Pre-Construction in Phoenix Tempe Scottsdale area?

General Real Estate Investing
1

Hello all! I have done an extensive search here in the forums and haven’t found what I am looking for. If it is somewhere else, please forgive me. I also didn’t know where to post this as I didn’t see where it would fit better, so if this is in the wrong forum, I ask for your forgiveness again.

I live in the Phoenix area and even though everyone knows our market has somehow cool down, I see bigger and taller buildings (most of them new condos) going up every day! I want to know if anyone out there knows whether these are good opportunities. I mean, I am pretty much a rookie, since I don’t own any investment properties… yet (closing on my first one in April, so help me God), but I have read and heard a lot about Pre-Construction investing and how, when done correctly can be very profitable. Is there anyone out there that knows about the different projects going on here in Phoenix/Tempe/Scottsdale that could share some information with me? :banghead2

Any input is greatly appreciated.

2

I have friends who got on the pre-construction condo bandwagon in Florida. Not one of them has made a penny. The condo’s they purchased are worth less than they paid, all have interest only loans on them, and now they are praying just to rent them. Every one say’s it was a big mistake. I know there are people who made money, but they were in and out early.

Seeing these buildings go up does not mean anything concerning market conditions. Right now, we have 4 highrise condo projects going in Providence and a real esate agent friend of mine said they can’t give them away. Be very careful. This market will get worse before it gets better.

Google search “Sam Zell” He built Equity Office Partners, the single largest commercial real estate company in the U.S. He’s selling his entire business right now. The best part… His nick name is “The Grave Dancer” for 40 plus years he has consistantly bought the dips and sold at the tops. If Sam’s selling the last segment of the real estate market (commercial) that is still going well. It tells me it’s all down hill from here.

3

I think it depends on your market. There are plenty of places around the USA where the markets are doing very well. The “bubble busting” group will tell you not to buy anything, to stay away from real estate, that it is all overpriced and only going down further. Talk to other investors in your area and make your own educated decisions. I also know of some that bought and lost money in Florida, but also know some that made money in the panhandle area with pre construction. Best of luck to you.

4

The stock market is risky and even that seems less risky than pre-con buying. If you’re going to throw your money away just mail me a check instead. :beer

5

Pheonix is one of the fastest growing cities and I think by the end of 2007 it will be the third largest city I read somewhere but still does not mean affordability in the pre construction market. Alot of these units are bought by inexperienced investors or investors who think/know longterm holds with some negative cashflow is okay and will pay off. I am in Fl, highly overpriced market and 4yrs ago, I was buying rentals with negative cashflow of $1000 per month, but knew the properties were appreciation so much that when I sold I had a profit even after the net loss each month. I bought and sold them during the boom and still make a good profit but was able to carry the negative to do this. I went in with that game plan.

When buying a property, you need to have your exit plan ready before you buy, Will you buy for appreciation, meaning you may need to hold these properties for 5-10yrs, carry negative loss for alittle bit, or are you looking to flip, break even, etc.

Condo’s are always a tough market though, especially condo conversions , they are amoung the worst investments I found out after buying 2 and hated them and wish I could give them away but can not. even though I am breaking even each month, and with the cashback incentive I am actually ahead, I wish I did not buy them couple years ago. Renters in the communities are not the same when it was rental only and place not taken care of as good since so few owner occuppied units to watch over the place daily.

Preconstruction homes have a better chance of profit as long as you have equity at build time based off current market rates. When an appraisal is done on preconstruction homes or condos they base the value off the property being completed that day. But when you have all these builders wanting you to use certain banks and well appraisers they pick, you do not always get an honest appraisal.

6

Hello Quick!
I hear a few Chicken Little’s :shocked The Sky is Falling!!!
Nah… just kidding! Everyone is entitled to their opinion, right? That’s what the forums are for :beer
I am a real estate agent here in Phoenix and an investor as well. And as yrush mentioned, the Phoenix Metro area is growing at a mind-boggling rate! I have some statistics I got a few weeks ago that we were the FASTEST growing state (percentage-wise) last year! It was the first time in 19 years that Nevada was not the fastest. We added more than 213,000 people in 2006! So, that’s just reinforcing the point that real estate continues to be a hot topic.

