Should I Buy Pre-Construction in Castle Rock, CO

Question

Does anyone know about the marker in Castle Rock.  I am new to this stuff but have an opportunity to buy brand new properties at a new development called Shadow Creek.  The area seems like a great location (20 mi south of Denver on I-25).  Any help would be greatly appreciated.

Jim Gordon · Answer

When you end up owning your preconstruction deal don't try to sell against the builder they will always win.

Frank Adams · Answer

Why on earth would you even consider pre-constructions in a SLOWING/FLAT/DECLINING market? Pre-construction only works is a SIZZLING HOT market. IMO it is dubious is anything appreciating at LESS THAN 8%.

Research some Denver metro newspapers and read articles on the RE market. I've been looking at the Fort Collins CO market, 70 miles north of Denver. While admitting that their market is FLAT they are literally ON THEIR KNEES THANKING GOD THAT THEY'RE NOT DENVER. Castle Rock may be 25 miles south, but it's still DENVER METRO.

Unless you live in Colorado Springs and would rather look at spec houses than go fishing in the Rockies, save your time!

all cash

Frank Adams · Answer

Yeah I know. I went to Air Force avionics training in Denver '67-'68 and loved in, was stationed in Colorado Springs '70 and part of '71 and was ready to move back when I returned from Germany in '77. Instead the week before I left I was offered a job in the SF Bay Area and went there instead.

I've wanted to move back there since '79 when I moved to TX, but it's taken until now to convince my bride!

Yep I'm aware of the ups and downs as I usually ski up there a month or so each winter.

all cash

Account Closed · Answer

All cash,

I once worked for HP in Cupertino CA. I made a number of trips over to Fort Collins as I was working with a few teams there.

There are some great cities and towns in CO.

Housing and the economy ups and downs in CO are another issue.

John Corey

Michael Rossi · Answer

I agree with All Cash.  I would NOT buy pre-construction in a declining market (or any other market for that matter).  I'm not speculating on something that is going to happen in the future, when I can do deals that are a SURE THING!  I want my profit NOW, not the hope of profit in a year or two.

For gambling, I like Las Vegas.  For making money, I'll take the sure thing every time!

Mike

Frank Adams · Answer

REI makes some very valid points, which apply in "normal" markets. Right now the Denver metro (and many other parts of CO) like other parts of the country are not "normal".

As I said in my first post, Ft. Collins/Greely with about an 8 month inventory of unsolds and builders starting to crank up the incentives are very thankful that they're not Denver. Sorry I don't have the current unsold numbers on Denver.

I (perhaps foolishly) contacted a few FSBOs and listing agents in Ft. Collins within the past month. Now I hear from them as often as I hear from credit card companies and "Dish Network". Maybe some of them will comp us plane tickets or hotels for a visit.

all cash

Account Closed · Answer

You need to look at the deal and figure out the market.

In some situations the developer is offering a true discount to today's prices by putting into the pot the savings they expect. If they pre-sell then they have less marketing, lower carry costs, etc.

In another situation a developer might need to sell a certain number of units to secure the construction financing. Hence they can provide a true incentive to the investor so they can secure the full project. Like when investors want a partner to get a SFR deal done so they split some of the profits with the cash investor. Developers can and will do the same.

The above is much more likely when you are talking pre-sales for a large condo development that needs to start now but can not release units for 2-3 years. To motivate investors to put up the cash and commit to buying the developer has to offer something other than just the price in 2-3 years.

Rental income is another can or worms. Granted when an apartment building is being built the lender and the developer are both taking a view about the likely rents in a months or years to come.

The problem is you can not accurately predict the future. Still developers build. Spec build and they are really making a bet. Pre-lease or pre-sales implies that someone else is taking on some of the risk. Many projects are built every day based on projections about the future. It is normal business. Some investors are more comfortable about co-investing in such situations. Some are obviously much less interested.

As All Cash has indicated he likes to use zero debt and frankly focuses on today's values. Hence he would not likely be a developer or someone who projects what is likely to happen in the future and then builds a commercial building, an apartment or a housing tract.

The British call this horses for courses. Different folks do different things and take different risks. Some are just dumb and will soon lose their money. Others are more skilled at certain types of transactions and can mange the risk. Construction is such a large segment it is obvious a few people have figured it out.

John Corey

Frank Adams · Answer

REI;

Yes, I have invested in pre-construction, in the past.

However I live in TX, land of 2%-3% appreciation so I no longer do so.

As of today I can't think of anyplace in the US where I would even consider doing so again.

As to why it's unadvisable to do so in a flat/declining market: Unless you believe the developer/builder has no clue about market trends, you must believe that he is selling at the (anticipated) market price at time of completion. There is no reason for me to ever buy at market price, now or in the future.

I've never seen a situation where I would think in June that I could acquire a property next January and rent it at a profit! Is that even possible in the UK?

all cash

Account Closed · Answer

Did you mean to say 'market'?

Just clarifying the question. I do not know about the location.

If you are looking to buy off-plan (pre-construction) I can offer a number of comments as to the pitfalls and possible upside in such deals. There are some special conditions to verify.

John Corey

Account Closed · Answer

All Cash,

Have you ever purchased off-plan (pre-construction)? If so was it a common activity or more of a one-off?

I agree that you need to understand the market trends. I would not say that there is some specific rate of appreciation that is required. Even if there was this is a forward looking deal so hard to say what the future trends would be.

Like any RE deal future appreciation is only 1 factor. Some will tell you to never bet on future appreciation.

John Corey