I need the advice of you experienced investor…
aprx 18 months ago… I signed on to purchase a new construction towne home,in the central florida area… purchase price is $239k, I put down 5% at that time which is aprx $12k… construction is now completed and bulider is now asking me to close… initially when I did this my idea was to flip it because I got in on phase 1, unfortunately my timing was not good, b/c obviously we all know what the market is currently doing. I am/was thinking about walking away from this one and cut my loss. :flush. b/c its a bulider , I cannot get my deposit back…I spoke to the bulider and if I go thru with the purchase, they will put up 5% to my 5%, which means My financing willl be with 10% down, on top of that the builder has agreed that they will also they will pay my closing costs and lease the place back from me for 24months(basically make my mortgage payments). the property willl not cash flow(which is one of my fears after the 24months). my intentions is that in 24months I can sell the property and get out(hopefuly, the market has rebounded by then). at this point even though I am going thru with financing , I am still unsure if I should even go thru with closing or should I just walk away from this one count my loss and focus on other bargains that are all over the place… now you experience investors please chime in with your comments(please only helpful comments, I do not need smart azzez, we are all doing this together to help our fellow investors and had to start somewhere)basically is it worth the risk? :banghead
For me, I would try to find a solution. I’m one of an old guard that believes if you sign a contract you do it. You walk away once it gets easier to do it again. before you know it your reputation is trash :flush.
Of course, you didn’t give complete numbers. Any idea how bad your new construction’s value has gone down? It is one thing if it is hovering around $225k - if it is at $180k that is a disaster :banghead.
I would say if the values are anywhere close, I’d try like hell to find a good Lease/Purchase tenant. Find one that can put maybe $5k down to help your costs - and if you can get them committed to do that beforehand - that will help with the builder’s matching funds. Arrange it to give you a little cash flow and a small payday should they exercise their option. You should break even or get a small profit out of it. better yet, if the L/O tenant doesn’t exercise their option, you’ll have your costs picked up for 12-24 months - maybe enough for the market to recover and you to get something else out of it. :bobble
If the values are horribly off - like 20% off :shocked then even I’d be willing to walk away from that.
not sure if it makes a difference in your response. but I am sub leasing to builder, tried to get him to let me put tenants in an collect rent, he would not agree… as far as value, the appraisal is currently been done…realtor, tells me they just have a few closing recently, from what I know builder has not reduced price…i hope it does not happen after I close…
There is NO WAY the Florida real estate market will be better in 2 years.
For anyone who cares, google search “Maids in China playing stock market” What does this have to do with Fla. Real estate?
When… not if… China’s stock market CRASHES it will be a severe financial blow to this country. China owns more U.S. debt than any 3 countries combined. As of right now 300,000 new stock accounts are opening A DAY in China… a day! Think back, this is exactly what happened in Florida with pre-construction. Our economy is headed for reccession, don’t let anyone tell you different. When China blows up it’s going to be like hitting a guy (the U.S.) who’s already on his knees.
The problem with these types of mania’s is the people doing the buying will pull the plug in full panic mode. Unfortunitely for you, your seeing this up close and personal. Look at Miami, people are walking away from their contracts at a rate the experts thought could NEVER happen. Miami has completed hi-rise luxury condos that are running at occupancy rates of only 20%.
Nothing like having the entire 15th floor to yourself, I guess??? ( yea, right, maybe if your Howard Hughes)
Here’s my advice…RUN, don’t walk away, run away from this home.
As far as the “you signed a contract” theory. Think about this…
If you have children, walk into their bedroom tonight and look at them while they’re sleeping. Ask yourself who you should protect, the builder, who’s got your $12K and should have seen this mess coming from 50 miles, or your kids?
He’s not giving you back your $12K is he?
Your in a HUGE HOLE and it’s starting to rain, should you climb out now or wait until the water starts to really rise? As far as your reputation goes? Sorry, I don’t buy that theory for 1 second. It’s sort of like saying, Well honey, we DID sign a sales contract for that new Ford Pinto, yea, yea, I know they blow up, but we signed a contract, my reputations at risk, come kids jump in the back seat.
