How to invest in pre-construction flips
I recently tied up some SFHs in Boise, Idaho. The plan is to put down a small deposit, wait for six months until the homes are complete and then sell them for a profit. While it sounds very simple, there are some important rules to follow.
- Make sure you target an area where there is strong price increase.
After you subtract closing costs, real estate commissions and maybe holding costs, the property needs to have risen sufficiently enough to make a decent profit. example: I’ve tied up homes for $190k [included closing costs] and they’re already worth $250k even though they’re a few more months from build-out. - Make sure the area is experiencing actual population and job growth.
You want to ensure that the price growth isn’t just fueled by rampant investor speculation. if so, when it comes time to sell, you won’t have any buyers. - Make sure you get in at the right time in the Cycle.
You don’t want to be left holding the bag at the tail end of a cycle like some Pulte home investors in Las Vegas. After they closed, Pulte reduced the prices by as much as $100k. - Stick to bread and butter homes
I’m buying between 1600-2000 sq ft homes in the sub 250k price range [depending on the market]. Don’t go for the super luxury homes. that just increases your risk. instead go for several b&b homes. that spreads your risk. - Make sure you get a home inspection done
Sometimes in a new home, the electrical won’t work or the plumbing is jacked up [because the contractor dumped plaster down the toilet]. dont’ skimp on this $300 investment. - Try to work out a deal with your agent
If you use them to resell the property, ask if they’ll give you a discount on the listing fees. - Try and work out a deal with the builder
Sometimes if you buy bulk, the builder will work out a deal with you.[difficult, but worth a shot]. - Make sure you do your homework about taxes.
The last thing you want to do is be in the highest tax bracket or be labelled a dealer.But thats a topic for another day.
UPDATE: March 2007
I NO LONGER RECOMMEND PRE-CONSTRUCTION FLIPS IN ANY PART OF THE COUNTRY. THE SITUATION HAS DRASTICALLY CHANGED AND YOU’RE MORE LIKELY TO BE STUCK WITH A PROPERTY YOU WON’T BE ABLE TO UNLOAD
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October 18th, 2005 at 12:17 am
when you say small deposit…what percent of the actual selling price are we talking about
October 18th, 2005 at 4:22 pm
usually 0.5 to 2.5% as occassionally 5%. I’m not a fan of putting down 10-20% as a deposit.
October 20th, 2005 at 5:45 am
Which markets are you looking at? I am a newbie in this pre-construction flipping.I live in NJ and I have looked at FL but I think the market there is staurated as there are morte investors than buyers.
Any ideas about upcoming markets.
October 24th, 2005 at 7:24 pm
Once the builders get the idea that investors are moving in to make a profit, they will lock out investors. This happened in Phoenix where some builders had a $40,000 penalty if the house was sold within a year. Others prevent the buyer from renting or selling. Some of them only sell to people that have just one other property.
October 25th, 2005 at 9:00 am
Thats true. builders have already locked out investors in boise. But there was a 6-12 month window before that happened. You want to get in before all the investors, not straggle in after the parties over to clean up the mess!
October 26th, 2005 at 6:19 am
I had called up some builders in Tucson but they wanted the owner to stay in proeprty for at least a year.
emapty spaces has alaredy mentioned that they are locking investors in boise as well.
So which is the next hot market for pre-cons flipping?
I read in one of the forums that Ft Myers in Florida is a good market. I was also looking at Durham NC but did not find it too appealing.
October 26th, 2005 at 8:23 am
I’m a little unclear. With pre-con, are you actually buying the property meaning setting up financing for the whole thing, or basically tying up the project then trading the option later, prior to taking position???
October 26th, 2005 at 9:15 am
I am sorry if I was not clear enough. By pre-cons flipping I mean what Empty Spaces has mentioned in his original post.
Select a location which has good appreciation rate, give 2-5% down for a new house , wait for it to complete in the next couple of months. When its time to close, be ready with the buyer and do a double close.
October 26th, 2005 at 10:29 pm
I really like Saint George, utah as the next pre-construction place.
November 2nd, 2005 at 11:34 pm
Great post, if you need a local to help you out in Boise let me know.
September 10th, 2006 at 3:11 pm
Thought I would share my recent experience with pre construction flippage;
http://www.hedgefunddomain.net/2006_07_01_hedgefunddomain_archive.html#115258065063529694
March 6th, 2007 at 9:34 pm
recently houston & austin texas has many lux & urban condo’s under development; is this a good time to do a pre-consctruction flip? if not; are there any places now or is now just a bad time…
March 18th, 2007 at 10:26 pm
A recipe for disaster
Pre-construction “investing” would be more accurately named pre-construction speculating”. Why do you think that there are such appealing returns available? Familiar with the risk / return ratio? Essentially it states that higher returns may be associated with investments with greater risk. Why? because the investment is less likely to pan out. However, when investments do pan out, the payoff is greater than other more stable investments. THERE IS NO FREE LUNCH. If there is potential for greater return, there is potential for greater risk. See further analysis of this post at http://www.capitalcritic.wordpress.com.
-Mike Jackson, CPA
March 19th, 2007 at 6:59 pm
I appreciate your comments Mike, & thanks for affirming my intitial belief. I was recently pitched & excited about the opportunity but knew that the timing was bad, the thought of quick & easy money was very tempting in a quick 9 months… i was wondering if you have any experience in preconstruction investing or speculating as u call it…over the past few years where it has successfully worked.
March 19th, 2007 at 7:24 pm
if you do choose to buy there make sure that the price/rent ratio is good.
if you can’t sell it make sure the rent covers most of the mortgage payment.
don’t go out and buy a $600,000 house that rents for $1650!