Pre-Construction Flips
I want to get some feedback on an investment strategy I used in 2003-2005 that I call the "pre-construction flip". It works like this:
- Identify high appreciating markets (greater than 12% annual)
- Identify home builders who don't care if an investor purchases and immediately resells a property in their housing tract.
- Enter into a purchase contract with the builder to buy a house that has not yet been constructed with an "earnest money deposit", usually $1,500 - $3,000.
- Qualify with the home builders preferred lender.
- Wait for the house to be built.
- Upon completion, if the current market value of the house (as determined by the market price that the builder is selling current homes) is at a minimum level (5% higher than your purchase price), then complete the purchase agreement. Otherwise don't complete the agreement and lose the earnest money deposit.
- Upon close of escrow, immediately list the new house FSBO at the same price that the builder is selling their homes.
- Secure a buyer within 2 weeks and close within 30 days.
- Make profit based on the difference between the purchase costs and the selling proceeds over a 4-6 month period.
Here are some real-life numbers for 2014:
- Purchase price: $300K
- 1st Mortgage = LTV: 96.5% FHA 3.5% down @ 4.5% for 30 years fixed = $289,500
- Upfront points 1%
- Closing Costs = $10,402
- Total Cash Investment = $20,902 (down payment + closing costs)
- 2nd mortgage = $20,902 (equity partner) LTV: 3.5% with $0 down @ 10% interest-only
- 2nd mortgage holding costs = 6 months @ $174/month = $1,045
- Reserves = 2 months of 1st and 2nd mortgage costs = $4,387
- Total Investment = holding costs + reserves = $5,432
- Annual Appreciation = 18% (1.5% per month) for 4 months
- Future Market Value = $318K
- Sales Commissions = $0 (FSBO)
- Sales closing costs = 1.5% -= $4,770 added to sales price
- Final Sales Price = $322,770
- Less closing costs = -$4,770
- Less Loan Payoffs: -$310,402
- Net Proceeds from Sale: $7,598
- Less Total Investment: -$5,432
- Less Deal Management Fee: -$404 (this is my fee for putting this all together)
- Net Profit: $1,762
- Cash on Cash ROI: 32.43%
- Annualized ROI: 97.30%
Please critique the numbers, the assumptions and the requirements. I did three deals like this in 2004-2005 when money was cheaper with less regulations. We turned $10K into $25K, $12K into $50K and $7K into $180K. I'm not looking to make a homerun off each deal, just a bunch a singles off each and every deal. Tell me what you think.
God Bless You!