Flipping new homes?

Question

I was reading a real estate book that mentions a strategy of how investors can make a quick profit by putting down a deposit on a new home that a builder or developer hasn't even started, basically, making a reservation on the property in the hopes that when the house is complete or sooner, the market value will have risen to a point where they can make a quick profit by selling your stake before closing on the deal. Has anyone ever used such a strategy? If so, how much (%) did you have to put down and what are the major downsides to such a strategy?

Albert Mainja · Answer

@Christopher Phillips Ok, i think its a great strategy especially when its done with the right timing like you said, thank you so much for your valuable information, i'll be looking into this further & explore the market here in Dallas Tx.

Christopher Phillips · Answer

@Albert MainjaIt's an interesting concept, but probably needs to be done with the right timing during a growing market.From a spec build standpoint, I see a lot of tear downs turning into brand new expanded homes.

Albert Mainja · Answer

thanks @Christopher Phillips for the feedback, i will check it out right away.

Russell Holmes · Answer

I'm sure market timing and location would have a lot to do with it, however I don't think it'd be a super stable plan for profit. I bought a builder house in 2009. 1910 sq ft 4/2 with a final price of $179k (less than comparable older existing houses nearby, and now worth about $237k). I only had to put $1000 down. The lot hadn't been touched yet but permits had been pulled (so I chose a lot with permits pulled for the house I wanted, they built them 6 at a time). If I wanted to pick the house and lot pre-permit, it was a $5k deposit. The market had dropped 95% of the way to the bottom before I bought, but it did lag a bit more into '11 and '12. I bought house number 35 or so out of about 135, so I was very interested to see the pace of new sales and resales of existing. They sold 4-5 houses a month in 2009. That slowed to 1-2 a month in 11-12 and then sped up to 7+ per month in late 12 and early 13. The builder regularly adjusted their prices to slowly climb along with, but stay a bit below, the market comps, but it never jumped by much, and even when it did increase, they'd add a few features to "justify". It all operated more like a car lot than a free market. While they were building and selling, not a single existing house sold for more than what you could have one built for, the "new" factor made buyers prefer a new one as opposed to "used", even though the houses built earlier than mine had higher ceilings and a few extras as the prices hadn't fallen all the way yet. Buying from the builder, they covered closing, waved the $2500 "lot premium" for my rear brick wall, added a few features with negotiations, etc and I had quite a bit of control over finishes, colors, etc...all things I had to select along the way, far before completion. The moment the last house sold and the builder left the neighborhood, the real appreciation started. The builder held off on increasing prices at the end to move their last inventory, which made for some great deals at that point. That artificially held prices down for the existing homes. The first year after the builder was done, our neighborhood appreciated around 10%+ despite the market I'm in only going up about 5-6%, our homes basically appreciated to catch up with existing comps. Ever since, houses get listed and go under contract in a matter of a few days. Appreciation has been strong since then, on par with the market once we caught up to comps. But until the builder was out, the "builder neighborhood" vibe made for a bit of an artificial market. People seemed to view "new" vs "old" despite the oldest house being from 2008. Basically, nobody would care about your $1000 deposit when they could go drop the same money on another lot and have more control. There were also restrictions on selling within the first year, not that you couldn't, but if you did there was to be no for sale sign, no open house, etc. So selling the option may have even been prohibited, I don't remember. A few people did get killer deals on the last few "stock" houses that had been built and not sold, but the deposits were so insignificant that they didn't do much other than to reserve your spot. It may be worth while if you had a deposit on one of the very last houses, but you could probably make even more buying one of the last complete houses and selling once the builder packs up and leaves.

Christopher Phillips · Answer

@Albert MainjaPersonally, no. But my clients have purchased the development homes. It's not for everyone due to long horizon. Takes awhile to get permits to knock down a house, do the demo, and then the build... In the hot towns near me squeezed for new housing, you'll always see a few homes getting knocked down and rebuilt. Just drove by one last week near me. It's usually taking down an older cape and putting up a large colonial.

Albert Mainja · Answer

@Christopher Phillips just out of curiosity have you done any of these deals yourself?

Christopher Phillips · Answer

@Albert Mainjahttps://www.linkedin.com/pulse/why-flipping-lots-new-construction-hottest-strategy-today-norton