Is flipping new constructions a good idea?

Question

I live in Austin Texas, where houses are flying off the builders shelf, and people go on a waitlist to build houses. The builders seem to raise their prices every 1-2 week. The market is HOT.

I'm currently on a waitlist (position 20) to build a 4bed 3bath, priced at $400K, in an area that is being heavily developed. My goal is to flip this house as soon it's completed, which could be 1-2 years from now depending upon when I actually get to build. I expect the house to be valued somewhere between $450-500K once completed due to the appreciation.

My agent tells me it's not a good idea to sell it as soon as it's mine, and that I should live in it for 2 years first to get the tax break. It's nice to save on the taxes, but I don't really want to move my family to a new house every time I do this, I just have a strategy to provide some additional income which I then use to buy rentals.

So the questions... Is my agent right, should I not sell it immediately? Or is there some big flaws with this strategy of flipping new constructions that I don't see?

Ryan Kelly · Answer

@Anders Rodland I’d argue this is a highly speculative strategy and based on a lot of factors you can’t control ( construction dates, market timing, appreciation, buyer demand, etc).. Plus, don’t forget you are buying new but selling used in an area that will still have a lot of new construction, so your resale home will most likely sell a bit below the brand new homes. At minimum I would have a Plan B and possible a Plan C if conditions change.

Wayne Brooks · Answer

When it works in a fast appreciating market it works.....when it doesn’t it doesn’t.  Here, from 2003-2006 it worked well....in 2006 a lot of would be new construction flippers of course lost all their deposits when demand/prices fell..

Cody Kauzlarich · Answer

@Anders Rodland

If you're banking on rapid appreciation of the area then why new construction? Just buy a freshly remodeled house, sit on it for six months and turn it. Why is new construction the significant part of the equation? And will Austin still be appreciating at the same speed in 2-3 years?

Bruce Lynn · Answer

Well typically you have one to 2% closing cost when you buy.   You have about 8% closing costs when you sell.  So it needs to go up 10% between the time you contract and the time you wanted to sell it just to break even.   And then you need to go find a new place to live.   So how fast are prices going up around you.  Are they going out more than 10% a year?

it has worked in places in the past like Phoenix and Florida.   But then those markets turned into vulture markets.  So if you can accurately time the market you can make many money.  And if your timing is wrong you can lose your shirt.  But I guess if you're just doing it one house at a time and you can potentially live in the house then it's probably a safe bet.

Jacob Pereira · Answer

Hey Anders,First of all, I'd like to commend your agent in looking out for your best interest instead of his/hers. If it was selfish advice, they would tell you to sell as soon as possible and earn an extra 5-figure commission check with very little extra work.

That said, just because it's clearly honest advice, that doesn't necessarily make it the best advice. If you don't want to live there and it makes more sense to sell than to rent it out, by all means, sell it. I'd also recommend you benchmark to the S&P 500 to see how you do relative to another investment. Include all the upfront money you put into it and look at if you bought an S&P index that same day for the same amount. Then any payments along the way should be added for the day they're paid out(if you want to really go hard, look at including your time investment as well; I do on my personal benchmarks). I think you'll find that your returns will actually be pretty low compared to your benchmark, but it would be interesting to see actual numbers on it. If you do decide to go that route, please post here. I'm sure there are people other than me who would love to see the results.

If you do decide to do that, please post your

Jeff C. · Answer

I'll take "signs of a top" for $500, Alex!

Alice Huang · Answer

Hey Anders!

Whereabouts in Austin?  Was living there before covid!

Is assigning your interest in the property an option?  When I worked in real estate in Vancouver, BC and the market is hot out of control, we often had buyers assign their purchase and sale agreement to another buyer prior to closing.

Cheers,

A

Anders Rodland · Answer

Thank you guys so much for all the replies and feedback, this is exactly the type of feedback that I needed to hear. Looks like my agent is one of the good guys, and his advice is very much in line with what you guys say. I will think twice and look at my options. I'm not committed to the new construction, simply on a waitlist without any deposits that I can jump out of at any time.

Victor Steffen · Answer

I'll echo what ryan said. New construction sells at a premium compared to resales. Even if you've never lived in it the home is still considered a resale and an appraiser will value it accordingly. New construction may be selling at 450k but resales in that area could still be in the 375-400 range. something to watch out for.

Is flipping new constructions a good idea?

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