I have been looking for a book on prec, but all I found was the books that you download. Any thoughts?
Plus my understanding now is that if I do not want to close the deal when the prop is built(I understand I can get an appraisal at that time and see how much it is worth) then I loose the initial cash investment of couple thousand dollars (or more). Right?
One more: why some companies that do prec require 2 to 6K, while others want to you to have at least 15-30K(they Ok retirement acount funds)? Is that because this way they will make sure I will have to close the deal just not to let go of that money?
And what are those long-term gain tax laws compared to short-gain ones?
Any additional comments welcome.
Thank you all!
tahnks for asking…I have the same q’s
xperts: please share the info :)) ;D
I have done many preconstruction deals and have entered into several different types where funding required changes…
All of the different methods of financing have to do with the individual builder. Some builders will offer SPEC homes, this is when they take a small deposit, usually under 10% but some even go as low as $2500 and will build the home. Once the home is completed you will then obtain financing. Its a great tool because you know what the home is worth at close and wether the resale market is strong enough to support closing the home. For instance, I have 1 preconstruction in Cape Coral finishing in June. I put down $2500 about 14months ago, right now the market is tanking there, it crashed in late Jan, the home is still appraising for $380K and I have a contract for $317K which represents about 20% equity, however in this weak resale market where homes are being bought under appraisal I might just pass up on the home if i do not have a buyer in place at close. If i do not close, I lose my $2500 but my credit stays intact.
Downside to a Spec home…You do not gain ownership till you close on the home for tax reasons. Also you technically can not market the home since you do not own it till you close. The builder will not allow you do bring Buyers to be to see the home.
Upside: Many times these contracts are assignable with 10% downpayments in many markets.
If the house is destoryed or construction delayed due to anything, it does not cost you any money, they are building with their funds, not yours.
then you have builders that want you to close on the home first. This is when you have a construction to perm loan. You must quailfy 1st, close on the loan and you will have 2 payment options. One the builder will add an estimated interest reserve into the contract and make the interest only payments due on the loan or you will pay them directly. During construction, the loans are interest only and rates are generally standard everywhere at 2% above Prime. then when the home is done the loan goes perm and a rate is locked. So check out your mortgage program on this, some will convert to a fix other an ARM once completed. Downside: you own the home now, so if the house is destoryed in fire, flood, etc, your generally responsible for the insurance deductible to rebuild. All builders will make you have an insurance policy on the home, but its small and worked into the financing from what I have seen.
Also if builder takes to long and the interest reserve runs out you will start making the payments.
Upside: You have ownership from day 1. Can market the home and do a double close once C/O is issued. For tax benifits you come out ahead.
Also you can do several of these homes at once, and the loans do not get reported on your credit report till the loans go perm so you can buy alot and not worry about your score getting hit immediately…
Those are your 2 different preconstruction types. Now for downpayments. all builders are different and alot has to do witht the financing as well… Some doing spec want 10% down at contract, 10% when you start and 10% at close. Alot of that has to do with the banks and the fact that the builder needs the money to build.
I am dealing with one builder now, that required 5% down but if the bank is willing to do 100% then i get my money bank. Its all based on the appraisal and FICO for that. But I have done several homes where I had no out of pocket expenses…just watch the market and make sure it’s a quailty builder…
YRUSH,
That is good information you provided. However there are companies out there that will finance an investment property as a one time close or a two time close in the borrowers name. The nice thing about either of those loans is that the property goes into the buyers name upon the closing of the loan. This gives the buyer the right to start marketing the houses immediately. The downside is the buyer is making payments during construction.
What do you guys think about using pre-con for your first home buying? How about the Hernando county homes, are they legit? 5500 down for a nice home in florida? I am not really an investor, I just would like to buy something that makes a lot of sense in an area that has a high likelyhood of appreciating.
Thanks