Advice: Looking to purchase & flip townhome, new construction-ATX

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Advice: Looking to purchase & flip townhome, new construction-ATX

Neal DaftaryPro Member
Member since 2022 · 11 posts · 2 votes

Hello BP Fam,

I'm new to real estate investing and looking for advice. I am planning to purchase a new townhome in a high demand suburb North of Austin, Texas with the intention of buying and selling it for a quick flip. 

The townhome is within part of an area that is going to be built out into a large walkable mixed use space which will be a mix of retail/commercial and entertainment called the northline, along with a pond and walking trail built behind it. Also walking distance to light rail which connects to downtown. For those familiar with Austin area it will be something similar to the Domain. We have reserved one of the initial townhome at the presale price (mid 700s) with the option to backout, and they have since been selling them for $40-65,000 higher than our purchase price. Completion will likely be towards end of this year. Our concern is is it a good idea to buy being that it is a townhome, and some speculation is involved? The price is equivalent to a new construction home at the similar square footage, but we believe it will be of value because of where it is being built. What are your opinions about the situation and also the state of the housing market by this fall? Do you think we would be able to sell a townhome for profit at this price point? Thanks for your advice. 

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Guy Gimenez
Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
4y

1.  Most builder contracts allow the builder to terminate your contract if value of the new construction rises steeply, and then the builder will re-sell to another buyer at the higher valuation.  

2.  What's your Plan B if your "appreciation" game doesn't work? Betting on appreciation is always considered speculative, not investing. 

3.  Keep in mind that when you re-sell, you're competing with the builder. Builder's have deep pockets, better financing options, etc. 

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  • Guy Gimenez
    Investor · Corpus Christi, TX · Member since 2012 · 2k+ posts · 1k+ votes
    4y

    1.  Most builder contracts allow the builder to terminate your contract if value of the new construction rises steeply, and then the builder will re-sell to another buyer at the higher valuation.  

    2.  What's your Plan B if your "appreciation" game doesn't work? Betting on appreciation is always considered speculative, not investing. 

    3.  Keep in mind that when you re-sell, you're competing with the builder. Builder's have deep pockets, better financing options, etc. 

    1Reply
  • Bryan Noth
    Realtor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
    4y

    @Neal Daftary

    I strongly support @Guy Gimenez on points 1 and 3.  With new builds your greatest competition is the builder(s).  If you have truly gained that much equity by the time construction wraps, the builder could very well terminate the contract and immediately list it again for a higher amount.  The builder will often be able to offer incentives that a typical seller could not best them on: price, upgrades, closing costs, etc. which puts you at a disadvantage when attempting to sell.  

    It could work in theory, I would watch how quickly current inventory is moving.  First, this gives you an idea for the level of demand your unit may have.  But secondly, gives you an idea how confident the builder might feel taking it back to market.  

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  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    4y

    The problem is if you use financing typically you will have 2-3% of the purchase price in closing costs.

    On the sell side more like 8% is what I plan for.

    That doesn't include any holding costs.

    So far you're looking at about 5-6% return, so not sure those numbers work.  Also you have to pay short term capital gains taxes on your spread, so that may bring your returns down to more like 4% if you sell quickly.

    That accounts for no risk....so what if it doesn't sell quickly, what if the buyer's lender requires some seasoning like 90 days or 180 days....what if the seller drops prices to push out the remaining inventory.  What if interest rates rise 1% between now and the time of resale, so buyer's payment goes up $500/month, does that affect sales prices?   Plenty of other risk factors like war in Ukraine, war in middle east, war in Taiwan, war with North Korea.   Commodity prices have fallen some probably, so builder may be able to match your price or under price you with new contracts.

    Probably safer bets if you want to invest.

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  • Neal DaftaryPro Member
    OP
    Member since 2022 · 11 posts · 2 votes
    4y

    Thank you for the input @Bryan Noth, @Guy Gimenez, & @Bruce Lynn. I didn't account for the closing costs and the builder canceling the contract. I am hoping the property would appreciate enough to cover the short term capital gains tax. @Bruce Lynn, can you me give a breakdown for the 8%? Does it include realtor fee? 


    Looking to invest in the Austin area (Leander, Taylor, Hutto). If there any investment opportunities that are easy to get into, I would love to learn more about it. Thank you.

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  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    4y

    @Neal Daftary nothing is "easy" and if it was you need to question it. Regarding the option to flip new construction, it's pretty risky because you don't have any way to control the outcome. You are 100% dependent on the market continuing a strong rise in appreciation. Maybe it will, maybe it won't. What if prices drop $50k? Would you hold it? Would you sell it at a huge loss? If you put a long-term tenant in it, I can 100% guarantee a traditional 12-month lease will not cover your expenses, but what if they don't allow short-term rentals? I would do a TON of due dilligence before pulling off this deal. If you don't have a Plan B to keep the property and make it cash flow, I would pull out of this purchase. My two cents.

    [email protected]512-674-5478
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  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    4y

    @Neal Daftary  I normally calculate about 8% closing costs on the sale as a ball park.  Most of that is realtor fees, but you could still have title insurance, which on the buy side of new construction almost all buyers get stuck with, but on resales it is typically a sellers expense, unless you get lucky and the buyer offers to pickup.  So it's kind of tough...you pay title insurance 2x...often in a situation like this.  On $700,000 buy/sell you might pay around $4000 each way.   Maybe you get lucky and your builder picks up on your purchase.  and maybe you get lucky on your resale and the buyer picks it up.   I personally never calculate on lucky, but maybe worst case scenario and if you get lucky then it is a bonus.   Also you will like have escrow fees, deed preparation, and some other fees.  If in Austin for example you may have environmental inspection fee or whatever they call it....(energy audit/green audit).    One other risk is appraisal.   So appraiser sees 10 contracts that close at $700,000 from the builder and now on resale you want ??$800,000.   Sometime in new neighborhoods that can be a tough gap to bridge.  Doesn't mean you resale isn't worth $800,000 or a year or two later everyone that contracted at $700,000 and it's not worth $800,000 now, but appraiser has to prove that it is worth the new number.   That is if your buyer is using financing and several other factors.

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  • Peter Walther
    Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes
    4y

    Have you seen, read and understand a copy of the developer's contract?  Frequently they have a requirement the buyer hold the property for a minimum period of time, say 1 year, to prevent exactly what you're thinking of doing.  A developer doesn't want to be in a sales competition with his own just sold inventory.

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  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    4y

    Why not just buy it, hold it and rent it for a while? Who wants to pay those taxes?

    [email protected]512-888-9122
    The Moorhead Team5140 Reviews
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