I'm sure some of you have run into this before. A property I purchased in an amazing neighborhood has garnered some interest already (before even starting on any work) from friends/colleagues of friends. One in particular is very interested and would like to know how it would all work. Letting them have some control of customizing would need to be accounted for in how the pricing works out as well. I'm a general contractor so I have a good idea as to how to structure the selections and budget, but when it comes to the commitment to buy, I could use some guidance. How do you all structure a pre-sale deal? Of course, there would need to be a contract and a significant down payment up front to guard me against them backing out, but specifically how is this done? Any insight from people that have done this before would be much appreciated!
I wouldnt do it, its a pain in the ***, you lock in a price too early, and you let someone dictate finishes and timeline while cutting out competition. If you just do what you do and make the property amazing, if the neighborhood is as good as you say, you should have multiple people beating down your door handing you offers.
Pre-solds are common in new construction, but are done in rehabs as well if you have the marketing and know your buyers.
A book could be written as to the structures as you have many options, they can buy and finance and you contract, you buy and sell turn key, you can get the seller involved, do the work for them and flip the contract to an end buyer, partner with the owner and sell turn key, arrangements are endless.
To structure it, you'll need to consider the buyer's position and ability to buy, they will be getting the end loan.
Really boils down to financing, who gets the construction financing, does title need to pass to do the work, where do you put your profit, again, the end buyer's ability to finance.
You'd be selling from plans and specs, yes, you need a good down payment if the buyer is picking appliance, colors, materials as what they may select may not be as marketable if the fall out of the deal, you're stuck with pink bedrooms, green carpet, crappy ceiling fans and hickory cabinets. So, the best way is to keep an eye on what is marketable and then have the buyer pay as they go at about 1.5 times the actual cost to you being applied toward the purchase price, non-refundable too. When a buyer wants something that is usual and customary that is marketable, you can collect at cost as needed.
If you have the funds to buy and rehab and your buyer is not getting silly with wants and needs, there isn't really any need to require a larger deposit, 10% should be fine and just finish it, then sell it.
BTW, there is another aspect for a contractor to buy a place, rehab it and sell it back to the old owner. They may want renovations and can't finance construction and do the work, many reasons, but it can be easier to buy it than to obtain construction funds and put your profit in the sale-back. Think seller financing deferred payment. They old owner may be able to obtain purchase money after 6 months. :)
Great answers thanks @Anson Young and @Bill G.
Speaking to your point, Anson, about locking in your price and cutting out competition: There is theoretically some upside to being able to take away a lot of the carrying costs involved during the work and also not having to pay out any realtor commissions. When you're dealing in a higher end area, such as the Maryland suburb I am, with a target price right around 900K, that's no small chunk of change. In my eyes, customizing exactly how they want leaves room for an even larger return as some of the items they would want cost more to do. Locking in a contract also allows my bank financing to be freed up earlier as well. I'm sure it's going to take a bit of work/headache to structure it though.
Bill thanks for your perspective. Yes, it definitely seems that there are a number of ways to do this. I bought the house directly from an estate off market so I physically own it now, so some of the creative financing is off the table, although I suppose I could seller finance for a while ;) . I guess as long as its put together clearly and through lawyers there's no cut and dry way to get it done.
Anyone else with experience with this?
I'm very interested to see how this turns out! Keep us updated!
I agree with @Anson Young I would shy away from this because of the headache.
I built custom houses (some cost plus jobs) others traditional builds. I will say when the buyer is involved from start to finish it's usually a tough project.
Consider selling it as is and put a nice profit on it and just take a check to the bank.
Read this post with a similar subject.
I think this completely depends on your financing source. If you are paYing 18%, the shorter hold time may well be worth the additional pain.
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