Riskier -- spec build or high end flip?

1 Reply

Why do people consider spec building to be riskier than high end flipping?  Simply because there are more steps, more upfront risk with city approvals, or is there something else?  Or is it simply that with a flip you already have an existing asset, so in the case of a default or other issue at least you have some collateral to offer your lender?  

Does it have to do with the type of financing you can get?  Better/no recourse loans available for flips?  Isn't the reality though at the end of the day no matter what you have to sell a house to get your money back and loan paid off?

I've been discussing this offline recently with a couple of local investors here and they seem to have different opinions.  Curious to hear what the pros here think.  Thanks.

Account Closed Rates are relative to the risk for lenders, and their comfort level.

Spec vs Existing structure - Spec is usually higher risk. However; should the existing structure be uninhabitable, the risk could actually become higher, as it would have to be demolished in order to rebuild, meaning higher costs than bare lot. 

Things lenders look at: 

  • Value of the asset used as collateral
  • Location of the asset (Strong markets justify higher risk) 
  • Experience of the builder/flipper 
  • Track record in the business 
  • Other 

Things that can be done to help mitigate risk:

Solid project in a strong market, with an appraisal (comps work if the lender is knowledgeable on market)

Experienced builder or flipper

Thorough cost breakdown so that all costs are known, and there are no surprises.

Have a plan in place to manage funding to insure subs/suppliers are paid on time, etc.

Inspection or progress reports on a regular basis (with internet it's easy to document the progress of jobs with video, pictures, etc.) 

Lien releases signed by all materials suppliers and subs with payment

I'm sure I've missed a little, but others can weigh in too. 

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