Sorry, I’ll fall on my sword for someone other than a builder who can declare bankruptcy tommorrow while on his 50 ft. boat. I’ve been a builder for 20 years, NEVER declared bankruptcy EVER. But I have watched a lot of absolute scum bag builders take working people to the cleaners and then just pull the plug.
DON’T DO IT!
You went to school. It cost you $12K, want to sign up for our 30 year course? Sign right here Sir.
My word is my bond. When I say I am going to do something, I do it, even if it costs me money. You made a very foolish choice - buying a pre-construction at the top of a real estate bubble. However, I agree with Salverston - people who weasel out of their agreements rapidly get a bad reputation. There are many people I won’t deal with because their word is no good. You need to look in the mirror and decide what kind of person you’re going to be.
I think everybody thus far have made some very good points… which can certainly be argued…My belief is that this is business…and in business you try to make the best decision that benefits you as the business man.not the person on the other end… equally important , i strongly believe that a man’s word is his bond…if i walk away i forfeit my $12k which should compensate for me not going thru with the contract, loosing $12k now is easier to deal with than loosing $20k,30,40,+ and what ever comes along with it,if I was to walk away from this does and it is the best and right decision, in the end is me make the right business move make me a bad person (again I am a man, who strongly believes in his word,but again this is business)also on the business end if for some reason i see a disaster on the horizon do I start the process now to avoid that disaster :question :huh
I centainly have a big decision to make. and certainly appreciate all the input I have rec thus far…
Read your contract.
When you get to the nitty gritty of it I’ll bet it says something like, “Here’s $12K as a deposit on buying this condo. If I don’t follow through, you get to keep it and we each walk away with no further obligations”. If you believe the contract is no longer in your best interest, the contract specifies what it costs you to make that decision. You gave your word, and your word is what the contract states. Don’t feel bad about using an option you both agreed to and is specified in the contract.
I’ll add one more point…
Make sure you run ALL the numbers on this home BEFORE you decide to buy it. I think you’ll find that should you complete this transaction it will make your life very difficult for a very long period of time.
Don’t assume, check those numbers. After all you’ll be on the hook here for over $200,000 for 20+ years on a home you’ll never live in. What are the yearly taxes, mortgage payments, insurance, and maintainance? Don’t think for a second that because it’s new you won’t have maintainace issues. YOU WILL. Like I said sit down and add these up.
Mike “propertymanager” usually uses 50% of his rental income for expenses. Think about that… Florida is LOADED with rentals from people who can’t sell their homes. Which is not good for rents. My friend has a $300,000 condo in Florida (pre-construction purchase) that he can’t give away, so he rents it… for $1000/ month!! He’s BURIED in this thing and will eventually let the bank take it. He has no choice, he can’t spend more than he makes.
At those rent rates you are going to be POURING money into this thing every month. If you can’t sustain that then I guess you’ll be breaking your word to the BANK that holds YOUR mortgage. If you can’t sell it and can’t pay for it, some where, someone is going to lose. You just have to pick who. The builder at least gets your $12,000 for building a house he was going to build anyway.
This is a BUSINESS decision. I live in New England. A few years ago a local mill burned. The owner of that mill did something amazing. While he waited for things to be rebuilt he continued to pay ALL his employees. He eventually re-opened the mill but by that time WAL MART had decided to buy it’s products from CHINA because it was a better business decision (half price). Now Wal Mart could have done the right thing and just kept buying from the mill but it would have been a poor business decision. The mill owner went bankrupt, every one of those employees lost their jobs. In the end, his morally correct decision made absolutley no difference in the eventual outcome. Your in the same boat, what difference does it make if you promise to buy a home and don’t, or promise to pay a bank for that home and can’t. Same result either way. Don’t let anyone kid you, this is business decision, plan and simple. You buy it, you lose.
I agree with this. If there is a clause that allows for you to exit and you wish to exercise that becuase you believe its in your best interest, then do so. There is absolutely nothing wrong with that becuase remember both parties agreed to the ENTIRE contract.
