New Construction Investment in Peyton, Colorado

[Darren Smith]

I have an opportunity to invest in a new construction build in Peyton, Colorado. It's a hot market next to Falcon where there are lots of new homes selling for $300,000 to $600,000. The numbers on the deal are $162,000 invested in an escrow account. It's paid out in four installments over the 3 1/2 months it takes to build the home. When the home sells I get $192,000 back for an 18.5% ROI. The list price for the house will be $229,000. The neighborhood is a nice small area very close to schools, grocery stores, and a main road to drive to Colorado Springs. The other positive is that the builder has build over 1,000 homes in the area but went bankrupt during the downturn. I visited two of the homes he's just completed and they are both very nice and something I would like to live in.

My question is, what is a good ROI for investing in a new construction project? Is 18.5% enough for such a long-term project? If I was able to turn two homes a year that would be a 37% ROI. Also is the $229,000 list price high enough above the $192,000 payout amount? I'm completely new to new construction, so any advice would be helpful.

[Karen Margrave]

@Darren Smith We will need a little more information. On the money that you are putting out, what is it being used for? You say the money will be out for 3 1/2 months, how are you thinking that's a long term loan?  

Does he already have permits? Does he own the land? Will your loan be secured by a 1st TD? What checks and balances would there be in regard to releasing payment and knowing where it is being spent, etc.? Who is going to be responsible for getting lien releases from subs and suppliers, etc.?  Who is in charge of the funds and approves disbursements? Have you looked at the budget? Is the contractor paying himself or taking profit at the end? These are just some of the questions that need answered.