A lot of people predicted a “burst” and I haven’t heard any loud burst. A little air seeping out? Maybe :biggrin The bottom did NOT fall off and those that keep waiting it will, will miss opportunities. Has the market (especially residential) cooled down? Undeniably Yes! Is “everything downhill from here”? Big NO! We needed this market! The one that scares most speculators away! Our market is going through a much-needed correction after the crazy 2004 and 2005 years of people buying left and right everything under the Sun.

This is the market where patience and research separates the would-be’s from the ones that make it. There are a lot of condominium projects going up for sure. Some of them are better than others. And I am not even going to spend time in condo-conversions because I am with yrush on that one.

Let me share with you an article that just came out yesterday on our Arizona Republic:
http://www.azcentral.com/arizonarepublic/business/articles/0214biz-grigio0214.html

In this article they are talking about a new Apartment Complex on the North Shore of the lake. I drive by this place everyday. I remember when you could see the other shore from the 202 freeway. Pretty soon you won’t be able to do that. But basically, this is an apartment complex, not condos! And people are still paying up to $5,000 a month JUST TO RENT IT!

Now in my opinion, if someone is willing to pay that amount for just renting, there must be a lot of other people willing to pay as much to OWN. Granted, this complex offers amenities and services that are well worth the price tag, but that’s exactly my point!

In my opinion, there will be a fair share of the condo projects that will not appreciate as much as others and will be a money blackhole for their owners for some time. Yes, that is the truth! However, there are a few projects in the works right now that I and a lot of people I know are very excited about.

I, myself, am invested in them! Because I know they are poised to be great developments, part of something bigger! Projects that offer the kind of amenities and conveniences that people are looking for more and more.

It is truly amazing what these developers have done here. At first I was one of the biggest skeptics. I was one of the ones who said “Who is going to buy at those prices?” Well, guess what, people are buying and they are not just investors. Buyers are starting to notice the conveniences and amenities these developers are offering. Developers had an “if you build it, they will come” mentality and I am still amazed but it is working.

Oh my God! I have extended myself too much! Sorry!

Anyway, I wanted to ask you (Quick), you didn’t mention anything about the West side of town, have you taken a drive by WestGate lately?
http://www.azcentral.com/business/articles/0201biz-gl-office0201.html
That’s where the new University of Phoenix Stadium was built. Super Bowl 42 (next year) will be held right there! They are opening new Spring Training Facilities for Major League Baseball teams! It is growing!
Like I said, I, myself, have bought in some of these developments because I know they are solid investments. I will be delighted to discuss with you or anyone or send more information about the different projects that I consider the best buys out there, whether for occupying or investing.

One final note, I am not talking about flipping strategies here. Because that’s more speculation than anything else. I am not talking about buying now and selling before the development is built-out. I am talking about good investments that will give you great returns in the long run. I am not saying 30 years, but I am not saying within the year, either.

Alright, sorry for the length. And I could write a lot more… :banghead

7

Most of the time preconstruction investors are solely looking to flip. I agree that in the long run, the Phoenix area will be good but in the next few years, who knows with the glut of housing for sale. There are some subdivisions that have over half the homes for sale or are vacant looking for renters.

8

There is no right time for preconstruction investing with the intentions of flipping which is what investors do unless they plan to move into the home with hopes of equity.

No one predicted the crash in Cape Coral/Lehigh Acres to my knowledge. it took a major dive, from 20-35% appreciation in 2004 and 2005, then in mid Jan 2006 the prices started dropping at about 2% a month. Since preconstruction was taking 14-16months on avg to complete, people who got in when it was hot in early 2005, even late 2004 got stuck in the drop and either broke even, took lose or foreclosed. Many tried or are renting and taking hard negative cashflow as well. It was a market we did not see going down and yet people still going there strong, but with large surplus of builders inventory on unsold homes from investors, the market crashed.

My advice…if your thinking of preconstruction, only go in markets where builders require 5% down at contract or CTP loans. This are the guys looking to close since they had to put down 15K or more, or get a loan and are stuck. Less likely to just give it away. Any market or area where the builders have many homes for sale and giving them away, competing with the other sellers is a bad market.

