fix the problem. A lot can happen in 8 years but if you simply walk away, you lose $24K for sure.
I would have talk to a lawyer or at least a real estate broker and see if they can get you out of the contract.
You’re right, and thanks for being optimistic. I don’t know where you all are from but Florida is prime real estate area, especially South Florida. Of course the builder lowered his price but this happening everywhere else in the country. Let me test the waters; I’m thinking about lease option to buy,. Thanks.
No, I’m not advising you what to do. All I’m saying is that speculation is risky. People do lose money, sometimes a lot of money. It looks like you will lose money on this investment regardless of what you do.
In my estimation, you will be losing about $800 per month or $9,600 per year if you rent the place. If the taxes and insurance are included in your mortgage payment, then you can subtract that from the $800. If you do the management and maintenance yourself, you will save approximately another $225 per month. You’ll have to do the math to see where this leaves you.
I am not an expert in your area - you should be. You will have to decide what you think is going to happen in your area. Is there a glut of inventory that will take years to correct? Are prices so inflated that they are likely to come down? Are insurance rates getting so high that the demand for housing in your area will decline? Is your area growing rapidly with new jobs and an influx of people? I don’t know the answers to any of these questions, but you should.
usaims, just look at both sides of the coin. do not JUDGE things emotionally. i’m not saying that you are either. i’m just saying, if you’re in a stinker - think clearly about what your options are and what you are comfortable with.
if you’re comfortable with possible losses and just decide you can swing them and hang onto the property for an extended period of time - then go for it. if not, consider your OPTIONS.
i hear what people are saying about pre-construction deals - its like property manger said - in a good market - they are definitely deals - it comes down to the homework on the part of the investor and the experience he/she has. but “speculative” investing is difficult for someone who is NOT a seasoned investor.
for the seasoned and sophisticated investor - speculation is easier…because
they’re experience lets them know so
if they invest in a stinker - they’ve got the cash to swing it and even make it a positive in terms of deductions etc.
1 stinker out of 20 EXCELLENT DEALS - is a FANTASTIC AVERAGE
if i were to guess - a seasoned investor who speculates in rei probably has a “batting average” of .500 - so half the time they hit home runs and the other half they “lose”…but they’re loses pale in comparisaon to their homeruns.
if you’re a novice, speculative investing should be avoided due to the lack of control you have over the investment type.
having said that - and “raining on your parade” - i hope this doesn’t get you down man - don’t worry about - THINK ABOUT IT. consider your options…ALL OF THEM. take in what everyone says and talk to your attorney, talk to your CPA, talk to other investors - then BE DECISIVE!
Folks, I feed good about this. First of all, the builder is considering lowering the price.
Secondly, this is WARM and SUNNY Palm Beach County; only 4 miles from the beach.
Job market is expected to be excellent because lots of bio-tech companies are moving to South Florida.
And I want to mention that I do have some experience with pre construction property because my house that I live in was one and it is doing very well. Remember, there is a two year warrantly on all applicances, a one year warranty on plumbing and electricity, and a 10 year on the sturcture. And I only live 21 miles from the place.
I also got good fiancing with Wells Fargo; 6.625 % on an investor rate; with no points, fixed, on a 30yr (not interest only). I know its spectulative and its a risk with TODAY’s market. If I lose on this, I’ll learn from my mistakes. This is my very first and it might be the last. Time will tell, I can’t walk out on 24k.
You’ve made your decision. Now you just need to learn everything you can about dealing with tenants and you’re on your way. Go back and look at the archives on this site. There is a lot of good info here.