An Old, Risky Strategy May Work Again?

Question

I see a type of opportunity that disappeared years ago.  It became viewed as a shady strategy, but was that warranted?  What do you investors think of this method in today's market in Denver?

I remember in, say, 2003, you could lock in a pre-construction deal in a new Phoenix subdivision, and make quite a bit of money by selling the house soon after it was completed.  Sometimes you could do this with very little earnest money.  If the housing market was increasing 20% per year, and it took 9 months to build the house, then you could make 15% by only putting down 1% earnest money.  It was also usually very easy to cancel these contracts with no penalty if you got cold feet.

I knew people in Denver who did it in the mid 90s in some parts of Highlands Ranch and other exurbs.

If the particular subdivision was near build-out, then a good ROI was almost guaranteed.

A relatively desirable new development in Denver is promoting similar deals right now, and I think this strategy could enjoy a comeback.  Buyers LOVE new houses that haven't been lived in before, and some of them don't have the time to wait for their house to be built.  This development is quite close to downtown.  I'm not connected to these guys in any way, but I'm developing new houses in old neighborhoods across town, so I'm watching this closely.

I think an investor doing this is adding value:

1.  He's putting up the earnest money for the 9 months.

2.  The builder has a contract on the property, so his confidence level is high that it will sell upon completion.

3.  The builder's bank has a warm fuzzy feeling also.

Here's the blurb I found in my inbox:

"These new lots are slightly larger, on street corners. Sales agents at Brookfield Residential have fielded requests for these kinds of lots all year, and now they are available for reservation. Home buyers can visit the sales office at 1730 W. 67th Ave. in Denver, choose the lot that suits them best, then choose one of six models to build on that lot.

“We are delighted to make these lots available to the people who have envisioned their dream homes in a particular setting,” said Perry Cadman, general manager of Brookfield Residential in Colorado. “And we are happy to be the ones to construct those dream homes for them.”

For more information about home-buying opportunities at Midtown, go to www.BrookfieldResidentialCo.com "

Here's the map to this classic infill location:  http://www.brookfieldresidentialco.com/homes/midtown

Account Closed · Answer

Kevin,

If it's not too late, that's a good strategy. In our market, we're about 18 months behind the curve. Also, some developers have a stipulation in the contract that you must live in the house for 12 months before you can resell it. That was the reason why we didn't buy them.

Kevin Dickson · Answer

I'll at least give them a call to see if their preferred lender has any investor restrictions.

Pat L. · Answer

It was a very lucrative strategy that we enjoyed for quite a few years in the old days.

But they started restricting us with a 'speculator clause' & in the spec condos they restricted rentals, Consequently, it became an cost issue having a partner move in for the 12 months 'seasoning' period.

If it was available up here I would definitely be into it again.

Bill S. · Answer

Yes, I was thinking of this the other day. Adjacent to one of my properties someone purchased half a new duplex for $450K when it was a hole in the ground. 6 months later when it was finished the other half sold for $515K. I thought maybe I should put one under contract and see what happens. My problem is I don't know what the strategy is with this. I don't know what approach is best with regards to upgrades. I've heard you want to do everything but that puts you at the top of the market for that development which can mean you have the smallest slice of the buyer pie for that development.

Chanté Owens · Answer

This isn't exactly what you are talking about, but along those same lines, one of my friend's mom would purchase a couple of properties in communities in Phoenix/Mesa/Gilbert and do a lease back to the builder.

It was great for her because the builder would say they would be completed in 6-9 months (she'd jump right on it), and they would typically take closer to 12 or so, and during that time, she would secure a loan on the property (and they would typically give a her a discount since she would buy multiple properties). She would then lease them back to the builder, and once they were completed, she would realize a great profit, because her properties were the model homes and people loved them since they were already upgraded (window treatments, wall paper, upgraded flooring and counters), so they always sold within a day or two of being listed.

In one development she bought three condos and when she purchased each of them they were about 90-100k a piece and the builder leased them back for almost double what her mortgage payments were, and once she sold them, she made at least 10-20k off of each of them in just the time for them to be completed as they appreciated pretty well and fast.

So, in respect to what you are saying, if it's in a relatively desireable neighborhood, you are correct in that  lot of people love new builds. I have a friend who moves once every 3-4 years because she doesn't like old homes. I read stats about 10 years ago that in the Phoenix, AZ market the average length people lived in a home was 7 years! That's crazy to me, because I am used to my parents and family members who've lived in their homes for decades.