9

Hello,
I am still working on a check list to analyze pre construction deals from a distance. It should be ready in a week or so…
I can email it. It is free but please provide me your feedbacks on it so I can improve it.
Also, here was my post on the subject:
http://www.reiclub.com/forums/index.php?topic=24209.0

Thanks,

10

I echo the words of yrush2000 and I go a little further. Preconstruction investing with the intentions of flipping is more speculation than REAL investing. Investing is when you have taken the time to do your research about a particular project, the area, the builder/developer and are in a good position to take advantage of the opportunity when it comes up.
Your guidelines are good starting points as well!
Also, WelcomeToRealty, I emailed you about the list, but have not seen anything from you. Have you replied to me and maybe I lost it?
All in all, I do think there are some good INVESTMENT opportunities, (working word here is INVESTMENT) if you come in knowing that the best strategy will be to hold on to these condos for a few years. I think the worst of the market (locally here in Phoenix) is over with and we are starting to slowly recover. It will take several years no doubt, but the market should start picking up in the next few months. We should start seeing more activity. That’s my humble opinion, though. :director

11

any good investment start with understanding/developing an exit plan. next, you need to assess and understand the risk and how they might alter that exit plan (or eliminate it). Lastly, is time horizon and ability to ride thru unexpect events (long martket down turn, shifts in demand, etc).

what goes wrong with many pre-construction deals (IMHO) is people have one exit plan (flip), fail to account for risk (i.e.flat, down market) and can not handle the holding cost.

I also liked the point made that lack of a reasonable barrier to entry means people with no “skin in the game” will cut and run at the first sign of trouble which ultimate hurts all the other players. This is why I personally don’t like pre-construction becuase your success (or lack of) could be dictated strongly by the actions of other owners in the area/complex.

12

Yes! It’s like when you are playing BlackJack with a couple of novices and they “take” when you are hoping no one would so the dealer gets that! They ruin it for everyone in the table! :bash
I agree that the good opportunities will have a reasonable barrier to entry. Actually, the projects I know and tout and have invested in here in the Phoenix area all have at least 10% down (with excellent credit, otherwise 15%) and, they require $10K-$15K in earnest money. This way you know the people buying these are serious about ownership… for the most part. :handonhip

13

The best preconstruction projects are ones where the builder is offer spec homes. This is where they ask for no more than 5% down and many times the contract is assignable with contingincies like how much of a profit you can make on flip before you have to give them some of the money or a min, sale price, etc.
If you need to get financing 1st, I learned to back off because of delays and those will cost you payments even if you have an interest reserve they will use it all up way before the project is completed. My advice is if you in a loan with a reserve now, still try and set aside each month from the start at least $500 a month min. Because when the serve runs out and the bank has paid the builder over 200K in draws your payments will be in the $1500 a month range and you need the money. In general a reserve is done in about 6months to 8 months depending on how fast they move from the start. In Fl it takes about 6months to get your permits so the reserve cost about $2500-$3000 before anything but lot clearing happens and generally the reserve on a home about 250K is only 8K a max. Of course a reserve is based on equity at closing. If you have no reserve and the bank says they can add it, that just means your giving them money up front for payments and I do not advise that., Just set is all aside now…

Also remember the market is about to get real tough with financing. The other day I have a brief conversation with a broker friend of mine. He was telling me all the banks are shutting the doors on financing. No more 100% with 640 FICOs, and stated is really going to be for self employed workers over W2 guys. They are getting killed and have to tighten things up. Mnay banks are looking for over 680 for Stated loans and 720+ for No doc and No ratio loans. 6 months of reserves and many want 12 months cancel rent checks no expections he told me. This is for prime and sub prime banks. Lenders will still use there own guidelines so unless some brokers can shed some light since i did not get all the facts yet, I am sure preconstruction will become harder to quailfy for and 10-20% downpayments will be normal again.
If almost seems like they are moving back to the 80’s for lending requirements. Gee…didnt the market crash then too…LOL

And he mentioned to see a rise in interest rates he was told, as high as 10% on the 1st even with decent/good credit.

If your in preconstruction now and lending does get this hard, it will open the door for excellent lease option terms. So best advice…your exit plan in this market is not to flip since nothing is going up 15% over night, look into a 12 month or more lease option. maybe we can go back to when we asked for 5% down on a lease option oppose to the $3-5K everyone is asking for now on 300K homes…