NNOTE: This article is part of the forthcoming book, the Gotcha Guide™ to Buying or Investing in Real Estate. Email us to join the mailing list for the release date.
by DeeinAustin™
I am a moderator at REIClub.com, which is a great resource for both beginning and experienced investors. I came across a spec build scenario today that raised a red flag.
"Spec" builds are when you build a house with the intent to sell it as an investment. The builder, you and/or your agent will locate a piece of land, determine what to build and sell it before or shortly after the home is complete. Spec building is very risky, but can be a lucrative strategy.
In a post on REIClub.com, the investor was financing both the land and project using a construction loan. This is normally not an issue, but in this case, the builder was also asking to split profits after the sale.
TYPICAL OPTIONS FOR A SPEC BUILD
- Option 1. The builder finances at least part of the project, which increases their risk, but also the return because profits are split once the home is sold. Of course, they are still paid as the builder.
- Option 2. The investor obtains all financing and the builder gets paid as a contractor for managing the project and completing the build.
Think about it. The goal of investing is to achieve maximum profits in relation to risk. The best way for a builder to maximize profits is to take on some risk so they can have a portion of funds from the home sale. If the builder prefers to get paid right away, they can just build as they normally would and get paid in draws. The investor/buyer would then receive all of the profits since they've taken the greatest financial risk.
In either scenario, all parties maximize their profits based on how much risk they commit to.
Read the full thread at REIclub.com: Investment with new home builder. See our sage advice for investing in Texas.
Worst case scenario with a builder...read about projects in Killeen and Maravilla.
-All rights reserved © Dee Copeland 2007
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