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Evaluating my trading Up strategy

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Posted Aug 3 2008, 10:54

I'm two months into REI and thought I my strategy would be quick flips, rehabs and wholesales. I've never owned a house, have excellent credit (740+), and earn a decent income. At a recent new member orientation at my local REI club I bumped into a broker who shares their commission from a purchase with the buyer they represent. The broker convinces me that given my situation (no RE assets, <$10K cash available) that I employ a trading up strategy as it was one of only three strategies that makes sense in the current Central Florida market. He argued that if I'm able to get a good enough deal a builder will cover all closing costs; I'd have equity within a month or two; I'd get cash at closing because he'd give me a cut of his commission; I'd get certain tax benefits; and of course, pride of ownership.

I'm now under contract for a home at $275K, the list price was $298K, and the same model sold last year in the subdivision for about $345K (April 2006). The most popular model sold out at $150/SF (it also had the lowest list price at $252K, a year ago it was $307K), my home came in at $141/SF. We were able to negotiate our number based on the fact the builder was attempting to close-out on the community. The builder is covering the closing costs, the builder will apply money left over from the closing costs to buy down points on the mortgage, and I'm getting around $3.3K at closing from my broker. I tried to run Zillow and Trulia searches to see what other homes had sold for in the community; however, the place isn't even mapped yet (Google, MapQuest, Trulia, etc. all show vacant land where my home is).

The strategy is that I live in the home for two years and use a HELOC for future investment property. I would then rent this house for the last three years, preferably putting the tenant into a lease option or purchase agreement, and as long as I own the home I'm doing an interest-only 5/1 loan.

Focus: Does this make sense strategically? Economically? I'm looking for a second opinion. I will be closing at the end of the month.

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