Hey everyone-
I had this guy I know through REI present this opportunity if you will, but I’m not too familiar with pre-construction investing. From what he tells me you put 3k down as earnest money on a property locking in your price at say $252,000. They pre-qualify you for a construction loan and from there it sounds like you flip the property or reassign the contract or sell it before you need mortgage financing on it. ( based on the rate of this market you’d be looking at a 10% increase by the time the house would be finished 4-6 months). Does this make sense? It sounds like flipping to me and I know many say flipping isn’t investin it’s speculating, but that aside, does anyone have any experience or familiarity with deals like this or how they work?
Thanks for the help
What your friend is talking about is a preconstruction deal where the contract is assignable. The $3000 is the reservation fee due at contract. The anytime before completion and time to shop or even close on your home, you try to assign your contract to someone else for X amount of money. BUt beware, if your buyer can not close, you will be on the hook to close or lose your $3000 deposit as many builders will refund your deposit after closing happens. NOw if you happen to find someone willing to give you the deposit back plus your fee upfront, who cares if they do not close, you been paid…
going on the construction loan has its pros and cons.
you have to refi to get rid of the construction loan -rates on a construction loan will usually jump to 18% 30 days after completion of the house.
on the flip side, if the house appreciates a lot, the builder will usually try to screw you out of your profit. [unless he’s a big time builder, but even then i’d be careful]
What kind of construction loan are you talking about…18%…i dont want to goto your banks…
Construction loans are generally all follow the same interest rate guidelines of prime +2% so it will change through out the funding process.
Money is held in escrow and is paid out to builder in draws and the loan is interest only. Generally loans are for 12months unless completed earlier. If building is delayed, builders generally extend the loan in 3 month increments. Once construction loan is completed, loan is converted to a perm loan. The terms of the perm loan will be stating in the construction loan docs, such as 30yr Fix, ARM etc…rates of course will be determined by market at that time…
Please note…I am not a mortgage broker, but have done over 15 preconstruction loans…
So from my understanding the idea would be to try to find another buyer before mortage financing is needed. If that is the case, do the new buyers need to get qualified for the construction loan or mortgage? Also, if I locked in my price at 250k and the homes are selling for 275k at completion, then can I just reassign my contract to someone else for 260k-265k and take the profit?
yrush2000- How is the best way, in your experience, to market the property to reassign to someone else?
Thanks-
Not all contracts are assignable so many times you need to wait to the loan is perm and do a double closing with your buyer.
Some loans(builders) will require 5-10% down at contract and then 5-10% once the project is completed for the loan with there prefered lender.
When that happens, it’s many times an assignable contract and you do not need to quailify for the loan till te project is near completion.
As for marketing the home. Some builders offer inhouse marketing and others do not. If your doing a construction loan that goes temp to perm then you techincal own the home and can list on the MLS to sell with a realtor. Plus you can put a stick in ground, advertise anyway you would a normal home.
Advantages of why someone would buy a new home after it is built… Many buyers do not quailfy for preconstructin loans b/c of the stricter requirements or they do not have the downpayment money and want to do 100% financing. So those are your targets buyers many times…
The developer said I would put $3000 down, and I could do whatever I wanted with it after that. ( try to reassign or wait until it's about a month away from being finished and needs mortgage lending and then sell it.) If I found a buyer for the property, could we decide on the price and terms of the sale and then wait until it needed a mortgage, then at that time transfer from a const. loan in my name to a mortgage in the new buyers name?
You need to ask the developer if you are getting a construction loan now. The $3000 downpayment may just be good faith money to make sure your buying. If he does not have you get a loan upfront, he is building with his funds, some do that, I have some homes that way, they are great since if you really feel the market tanks you can just walk away and lose $3000…
If you have a loan, you will have to do a double closing with the new buyer…get the the loan and have the close on same day as you…
if you can assign the loan, you’ll also have to start marketing the house when its close to completion. this is easier said than done, even if you have equity in it.
if you have to close and list with an agent, make sure theres enough profit left for you!