How to profit from new approved subdivision buildouts

16 Replies

In my area there are 2 new subdivision under construction.  Developer says we can put a refundable deposit down.  Is it possible to profit this way?  Any laws that would prohibit this activity?  The town is in major growth mode with great schools.  Price ranges from ~300k, so obviously just looking to sell at higher price with in a year of build out.  It has potential to hit low ~400k due to schools and major pop. growth.  

Not quite sure what you're asking. Are you talking about putting a deposit down on the home to be built, having them build it out, and then keeping for a rental, hoping to realize appreciation over the next year or so? 

Of course there could be potential IF the supply of houses in the area is low, and demand high. IF there are not other subdivisions that would flood the market, etc. How many lots are in the subdivisions being built? Prices? Population of town? Economy? 

It's called speculation! 

@Karen

You're right this is major speculation for sure.  The area is booming and its definitely a small town connecting to a major city ( ~15 miles). Pop is about 25k and has housing shortage.  There are 2 big subdivisions going up with total of 500 homes with big lots 1-2 acres.  I guess I was just asking more along the lines of buying now with the prime lot location and then selling in 2 yrs or so, but I can see how this can be very risky with the current falsely inflated economy.  I'll stick to hunting for rentals with cashflows.  Thank you for taking the time to respond.

Raj

Keep in mind that you'll likely eat up to 10% of the sale price in costs/fees/commissions during your ownership and sale.  So, you'll have to see about 10% appreciation JUST TO BREAK EVEN!

How much appreciation do you expect to see in that area?

It has happened a lot in CA and Hawaii where a property will change hands several times before it is finished.  Each time the prior seller sold for a profit.  Developers hate this because they like the pre sales to help fund the project but hate that they lose out on hundreds of thousands of dollars on appreciation per unit.

Now most developers will have restrictions in their contracts to prevent this.

@Raj Vajir   Don't get me wrong, I'm not saying that you shouldn't do it, just to make sure you get all the necessary information, and research the market before you do it. We actually build spec houses in Orange County,  CA. In the past we've built spec office buildings, office parks, residential subdivisions, etc. It's a great niche, in the right markets. Good luck. 

@Karen Margrave  

 Aloha Karen  Have you experienced agreeing to a set price in an up market and seeing market value a lot higher when delivered?  Do you allow the original buyer to transfer his purchase agreement?

@J Scott: This is a very highly desired area and most of the town is a B grade area.  No apartments and no big crowds yet, but is anticipated due to the growth.  I drove by the subdivision and am already seeing alot of SOLD signs going up.  I anticipate about 25-30% growth within 2 years due to the high demand of housing in this area.  Due to this town being so close to the Austin job market, and the great schools, I anticipate a good appreciation.  Lots of folks moving into this town for jobs and just a great hill country living.  

@Bob Bowling: I moved from Ca and have heard of this hence my interest in it.  I will check the developer's clauses to ensure they don't have any restrictions on reselling lots prior to finished product.  

@Karen: Agreed I do need to get i more information on it.

Thank you

Can you buy lots in the subdivision and hold them?  Lot prices sometimes rise faster than home prices. What zip?

Originally posted by @Raj Vajir:

I anticipate about 25-30% growth within 2 years due to the high demand of housing in this area. 

Do you mean 25-30% appreciation in the housing marketing?  If so, you're thinking WAY too small...

You need to start pooling as much money as you can and start buying every piece of property in the area that you can find for just below market value (just enough to cover your fees and costs until resale).  Prove to investors that the area will be seeing 25-30% growth in the next two years, and they'll get a preferred return of 10%; if you can substantiate those numbers, they'll be lining up to give you money.

Rent the properties for two years, then sell.  You keep the spread, and you'll get filthy rich!

@Raj Vajir ,

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Raymond

@raj I know exactly what you are taking about. This style of "investing" was very popular in India between early 2000s to '07-08. I've seen people become filthy rich with this approach. And I've seen people lose everything they have with this approach. It's plain and simple speculation.

For the benefit of others, here's the "business model" - developer/builder enters into contract with you as an investor for about 10-30% down payment. The remaining 70-90% becomes due upon completion of the project (balloon payment), which is typically 2 to 4 yrs in india. The contract value is 25% to 50% discounted as compared to the final price once the project is completed.

These investors would then turn around and sell the property to a retail buyer right before the balloon payment comes due. And profit off the appreciation. They typically buy multiple of these properties to then sell to retail buyers in a few years. Most banks didn't finance these deals so it's all cash. But some banks did when they saw people making money off of these and they lived to lose money because they entered very late.

Everything works well as long as the market is appreciating and retail buyers are coming in hoards. Once that peters out, these investors are left holding the bag - they put in cash into the deals. And are now due the remaining 70-90% balloon payment to the builder on the several properties that they went under contract for!

This might have been a decent speculation to play when the Austin market started appreciating 4 or so years ago. In my opinion, It's already appreciated a lot to play this one in the larger Austin market.

Great input @Uday T.  

@Raj Vajir  to be safe, I wouldn't assume anywhere near the 25%+ growth we've had over the last few years will continue. I'm already seeing a slight slow-down in my areas. Prices aren't dropping, but houses are staying on the market a little longer.

@Lynn Currie @Uday T.  

Thank you very much for your inputs.  Makes sense.  The market in this area is slightly different than Austin as its got much more development to go.  We got 8 banks in the area, way too many for a small town for sure and most came in within 2-3 years.  I will definitely watch carefully and understand the developer's restrictions.

@Raj Vajir   We have had investors buy multiple homes in a subdivision we were building to buy/hold, then sell later. In the market you are in, that might be a great strategy. However; to buy and resell, if you're paying commissions on both sides, and on both deals, it starts eating up profits fast. The appreciation you are experiencing is very high, I'm sure it will begin to level off somewhat. But, Texas is definitely a very hot market now with many relocating there! 

I almost wouldn't call it "growth" as much as it is recovery in a lot of places.  Speculating on new growth after a recovery seems risky to me...especially since interest rates could very well start ticking upward before your property finishes.

A tenament of a cycle is that the outlying suburbs will expand and contract first when the market softens, so you face the most risk with this large house in an outlying "B" grade area. I've lived here for 27 years and seen Austin through several downturns and stagnant periods - I personally know a California investor who lost his %$$## in Cedar Park buying houses just like you describe. No appreciation can be had until your development and the one down the street is sold out, and you are stuck in PPSF land. You could be trapped in a negative cash flow situation for a very long time if the market softens.

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