Pre-Construction Flips

[Michael Evans]

I want to get some feedback on an investment strategy I used in 2003-2005 that I call the "pre-construction flip".  It works like this:

• Identify high appreciating markets (greater than 12% annual)
• Identify home builders who don't care if an investor purchases and immediately resells a property in their housing tract.
• Enter into a purchase contract with the builder to buy a house that has not yet been constructed with an "earnest money deposit", usually $1,500 - $3,000.
• Qualify with the home builders preferred lender.
• Wait for the house to be built.
• Upon completion, if the current market value of the house (as determined by the market price that the builder is selling current homes) is at a minimum level (5% higher than your purchase price), then complete the purchase agreement.  Otherwise don't complete the agreement and lose the earnest money deposit.
• Upon close of escrow, immediately list the new house FSBO at the same price that the builder is selling their homes.
• Secure a buyer within 2 weeks and close within 30 days.
• Make profit based on the difference between the purchase costs and the selling proceeds over a 4-6 month period.

Here are some real-life numbers for 2014:

• Purchase price: $300K
• 1st Mortgage = LTV: 96.5% FHA 3.5% down @ 4.5% for 30 years fixed = $289,500
• Upfront points 1%
• Closing Costs = $10,402
• Total Cash Investment = $20,902 (down payment + closing costs)
• 2nd mortgage = $20,902 (equity partner) LTV: 3.5% with $0 down @ 10% interest-only
• 2nd mortgage holding costs = 6 months @ $174/month = $1,045
• Reserves = 2 months of 1st and 2nd mortgage costs = $4,387
• Total Investment = holding costs + reserves = $5,432
• Annual Appreciation = 18% (1.5% per month) for 4 months
• Future Market Value = $318K
• Sales Commissions = $0 (FSBO)
• Sales closing costs = 1.5% -= $4,770 added to sales price
• Final Sales Price = $322,770
• Less closing costs = -$4,770
• Less Loan Payoffs: -$310,402
• Net Proceeds from Sale: $7,598
• Less Total Investment: -$5,432
• Less Deal Management Fee: -$404 (this is my fee for putting this all together)
• Net Profit: $1,762
• Cash on Cash ROI: 32.43%
• Annualized ROI: 97.30%

Please critique the numbers, the assumptions and the requirements. I did three deals like this in 2004-2005 when money was cheaper with less regulations.  We turned $10K into $25K, $12K into $50K and $7K into $180K.  I'm not looking to make a homerun off each deal, just a bunch a singles off each and every deal.  Tell me what you think.

God Bless You!