How to profit from new approved subdivision buildouts

Question

In my area there are 2 new subdivision under construction. Developer says we can put a refundable deposit down. Is it possible to profit this way? Any laws that would prohibit this activity? The town is in major growth mode with great schools. Price ranges from ~300k, so obviously just looking to sell at higher price with in a year of build out. It has potential to hit low ~400k due to schools and major pop. growth.

Account Closed · Answer

@raj I know exactly what you are taking about. This style of "investing" was very popular in India between early 2000s to '07-08. I've seen people become filthy rich with this approach. And I've seen people lose everything they have with this approach. It's plain and simple speculation. For the benefit of others, here's the "business model" - developer/builder enters into contract with you as an investor for about 10-30% down payment. The remaining 70-90% becomes due upon completion of the project (balloon payment), which is typically 2 to 4 yrs in india. The contract value is 25% to 50% discounted as compared to the final price once the project is completed. These investors would then turn around and sell the property to a retail buyer right before the balloon payment comes due. And profit off the appreciation. They typically buy multiple of these properties to then sell to retail buyers in a few years. Most banks didn't finance these deals so it's all cash. But some banks did when they saw people making money off of these and they lived to lose money because they entered very late. Everything works well as long as the market is appreciating and retail buyers are coming in hoards. Once that peters out, these investors are left holding the bag - they put in cash into the deals. And are now due the remaining 70-90% balloon payment to the builder on the several properties that they went under contract for! This might have been a decent speculation to play when the Austin market started appreciating 4 or so years ago. In my opinion, It's already appreciated a lot to play this one in the larger Austin market.

J Scott · Answer

Do you mean 25-30% appreciation in the housing marketing? If so, you're thinking WAY too small...You need to start pooling as much money as you can and start buying every piece of property in the area that you can find for just below market value (just enough to cover your fees and costs until resale). Prove to investors that the area will be seeing 25-30% growth in the next two years, and they'll get a preferred return of 10%; if you can substantiate those numbers, they'll be lining up to give you money.Rent the properties for two years, then sell. You keep the spread, and you'll get filthy rich!

Karen Margrave · Answer

Not quite sure what you're asking. Are you talking about putting a deposit down on the home to be built, having them build it out, and then keeping for a rental, hoping to realize appreciation over the next year or so? Of course there could be potential IF the supply of houses in the area is low, and demand high. IF there are not other subdivisions that would flood the market, etc. How many lots are in the subdivisions being built? Prices? Population of town? Economy? It's called speculation!

Lynn Currie · Answer

Great input Account Closed to be safe, I wouldn't assume anywhere near the 25%+ growth we've had over the last few years will continue. I'm already seeing a slight slow-down in my areas. Prices aren't dropping, but houses are staying on the market a little longer.

Doug Sheridan · Answer

A tenament of a cycle is that the outlying suburbs will expand and contract first when the market softens, so you face the most risk with this large house in an outlying "B" grade area. I've lived here for 27 years and seen Austin through several downturns and stagnant periods - I personally know a California investor who lost his %$$## in Cedar Park buying houses just like you describe. No appreciation can be had until your development and the one down the street is sold out, and you are stuck in PPSF land. You could be trapped in a negative cash flow situation for a very long time if the market softens.

Joshua Springer · Answer

I almost wouldn't call it "growth" as much as it is recovery in a lot of places. Speculating on new growth after a recovery seems risky to me...especially since interest rates could very well start ticking upward before your property finishes.

Karen Margrave · Answer

@Raj Vajir We have had investors buy multiple homes in a subdivision we were building to buy/hold, then sell later. In the market you are in, that might be a great strategy. However; to buy and resell, if you're paying commissions on both sides, and on both deals, it starts eating up profits fast. The appreciation you are experiencing is very high, I'm sure it will begin to level off somewhat. But, Texas is definitely a very hot market now with many relocating there!

Raj Vajir · Answer

@Lynn Currie @Uday T. Thank you very much for your inputs. Makes sense. The market in this area is slightly different than Austin as its got much more development to go. We got 8 banks in the area, way too many for a small town for sure and most came in within 2-3 years. I will definitely watch carefully and understand the developer's restrictions.

Raymond B. · Answer

@Raj Vajir,To make the @ work, do the following: Hold down the shift key and type @? Look below this Window, and you will see a list of names of people that have posted in this thread. Click on the name of the person that you want notified via an email, that you responded to them. If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name. Then look below this Window and click on that person's name. Raymond

Jon Klaus · Answer

Can you buy lots in the subdivision and hold them? Lot prices sometimes rise faster than home prices. What zip?