I need to make a decision quickly! Advice?

Question

I'm just starting out and decided on a new-build home in Florida.  I signed a contract for 232k in Dec 2020.  Due to covid, labor, and lumber, etc., the home is finally ready for the build to start!  I am now being asked for an additional 30k for unforeseen complications or I can choose for them to return my deposit (2500) + 20%.

At 262k my cash flow would be basically zero after all expenses (rent = 2k/month) but I will start with approximately 38k in equity (home value around 300k).

Shall I sign the addendum or get my cash back?

Thanks for any advice!!

~Mike

Joe Villeneuve · Answer

My guess is the time and effort it took on your part up to this point, has made this into an emotional decision when it should be entirely financial. Here, as I see it, are your options:

1 - After closing costs (as mentioned above) you'll be looking at best around $20k if going through with this and selling after completion.  Not worth the time, and money up to this point.  Also not sure of what surprises you will step on from this point forward.  $20k profit, on a house worth $300, isn't much room for error.  Option #1 = Bad option.

2 - If you finish this property and just break even renting it, what's the point?  Option #2 = Worse option.

3 - Back out and get your deposit back.  Option #3 = The ONLY option.

JD Martin · Answer

What does your contract say about additional costs? Before I did anything, I'd look through my contract carefully and see if they have the right to breach the contract that way.

If I was certain that I would have that much equity, and that the market would stay hot, I'd let them build it and sell it when it was finished and look at it as a fresh-ground flip. That's a lot of ifs, however, and not a whole lot of profit.

Account Closed · Answer

@Michael Carges  The appreciation is good, we are seeing a lot of that here in Florida!  What research have you done in regards to the rent rate?  Is it possible to bump it up a bit?  Are you working with a property manager or realtor that can help you locally with this?

Joe Villeneuve · Answer

You can look at it anyway you want, but while you're looking, don't miss these financial facts:

1- Cost to you = $63,6802 - Profit = $20,0003 - Remaining Cost not recovered = $43,680 (you don't make a profit until you recover all your costs, so the $20k "profit" in Item #1 isn't a profit...unless you think going to Vegas with $10k in cash, increasing your cash to $15k, then losing $30k is somehow winning $5k)4 - If, as mentioned above, you can get $350/month ($4200/yr) in rent...which if you were breaking even before, you would now be cash flowing $4300/year.5 - Unfortunately, that means it will still take you 10+ years (all being perfect) to recover the rest of your cost.6 - Still not a good deal...at all.

Joe Splitrock · Answer

@Michael Carges I understand Force Majuere, but you signed a contract in December 2020, which was a year into a pandemic when lumber prices had already skyrocketed. Force Majuere is for unforeseen events, not events you are already in the middle of. It appears to me that the builder sees skyrocketing demand and increased housing prices as a chance to charge more.

Fighting this could difficult, but you could ask for proof of hard costs. They should have lumber quotes from the original bid and comparable quotes today. Get a detailed breakdown to make sure you are paying actual costs, not costs + profit.

As far as proceeding, the only question is if the numbers work. Pretend you have no history with this deal. If you were looking to invest today, would you still do the deal at the new price? Have you considered shopping for an existing home instead, so you don't waste more time with these jokers?

Account Closed · Answer

@Michael Carges that’s a great area and attracting a lot of the new transplants. Cost overruns suck but this isn’t a bad situation to be in once you can confirm rent rates. I’m seeing $2100 month for 4/3 ‘s in that area. Best of luck!

Account Closed · Answer

@Michael Carges with a 1000 people a day moving to Florida we are seeing a sharp increase in rents do to lack of inventory.  New builds are popping up all over and I've heard some of these new builds have waiting lists.  Hopefully that bump in rent will help you.  What area of Florida?  Those numbers are very much in line with what we are seeing in Cape Coral.

Michael Carges · Answer

Thanks for all the input from everyone!

I decided to cut my losses (in time) and get my deposit money back (with interest).

Interesting way to start my REI adventure!

David E Fitzgerald IV · Answer

I would look at if rents in the area have gone up which might make this scenario entirely different. Rents in a lot of areas have gone up considerably in just the past few months. With higher home prices rents are finally catching up.

Michael Carges · Answer

Yes Dave.  Its the Northport area.  I was hoping that the influx of people to Florida will continue for several years.  I'm leaning toward hanging onto the property for the next five years and re-evaluate my position then.

I need to make a decision quickly! Advice?

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