However, before I exit the contract, I would ask for a reuced price (i.e. re-negotiate the contract). If he says, NO, then you know where you stand. There is nothing wrong with inviting the other party to re-open negotiations. Many win-win situations can be created this way. As it stands now this is a lose-lose (you lose your money and the builder is still stuck with a house that is likely worth a lot less than your $239k price).
I certainly agree with the last 2 post…and do agree with your point of view… This is how I have been feeling the past few weeks, but wanted to know If I was been over cautious… business wise I am feeling the walking away is the best thing to do and call it even. your example with walmart is right on point, and your friend in the same situation is an eye opener… besides if I do go into this and run into the problems, then this kinda derails my whole REI for the future… again…fdjake and jmd_forest, do you think it makes a difference in my scenario that the builder will sub lease and make my MTG payments for 2yrs?
please continue to add your comments, as my mind is not completely made up at this point…
Just to be clear, my initial reply was not to encourage you to walk away but to remind you that if YOU had decided that the deal no longer made sense, there was no reason to beat yourself up over walking away. Assuming the contract specified liquidation damages were limited to your deposit (it’s possible the seller may have the option of sueing for specific performance rather than taking your $12K and walking away), that’s the price you pay to make that decision. You didn’t break your word and there’s no shame involved.
Regarding if the builder’s leaseback changes the situation: I don’t think you’ve provided nearly enough info for an outsider to make an informed recommendation. You say the property won’t cash flow… how much are average rents for your type of property, what are the other costs such as taxes, condo fees, maintenance, advertising, management, legal, accounting, etc, how much of those costs will the builder’s lease cover,
how is the LOCAL market fairing where you bought, what’s the average DOM, is DOM increasing or decreasing, are there any LOCAL issues that would cause you to anticipate appreciation/depreciation in the next 2 years. That’s just what I can think of off the top of my head
As fdjake notes, run ALL the numbers, run a few “what if” scenarios, perform the best due diligence you can, and make the decision that’s best for you.
I think the builder has already answered your question. By offering to pay your mortgage for 2 years he’s telling you in no uncertain terms “THE MARKET STINKS”
The Florida Real estate bubble was the biggest in the history of the state. That’s saying something because Florida has seen it’s fair share of boom/busts. Do your home work.
You have 2 choices here.To buy or not to buy, very simple really… If you think that the biggest Real estate disaster in Florida’s history will resolve it’s self in 2 years (not gonna happen) then buy the home. If however, you feel that this might takes years longer and prices will continue to fall as people who purchased and can’t sell get sick of putting money into these homes every month and decide to DUMP them (that’s what is going to happen) then don’t buy.
if he is willing to pay 2 years of the mortgage perhaps he would be willing to renegotiate the selling price considering the market. I am a builder and im sorry but i feel that these guys who CONTINUE to build KNOWING that there is already a ridiculously OVER SATURATED market bring it on themselves.
He may really be counting on you as a buyer however, there are not so many buyers right now. He may concede to you a better price to prevent further bleeding.
is the house in an area that could be rented weekly to tourists?
IMHO, renting a brand new house out is pretty crazy. Renters are hard on properties (I’ve been doing it (rentals) for nearly 10 yrs.). Yes, you might get lucky and get a great tenant that stays for a coupleof years and is real easy on the place. More likely you will have some turn over and in 2-3 yrs it will be …well, less than a new home and certainly not having the feel of an owner occupied place.
If its a vacation rental, then run…very fast. That a huge money loser. The reason is high vacancy in the off season, high comissions to place renters and high expenses as the place has to be A-1 condition at all times (weekly renter are extremely picky).
As it was said, run the numbers and the what-if scenarios.
appraisal came back at $245k…
not sure what to think of that?
It means your property went up a whopping 2.5% in the last 18 months. It is a shame that it did not go down in value as that may have helped you get out from underneath this albatross as well as get you your 12K back. So the builder will make your payments for two years but not let you rent it to someone? That is fishy. Bad things happen to empty houses. Your appliances will get stolen for sure. What about if you negotiate with the builder that instead of him making the payments for two years he gives you a lump sum equal to 18 months upfront, or reduces the price of the house by that much PLUS gives you the extra 5% for down payment PLUS pays all of your closing costs. That might make the deal worthwhile. Have you sat down and looked at the numbers? 239K sales price minus the 12K he was going to match you at closing is 227K minus 3% ($7170) for closing costs is app 220K minus another 2K for seller closing costs is 218K minus 24 payments of $1935 (your monthly payments calculated at .9% of the sales price which is a total of $46,440) which gives the builder a total of $171,560 plus your 12K down payment which $183,560. Instead of making the payments for two years see if you can get the builder to match your 5% down payment, pay all of your closing costs and drop the sales price down to $208,000 which after you put down the 24K will put your loan amount at $186,000. This way the builder still comes out ahead a bit, and your loan to value will be below 80%. If you are setting up this loan correctly (as a construction to perm) you should be able to use the new appraised value. As it is if you sell the house before 24 months is up then the builder gets to keep that money that he would have had to use to make your payments.Which I am sure is what he is counting on. This way you get your money upfront. And you don’t have to worry that the builder is making your payments on-time every month. Remember it is your credit that is on the line. if the builder goes out of business or gets hit by a bus you are on the hook for that payment. You are much better off getting all of your money upfront and being done with the builder. This way you can sell the house for 210K make a small profit and somebody is getting a great deal at 85% of value. It is a win win for everyone instead of a win win for the builder. People are still buying homes in Florida, but not at full price that is for sure.
To me it is clear. You contracted a property for $239k - it is now $245k. It is not the flip you wanted - but that is the danger of relying on surging retail prices - if it doesn’t go up your stuck.
That said, it is not a disaster. Since the appraisal is okay - I’d go back to one of my earlier suggestions. Do this as a lease option. I would do like christopher w says and see if you can get some additonal concessions from the builder. Meanwhile I’d be marketing the heck out of this thing - Rent-to-own/Owner FInance, whatever.
If Owner Finance get 7%-10% down and do it as a land contract for, say $260k at 1-2% interest higher than the financing you get. That way your upfront expenses are minimized, you max out on the builder’s matching offer - you get some minor cash flow and then a small profit when the T/B purchases. if they don’t purchase it, you have a couple of years of break even or slightly positive cash flow and a couple years later of hopefully some appreciation.
If Lease to Own get $3k-$5k option consideration, and payments that cover your mortgage by at least $150/ a month - at a sale price of $270k. You have some up front negative, but a small positive cash flow. If they buy in a year you make $21k minus closing - not much but something, but normally what happens is they can’t buy, so you collect another option payment of $3k-$5k and continue on. In 2-3 year if it hasn’t sold, again, your upfront costs were minimized - the TB were responsible fore costs - you had a small cash flow, and you have a chance to sell for a small profit.
Check out the Lease Option section on this site. I think that is an excellent way to make a little lemonade out of your lemon.
Salverston is giving you good advice. What I can’t stress enough is to get further concessions from the builder instead of the two years worth of payments. Because essentially you can’t do anything with the house for two years or the builder can stop paying you. Get that money upfront either as a lump sum payment or off the sales price. As I said before bad things happen to empty houses. Not to mention that you will have to pay for lawn care, utilities, HOA, etc… You can make this into a good deal for yourself you just need to work it a bit. This is a buyers market so if you have a smart builder he will be willing to work with you to get this deal done.
I must say this is the best REI site going today, everyone willing to give excellent adviceall have been helpful thus far and I will utilize the advice to further negotiate with the builder
What were the comparable properties used for the appraisal. If property in the same subdivision that the builder has sold under the same terms that you are getting are the comparable properties, then that appraisal maynot reflect the true value of the property in a “resale” marketplace.
If you want to, get a second opinion. Ask a local realtor to give you a comparable market analysis for this property if you were to list it for resale. Ask the realtor to only use as comparables, properties similar to yours that were resold by private owners (not builders) in the past six months.
Maybe you can get a better picture of the market this way.